<PAGE>
                                  UNITED STATES
                       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, 2003

                                       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 000-23655

                         INTERNET SECURITY SYSTEMS, INC.

             (Exact name of registrant as specified in its charter)

              DELAWARE                             58-2362189
        (State or jurisdiction of               (I.R.S. Employer
      incorporation or organization)           Identification No.)

                   6303 BARFIELD ROAD, ATLANTA, GEORGIA 30328
                    (Address of principal executive offices)

         Registrant's telephone number, including area code (404) 236-2600
                                                            --------------

         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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). 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.

                                               Number of Shares Outstanding
  Title of each class of common stock             as of August 4, 2003
    Common stock, $0.001 par value                     49,747,000


                                       1
<PAGE>

<TABLE>
<CAPTION>
                                                                               PAGE
                                                                              NUMBER
                                                                              ------
                         PART I - FINANCIAL INFORMATION
<S>          <C>                                                              <C>
Item 1       Consolidated Financial Statements:
             Consolidated Balance Sheets at June 30, 2003 and
             December 31, 2002                                                   3
             Consolidated Statements of Operations for the three months
             and six months ended June 30, 2003 and June 30, 2002                4
             Consolidated Statements of Cash Flows for the six
             months ended June 30, 2003 and June 30, 2002                        5
             Notes to Consolidated Financial Statements                          6
Item 2       Management's Discussion and Analysis of
             Financial Condition and Results of Operations                      12
Item 3       Quantitative and Qualitative Disclosures about Market Risk         23
Item 4       Controls and Procedures                                            23

                          PART II - OTHER INFORMATION

Item 4       Submission of Matters to a Vote of Security Holders                24
Item 6       Exhibits and Reports on Form 8-K                                   24
</TABLE>


                                       2
<PAGE>

                         INTERNET SECURITY SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
           (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                         JUNE 30,         DECEMBER 31,
                                                                                           2003               2002
                                                                                        ----------        ------------
                                                                                        (UNAUDITED)
<S>                                                                                     <C>               <C>
                                     ASSETS
Current assets:
       Cash and cash equivalents                                                        $  165,488         $  148,317
       Marketable securities                                                                60,186             53,999
       Accounts receivable, less allowance for doubtful accounts
          of $3,477 and $2,790, respectively                                                51,311             56,700
       Inventory                                                                               450              1,055
       Prepaid expenses and other current assets                                             8,746              7,000
                                                                                        ----------         ----------
                Total current assets                                                       286,181            267,071
Property and equipment:
       Computer equipment                                                                   42,698             38,403
       Office furniture and equipment                                                       20,400             21,446
       Leasehold improvements                                                               22,329             21,183
                                                                                        ----------         ----------
                                                                                            85,427             81,032
       Less accumulated depreciation                                                        46,609             39,313
                                                                                        ----------         ----------
                                                                                            38,818             41,719
Restricted marketable securities                                                            14,125             14,690
Goodwill, net                                                                              200,864            200,464
Other intangibles, less accumulated amortization of
       $11,718 and $9,223, respectively                                                     12,889             15,384
Other assets                                                                                 6,899              7,240
                                                                                        ----------         ----------
                Total assets                                                            $  559,776         $  546,568
                                                                                        ==========         ==========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Accounts payable                                                                 $    3,552         $    1,765
       Accrued expenses                                                                     19,730             22,332
       Deferred revenues                                                                    53,120             55,587
                                                                                        ----------         ----------
                Total current liabilities                                                   76,402             79,684
Non-current liabilities                                                                      2,472              2,328
Commitments and contingencies
Stockholders' equity:
       Preferred stock, $.001 par value, 20,000,000 shares authorized,
          none issued or outstanding                                                            --                 --
       Common stock, $.001 par value, 120,000,000 shares authorized,
          49,668,000 and 49,544,000 issued and outstanding, respectively                        50                 50
       Additional paid-in capital                                                          470,883            463,779
       Deferred compensation                                                                  (285)              (702)
       Accumulated other comprehensive income                                                1,666                949
       Retained earnings                                                                    12,767              2,514
       Treasury stock, at cost (306,000 and 133,000 shares, respectively)                   (4,179)            (2,034)
                                                                                        ----------         ----------
                Total stockholders' equity                                                 480,902            464,556
                                                                                        ----------         ----------
                Total liabilities and stockholders' equity                              $  559,776         $  546,568
                                                                                        ==========         ==========
</TABLE>

                             See accompanying notes


                                       3
<PAGE>

                         INTERNET SECURITY SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                                             JUNE 30,                           JUNE 30,
                                                                    --------------------------         ---------------------------
                                                                      2003              2002              2003             2002
                                                                    --------         ---------         ---------         ---------
<S>                                                                 <C>              <C>               <C>               <C>
Revenues:
   Product licenses and sales                                       $ 24,349         $  30,187         $  50,613         $  60,400
   Subscriptions                                                      27,926            22,788            54,824            43,110
   Professional services                                               6,850             7,056            13,141            14,898
                                                                    --------         ---------         ---------         ---------
                                                                      59,125            60,031           118,578           118,408
Costs and expenses:
   Cost of revenues:
        Product licenses and sales                                     1,804             1,344             3,245             3,671
        Subscriptions and professional services                       12,539            13,362            24,887            25,871
                                                                    --------         ---------         ---------         ---------
   Total cost of revenues                                             14,343            14,706            28,132            29,542
   Research and development                                           10,121             8,821            19,792            17,428
   Sales and marketing                                                20,995            23,902            42,171            46,589
   General and administrative                                          5,439             6,832            10,979            12,276
   Amortization of other intangibles and stock-based
        compensation                                                   1,325             1,464             2,729             2,960
                                                                    --------         ---------         ---------         ---------
                                                                      52,223            55,725           103,803           108,795
Operating income                                                       6,902             4,306            14,775             9,613
Interest income                                                          737               872             1,380             1,602
Minority interest                                                        (14)              (68)             (102)             (207)
Other income                                                               9             1,873                33             1,836
Foreign currency exchange gain (loss)                                    225              (100)              469               (77)
                                                                    --------         ---------         ---------         ---------
Income before income taxes                                             7,859             6,883            16,555            12,767
Provision for income taