<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended              June 30, 1999
                                        ----------------------------------------

                                       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 ________________

                                 ISS GROUP, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                                                 <C>
       DELAWARE                                                                          58-2362189
(State or jurisdiction of                                                           (I.R.S. Employer
incorporation or organization)                                                      Identification No.)
</TABLE>


6600 PEACHTREE-DUNWOODY ROAD, 300 EMBASSY ROW, SUITE 500, ATLANTA, GEORGIA 30328
--------------------------------------------------------------------------------
                    (Address of principal executive offices)


        Registrant's telephone number, including area code (678) 443-6000
                                                           --------------

                                 NOT APPLICABLE
             -------------------------------------------------------
             (Former name, former address and former fiscal year, if
                          changed since last report.)



         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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

<TABLE>
<CAPTION>
                                                                  Number of Shares Outstanding
         Title of each class                                         as of August 12, 1999
-------------------------------------                             ----------------------------
<S>                                                               <C>
   Common Stock, $0.001 par value                                       37,985,638
</TABLE>



<PAGE>   2


<TABLE>
<CAPTION>
                                                                                           PAGE
PART I.  FINANCIAL INFORMATION                                                            NUMBER
                                                                                          ------
<S>      <C>                                                                              <C>
Item 1   Consolidated Financial Statements:

         Consolidated Statements of Operations for the Three Months
         and Six Months ended June 30, 1999 and June 30, 1998.............................. 3

         Consolidated Balance Sheets at June 30, 1999 and
         December 31, 1998................................................................. 4

         Consolidated Statements of Cash Flows for the Six
         Months ended June 30, 1999 and June 30, 1998...................................... 5

         Notes to Consolidated Financial Statements........................................ 6

Item 2   Management's Discussion and Analysis of
         Financial Condition and Results of Operations..................................... 8

PART II. OTHER INFORMATION

Item 1   Legal Proceedings................................................................. 14

Item 2   Changes in Securities and Use of Proceeds......................................... 14

Item 4   Submission of Matters to a Vote of Security Holders............................... 14

Item 6   Exhibits and Reports on Form 10-Q................................................. 15
</TABLE>



                                     - 2 -
<PAGE>   3


                         ISS GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED           SIX MONTHS ENDED
                                                                  JUNE 30,                   JUNE 30,
                                                         -----------------------       ---------------------
                                                           1999           1998          1999          1998
                                                         --------       --------       -------      --------
<S>                                                      <C>            <C>            <C>          <C>
Revenues:
     Perpetual licenses                                  $ 11,336       $  5,559       $22,286      $ 10,434
     Subscriptions                                          3,904          1,487         7,391         2,656
     Professional services                                  1,709            285         3,258           314
                                                         --------       --------       -------      --------
                                                           16,949          7,331        32,935        13,404

Costs and expenses:
     Costs of revenues                                      2,369            892         4,555         1,405
     Research and development                               4,469          1,832         8,291         3,468
     Sales and marketing                                    8,253          5,431        16,079        10,079
     General and administrative                             1,372          1,100         2,781         2,081
     Amortization                                             248             --           498            --
                                                         --------       --------       -------      --------
                                                           16,711          9,255        32,204        17,033

Operating income (loss)                                       238         (1,924)          731        (3,629)
Interest income, net                                        1,537            841         2,419           907
Income (loss) before income taxes                           1,775         (1,083)        3,150        (2,722)
Provision for income taxes                                   (125)            --          (200)           --
                                                         --------       --------       -------      --------
Net income (loss)                                        $  1,650       $ (1,083)      $ 2,950      $ (2,722)
                                                         ========       ========       =======      ========


Basic net income (loss) per share of Common Stock        $   0.04       $  (0.03)      $  0.08      $  (0.11)
                                                         ========       ========       =======      ========
Diluted net income (loss) per share of Common Stock      $   0.04       $  (0.03)      $  0.07      $  (0.11)
                                                         ========       ========       =======      ========

Weighted average number of shares:
   Basic                                                   37,862         33,730        36,707        25,606
                                                         ========       ========       =======      ========
   Diluted                                                 40,906         33,730        39,889        25,606
                                                         ========       ========       =======      ========

Unaudited pro forma net income (loss) per share of
   Common Stock                                                                                     $  (0.09)
                                                                                                    ========

Unaudited weighted average number of shares used in
  calculating unaudited pro forma net loss per
  share of Common Stock                                                                               30,834
                                                                                                    ========
</TABLE>



                                     - 3 -
<PAGE>   4


                                 ISS GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS
                  (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                                     JUNE 30, 1999     DECEMBER 31, 1998
                                                                     -------------     -----------------
                                                                      (UNAUDITED)          (AUDITED)
<S>                                                                   <C>                  <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents                                          $ 133,608            $ 52,632
   Accounts receivable, less allowance for doubtful accounts
       of $407 and $287, respectively                                    14,959              12,586
   Prepaid expenses and other current assets                              1,547                 743
                                                                      ---------            --------
       Total current assets                                             150,114              65,961

Property and equipment:
   Computer equipment                                                     6,030               4,370
   Office furniture and equipment                                         1,923               1,027
   Leasehold improvements                                                   519                 275
                                                                      ---------            --------
                                                                          8,472               5,672
   Less accumulated depreciation                                          3,035               1,655
                                                                      ---------            --------
                                                                          5,437               4,017

Goodwill, less accumulated amortization of $239
  and $77, respectively                                                   2,933               3,094
Other intangibles, less accumulated amortization of $490
   and $154, respectively                                                 4,355               4,692
Other assets                                                                525                 257
                                                                      ---------            --------
      Total assets                                                    $ 163,364            $ 78,021
                                                                      =========            ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                   $   1,349            $    692
   Accrued expenses                                                       3,149               4,202
   Deferred revenues                                                     10,296               6,678
                                                                      ---------            --------
      Total current liabilities                                          14,794              11,572

Non-current liabilities                                                     110                 134

Stockholders' equity:
   Common stock, $.001 par value, 120,000,000 shares authorized,
    37,954,000 and 34,584,000 issued and outstanding,
    respectively                                                             38                  35
   Additional paid-in captial                                           155,278              76,092
   Deferred compensation                                                   (475)               (662)
   Cumulative adjustment for currency revaluation                           (39)                142
   Accumulated deficit                                                   (6,342)             (9,292)
                                                                      ---------            --------
     Total stockholders' equity                                         148,460              66,315
                                                                      ---------            --------
     Total liabilities and stockholders' equity                       $ 163,364            $ 78,021
                                                                      =========            ========
</TABLE>



                                     - 4 -
<PAGE>   5


                                 ISS GROUP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED JUNE 30,
                                                            -------------------------
                                                               1999           1998
                                                            ---------       --------
<S>                                                         <C>             <C>
OPERATING ACTIVITIES
Net income (loss)                                               2,950       $ (2,722)
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
   Depreciation                                                 1,380            458
   Amortization                                                   498             --
   Deferred compensation expense                                  187            360
   Deferred rent                                                  (24)           141
   Changes in assets and liabilities:
     Accounts receivable                                       (2,373)        (3,280)
     Prepaid expenses and other assets                         (1,072)          (503)
     Accounts payable and accrued expenses                       (396)          (501)
     Deferred revenues                                          3,618          2,232
                                                            ---------       --------
Net cash provided by (used in) operating activities             4,768         (3,815)

INVESTING ACTIVITIES
Purchases of property and equipment                            (2,800)        (1,770)
                                                            ---------       --------
Net cash used in investing activities                          (2,800)        (1,770)

FINANCING ACTIVITIES
Payments on long term debt                                         --           (140)
Proceeds from exercise of stock options                         1,792            179
Net proceeds from secondary offering                           77,397         61,547
                                                            ---------       --------
Net cash provided by financing activities                      79,189         61,586

Foreign currency impact on cash                                  (181)             5
                                                            ---------       --------
Net increase in cash and cash equivalents                      80,976         56,006
Cash and cash equivalents at beginning of period               52,632          3,929
                                                            ---------       --------
Cash and cash equivalents at end of period                  $ 133,608       $ 59,935
                                                            =========       ========


SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid                                                      --       $      8
                                                            =========       ========
</TABLE>



                                     - 5 -
<PAGE>   6


                                 ISS GROUP, INC
                    NOTES TO CONSOLIDTED FINANCIAL STATEMENTS

1.       Significant Accounting Policies

         The accompanying consolidated financial statements of ISS Group, Inc.
         ("ISS" or "Company") should be read in conjunction with the Company's
         consolidated financial statements for the year ended December 31, 1998.
         Significant accounting policies disclosed therein have not changed.

         The accompanying consolidated financial statements are unaudited;
         however, in the opinion of management, they include all normal
         recurring adjustments necessary for a fair presentation of the
         consolidated financial position of the Company at June 30, 1999 and the
         consolidated results of its operations and cash flows for the six
         months ended June 30, 1999 and 1998. Results of operations reported for
         interim periods are not necessarily indicative of results for the
         entire year.

         The consolidated balance sheet at December 31, 1998 has been derived
         from the audited financial statements at that date but does not include
         all the footnotes required by generally accepted accounting principles
         for complete financial statements.

         The Company's business is focused on maintaining the latest security
         threat and vulnerability checks within existing products and creating
         new products and services that are consistent with the Company's goal
         of providing an adaptive security management approach to network
         security. This approach entails continuous security risk monitoring and
         response to develop an active and informed network security policy.

2.       Comprehensive Income

         Comprehensive income for the quarter ended June 30, 1999 aggregated
         $1,831,000. The effects of foreign exchange gains and losses arising
         from translations of assets and liabilities of our foreign operations
         into U.S. dollars at June 30, 1999 are included as a component of
         comprehensive income. Such amounts were $181,000 in the period ended
         June 30, 1999.

3.       Secondary Stock Offering

         On March 2, 1999, ISS completed a public offering of its Common Stock
         ("the Offering"). A total of 2,588,800 shares were sold in the Offering
         including 1,388,800 newly issued shares by the Company and 1,200,000
         outstanding shares sold by existing stockholders. The Company did not
         receive any of the proceeds from the sale of stock by the selling
         stockholders. The shares were sold to the underwriting group in the
         Offering at a price of $59.00 per share which, after underwriters'
         discount and offering expenses, resulted in net proceeds to ISS of
         $77,397,000. The proceeds of the Offering are invested in short-term
         interest-bearing investments at June 30, 1999.

4.       Income (loss) per share

         On April 1, 1999, the Company's Board of Directors declared a
         two-for-one stock split effected in the form of a stock dividend paid
         on May 19, 1999 to stockholders of record on May 5, 1999. Accordingly,
         all share and income (loss) per share amounts have been retroactively
         restated for this 100% stock dividend.



                                     - 6 -
<PAGE>   7



                                 ISS GROUP, INC
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.       Income (loss) per share (continued)

         Basic historical net income (loss) per share was computed by dividing
         net income (loss) by the weighted average number of shares of Common
         Stock outstanding. Diluted historical net income (loss) per share was
         computed by dividing net income (loss) by the weighted average shares
         outstanding, including Common Stock equivalents if dilutive. For the
         quarter and six months ended June 30, 1998, options aggregating
         4,688,000 were antidilutive and therefore were not included in the
         computation. For the quarter and six months ended June 30, 1999
         weighted average shares included 3,045,000 and 3,189,000 shares,
         respectively, to reflect the dilutive impact of stock options.

         Pro forma loss per share for the quarter ended June 30, 1998 was
         computed by dividing the net loss by the weighted average number of
         shares of Common Stock outstanding plus the conversion of the
         Redeemable, Convertible Preferred Stock into 5,737,000 shares of Common
         Stock as of January 1, 1998 instead of March 27, 1998 when such shares
         of preferred stock automatically converted into Common Stock.

5.       Commitments & Contingencies

         On July 13, 1999 ISS and Network Associates, Inc. announced that the
         patent infringement suit filed in July 1998 by Network Associates, Inc.
         against Internet Security Systems, Inc. (a wholly-owned subsidiary of
         ISS) was resolved to the parties' mutual satisfaction. The resolution
         of this previously pending litigation had no material adverse effect on
         the business, operating results, or financial condition of ISS.



                                     - 7 -
<PAGE>   8



                                 ISS GROUP, INC
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. Except for the historical financial information,
the matters discussed in this Quarterly Report on Form 10-Q may be considered
"forward-looking" statements. Such statements include declarations regarding our
intent, belief or current expectations. Such forward-looking statements are not
guarantees of future performance and involve a number of risks and
uncertainties. Actual results may differ materially from those indicated by such
forward-looking statements. Among the important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements are the risk factors included under Exhibit 99 at the end of this
Quarterly Report on Form 10-Q, as well as the risk factors identified in the
Annual Report on Form 10-K for the year ended December 31, 1998 as filed with
the Securities and Exchange Commission and available at their Web site at
www.sec.gov.

OVERVIEW


We are a leading source for e-business risk management solutions. Our Adaptive
Security Management approach to Internet and network security protects
distributed computing environments, such as internal corporate networks,
inter-company networks and electronic commerce environments, from attacks,
misuse and security policy violations. Our SAFEsuite(R) family of products is a
critical element of an active Internet and networking security program within
today's world of global connectivity, enabling organizations to proactively
monitor, detect and respond to risks to enterprise information. Our business is
focused on maintaining the latest security threat and vulnerability checks
within our existing products, creating new products and providing technical and
professional services that are consistent with our goal of providing enterprise
solutions to address network security.

We generate the substantial portion of our revenues from our SAFEsuite family of
products in the form of perpetual licenses and subscriptions. We recognize
perpetual license revenues upon delivery of software or, if the customer has
evaluation software, delivery of the software key and issuance of the related
license, assuming that no significant vendor obligations or customer acceptance
rights exist. Where payment terms are extended over periods greater than 12
months, revenue is recognized as such amounts are billable. Annual renewable
maintenance is a separate component of each perpetual license agreement with
revenue recognized ratably over the maintenance term. Subscription revenues
include maintenance and term licenses including managed service arrangements.
Term licenses allow customers to use our product and receive maintenance
coverage for a specified period, generally 12 months. We recognize revenues from
each subscription agreement ratably over the subscription term. Professional
services, which are typically billed on a time-and-materials basis, assist in
the successful deployment of our products within customer networks, the
development of customers' security policies and the assessment of security
policy decisions. We recognize professional services as such services are
rendered.

We believe that each of our current products and products in development,
together with maintenance and professional services, will represent important
sources of revenue in the future. While we expect the expansion of these product
offerings to originate primarily from internal development, our strategy
includes acquiring products and technologies that fit within our product
strategy and that potentially accelerate the timing of the commercial
introduction of such products and technologies as integrated components of our
enterprise network security solutions.



                                     - 8 -
<PAGE>   9


                                 ISS GROUP, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS (CONTINUED)


Our business has grown rapidly since 1995. Prior to the quarter ended March 31,
1999, we experienced net losses that had resulted, in large part, from
significant costs incurred in the development and sales of our products and
professional services. We expect to continue to expand our domestic and
international sales and marketing operations, increase our investment in product
development and our proprietary threat and vulnerability database, seek
acquisition candidates that will enhance our products and market share, and
improve our internal operating and financial infrastructure in support of our
strategic goals and objectives. All of these initiatives will increase operating
expenses. As a result, while we narrowed our operating losses over the course of
1998 and achieved profitability in the first and second quarters of 1999, we
cannot be certain that we can sustain such profitability.

Due to our fast growth in an emerging market, period-to-period comparisons of
our operating results are not meaningful. Although we continue to experience
significant revenue growth, we cannot assure our stockholders that such growth
can be sustained and, therefore, investors should not rely on our past growth as
a predictor of future performance. Rather, our prospects must be considered in
light of the risks and difficulties frequently encountered by companies in new
and rapidly evolving markets. There can be no assurance that we will be
successful in addressing such risks and difficulties. See the risk factors
included as Exhibit 99 to the Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

The following table sets forth certain consolidated historical operating
information, as a percentage of total revenues, for the three months and six
months ended June 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                  Three months ended          Six months ended
                                        June 30                   June 30
                                   1999         1998          1999         1998
                                  -----        -----         -----        -----
<S>                               <C>          <C>           <C>          <C>
Licenses                           66.9%        75.8%         67.7%        77.9%
Subscriptions                      23.0%        20.3%         22.4%        19.8%
Professional services              10.1%         3.9%          9.9%         2.3%
                                  -----        -----         -----        -----
   Total revenues                 100.0%       100.0%        100.0%       100.0%
                                  -----        -----         -----        -----

Costs of revenues                  14.0%        12.1%         13.8%        10.5%
Research and development           26.3%        25.0%         25.2%        25.9%
Sales and marketing                48.7%        74.1%         48.8%        75.2%
General and administrative          8.1%        15.0%          8.5%        15.5%
Amortization                        1.5%          --           1.5%          --
                                  -----        -----         -----        -----
   Total costs and expenses        98.6%       126.2%         97.8%       127.1%
                                  -----        -----         -----        -----

Operating income (loss)             1.4%       (26.2)%         2.2%       (27.1)%
</TABLE>



                                     - 9 -
<PAGE>   10


                                 ISS GROUP, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS (CONTINUED)


REVENUES

Our total revenues increased 131% to $16,949,000 for the three months ended June
30, 1999 and 146% to $32,935,000 on a year-to-date basis compared with the same
periods in the prior year. Perpetual license revenues continued to be the
primary source of revenue generation, but decreased as a percentage of total
revenues from approximately 76% and 78% of total revenues in the three months
and six months ended June 30, 1998, respectively, to 67% and 68% of total
revenues in the three months and six months ended June 30, 1999, respectively.

Both subscription revenues and professional service revenues increased compared
to the comparable periods in the prior year in both absolute dollars and as a
percentage of total revenues. Subscription revenues, consisting of maintenance
and term licenses of product usage, accounted for 23% and 22% of our total
revenues in the three-month and six-month periods ended June 30, 1999,
respectively, a 3% increase in percentage of total revenues over the comparable
periods in the prior year. Professional services represented 10% of total
revenues in both the three month and six month periods ended June 30, 1999 as we
continued our initiative begun in 1998 to build our service capabilities to
address the demand from our customers for implementation, training and
consulting services.

Our suite of product offerings continues to provide increased product
diversification, although there can be fluctuations on a quarterly basis. In the
second quarter of 1999, licenses of our vulnerability assessment products were
strong, representing 59% of our license revenues. Our intrusion detection
product, RealSecure, represented 39% of license revenues for the second quarter
and SAFEsuite Decisions, our enterprise security management application released
in the fourth quarter of 1998, represented 2% of our license revenues. For the
six months ended June 30, 1999 vulnerability assessment products comprised 51%
of license revenues and intrusion detection represented 46%, with SAFEsuite
Decisions comprising 3%. This compares to the first half of 1998 where
vulnerability assessment products represented 72% of license revenues and
intrusion detection products represented 28% of license revenues.

Geographically, we derived the majority of our revenues from sales to customers
within North America; however, international operations continued to be a
significant contributor to revenues, as revenues from customers outside of North
America represented 26% of revenues in the first half of 1999, compared to 21%
of total revenues for the comparable period in 1998.

COSTS AND EXPENSES

Costs of revenues include packaging and distribution costs for our software
licenses. Since we use the Internet to provide product updates and keys
necessary to activate a customer's software, this is a minor cost. Costs of
revenues also include costs associated with the technical support group that
provides assistance to maintenance customers. Finally, the category includes the
costs we incur to provide professional services to customers. As a result of the
growth in our professional services capabilities which began in 1998, our gross
margin, represented by total revenues less costs of revenues expressed as a
percentage of total revenues, decreased from 89% in the quarter ended June 30,
1998 and 88% in the first half of 1998 to 86% in the comparable periods of 1999.

Research and development expenses consist of salary and related costs of
research and development personnel, including costs for employee benefits, and
depreciation on computer



                                     - 10 -
<PAGE>   11


                                 ISS GROUP, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS (CONTINUED)


equipment. These costs include those associated with maintaining and expanding
the "X-Force," a team composed of security experts dedicated to understanding,
documenting and coding new vulnerability checks, real-time threats and attack
signatures and developing solutions to address global security issues.

Research and development expenses increased from $1,832,000, or 25% of total
revenues, in the quarter ended June 30, 1998 to $4,469,000, or 26% of total
revenues, in the comparable quarter in 1999. On a year-to-date basis, research
and development expenses increased 139% to $8,291,000 in 1999 from $3,468,000 in
1998. We continue to increase these expenditures as we perceive primary research
and product development as essential ingredients for retaining our leadership
position in the market. These increases were due primarily to increases in
personnel focused on our best-of-breed products, enterprise applications and
research for future product offerings. Additionally, we continued our
development efforts in connection with certain OEM arrangements. Under these
arrangements entered into during the second half of 1998, we began to earn
royalties, which are expected to increase to higher levels in future periods.

Sales and marketing expenses consist primarily of salaries, travel expenses,
commissions, advertising, maintenance of the ISS Website, trade show expenses,
costs of recruiting sales and marketing personnel and costs of marketing
materials. In the quarter ended June 30, 1999, sales and marketing expenses were
$8,254,000, or 49% of total revenues, compared with $5,431,000, or 74% of total
revenues, in the quarter ended June 30, 1998. Year-to-date figures exhibit
similar trends. The absolute increases have occurred principally from our larger
workforce, which has increased each quarter since 1997 both domestically and
internationally. The decrease in sales and marketing expenses as a percentage of
total revenues continues a trend that occurred during 1998 as a higher
percentage of the ISS enterprise sales force is achieving greater levels of
productivity due to more experience in selling our products and a broader
enterprise offering of enterprise products.

General and administrative expenses in the quarter ended June 30, 1999 increased
to $1,372,000, or 8% of our total revenues from $1,100,000, or 15% of our total
revenues in the comparable quarter in 1998. Year-to-date amounts reflect similar
dollar and percentage trends. General and administrative expenses consist of
personnel-related costs for executive, administrative, finance and human
resources, information systems and other support services and legal, accounting
and other professional service fees. The increase in these expenses in absolute
dollars is attributable to our effort, through additional employees and systems,
to enhance our management's ability to obtain and analyze information about our
domestic and international operations, as well as the expansion of our
facilities.

We recorded $498,000 of amortization expense in the six months ended June 30,
1999 related to goodwill and intangible assets resulting from the October 1998
acquisitions of March Information Systems, Inc., a United Kingdom-based
developer of Windows NT and Unix-based security assessment technologies, and the
technology assets of DbSecure, Inc., a developer of database security risk
assessment software.

INCOME TAXES

We recorded a provision for income taxes of $125,000 and $200,000 for the
quarter and six-month periods ended June 30, 1999, respectively, related to our
European operations. No provision for federal, state or foreign income taxes has
been recorded for the United States and



                                     - 11 -
<PAGE>   12


                                 ISS GROUP, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS (CONTINUED)


Asia/Pacific operations due to the existence of net operating loss
carryforwards. We have not recognized any benefit from the future use of loss
carryforwards for these periods or any other periods since our inception because
management's evaluation of all the available evidence related to the
realizability of the tax benefits of such loss carryforwards indicates that the
underlying assumptions of continued profitable operations in the future contain
risks that do not provide sufficient assurance to recognize such benefits
currently.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations in the first six months of 1999 was $4,768,000
and included net income of $2,950,000 and $2,041,000 of non-cash expense
charges. Additionally, billings and collections generated additional cash as the
increase in net accounts receivable in the first half of 1999 of $2,373,000
associated with our growth was more than offset by the $3,618,000 increase in
deferred revenues. The increase in deferred revenues was due to growth in both
annual maintenance contracts and term licenses.

Investment in equipment totaled $2,800,000 in the first half of 1999 as we
continued to provide existing and new personnel with the necessary hardware and
software tools to perform their job functions.

Cash provided by financing activities of $79,189,000 was primarily the result of
our secondary stock offering that was consummated in March 1999. The net
proceeds resulting from the stock offering were $77,397,000.

As of June 30, 1999, we had $133,608,000 of cash and cash equivalents,
consisting primarily of United States government agency securities, money market
accounts and short-term, commercial paper carrying the highest investment grade
rating. We believe that such cash and cash equivalents will be sufficient to
meet our working capital needs and capital expenditures for the foreseeable
future. We expect to evaluate possible acquisition and investment opportunities
in businesses, products or technologies that are complementary to ours. Although
we have not identified any specific businesses, products or technologies that we
intend to acquire or invest in, and there any not any current agreements with
respect to any such transactions, from time to time we expect to evaluate such
opportunities. In the event we determine to pursue such opportunities, we may
use our available cash and cash equivalents. Pending such uses, we will continue
to invest available cash in short-term, investment grade, interest-bearing
investments.

YEAR 2000

We have reviewed our products and believe that they are designed to properly
function through and beyond the year 2000. Furthermore, we only support the
current and the most recent prior version of our products. While we have
conducted tests of our software and have informed our customers that our
products are Year 2000 compliant, we cannot guarantee that our products,
particularly when they incorporate third-party software, will contain all date
code changes necessary to ensure Year 2000 compliance.

In addition, we use several internal management and other information systems in
the operation of our business. Since we have experienced most of our growth in
systems and personnel since



                                     - 12 -
<PAGE>   13


                                 ISS GROUP, INC.
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS (CONTINUED)


January 1, 1997, purchases and upgrades of systems have occurred principally
since 1997. Internal systems for financial, human resources and sales reporting,
as well as telephone, voice mail and other office support systems, have all been
purchased since 1998 and are reflected in either the balance sheet as property
and equipment or expensed under our standard policy. We used our best efforts to
ensure that these new systems are Year 2000 compliance.

We have either tested or contacted providers of various tools used in our
product development process and the providers of desktop systems (primarily
Microsoft) to determine that these recognized systems, such as Windows NT and
Windows 95/98, will be Year 2000 compliant with appropriate fixes. We do not
depend on any suppliers or manufacturers whose failure to be Year 2000 compliant
would have any significant impact on our financial condition or results of
operations. We have completed much of our Year 2000 project for these remaining
items and expect to be completed by September 30, 1999. We do not expect to
expend any significant funds to correct Year 2000 issues. Any minor expenses
will be funded through cash provided by operations.

Based on available information, we do not believe any material exposure to
significant business interruptions exists as a result of Year 2000 compliance
issues, or that the cost of remedial actions will have a material adverse effect
on our business, financial condition or results of operations. Accordingly, we
have not adopted any formal contingency plan in the event we do not achieve Year
2000 compliance.




                                     - 13 -
<PAGE>   14


                                OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

         On July 13, 1999, ISS and Network Associates, Inc. announced that the
         patent infringement suit filed by Network Associates, Inc. in July 1998
         against Internet Security Systems, Inc. (a wholly-owned subsidiary of
         ISS) was resolved to the parties' mutual satisfaction. The resolution
         of this previously pending litigation had no material adverse effect on
         the business, operating results, or financial condition of ISS.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS


(d)      Use of Proceeds.

         (1)      On March 23, 1998 the Company's Registration Statement on Form
                  S-1, SEC Registration No. 333-44529 (the "IPO Registration
                  Statement") was declared effective by oral order of the SEC.
                  Net proceeds to the Company from this offering were
                  $61,547,200. During the three months ended June 30, 1999, the
                  Company used none of the proceeds from the offering for
                  general or other corporate purposes. The remaining $52,585,400
                  of the proceeds remain in temporary investments consisting of
                  money market accounts available on a daily basis, U.S.
                  Government agency investments and short-term, commercial
                  paper.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  The Annual Meeting of Stockholders of ISS Group, Inc. was held
                  on Tuesday, May 25, 1999.

                  The first matter submitted to a vote of the stockholders at
                  this meeting was the election of two directors to serve a
                  three-year term ending in the year 2002. Richard S. Bodman and
                  Kevin J. O'Connor were elected at the Annual Meeting by the
                  holders of Common Stock by the following votes: (a) Mr.
                  Bodman: 15,332,049 votes for and 21,630 votes withheld, and
                  (b) Mr. O'Connor: 14,030,713 votes for and 1,322,966 votes
                  withheld. There were no broker non-votes for purposes of any
                  such votes.

                  The second matter submitted to a vote and approved by the
                  shareholders was the approval of a series of amendments to the
                  Restated 1995 Stock Incentive Plan. The vote was as follows:
                  (a) Voting for: 11,708,334 shares, (b) Voting Against:
                  3,629,578 shares, and (c) Abstentions: 15,767 shares.

                  The third matter submitted to a vote and approved by the
                  stockholders was the approval of the 1999 Employee Stock
                  Purchase Plan. The vote was as follows: (a) Voting for:
                  15,197,616 shares, (b) Voting Against: 136,971 shares, and (c)
                  Abstentions: 19,092 shares.

                  The fourth matter submitted to a vote and approved by the
                  stockholders was the approval of an amendment to the Company's
                  Certificate of Incorporation, which increased the number of
                  authorized shares of Common Stock of the Company from
                  50,000,000 to 120,000,000. The vote was as follows: (a) Voting
                  for:



                                     - 14 -
<PAGE>   15


                                OTHER INFORMATION

                  14,092,697 shares, (b) Voting Against: 1,250,079 shares, and
                  (c) Abstentions: 10,903 shares.



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits.

         27       Financial Data Schedule (for SEC use only)

         99       Private Securities Litigation Reform Act of 1995 Safe Harbor
                  Compliance Statements for Forward-Looking Statements

(b)      Reports on Form 8-K.

         ISS filed no reports on Form 8-K during this reporting period




                                     - 15 -
<PAGE>   16


                                 ISS GROUP, INC.
                                   SIGNATURES


Pursuant to the requirements 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.

                                            ISS GROUP, INC.
                                            ---------------
                                             (Registrant)



Date:   August 13, 1999                 By  /s/ Richard Macchia
     ------------------------             --------------------------------------
                                            Chief Financial Officer
                                            (Principal Financial and Accounting
                                            Officer)



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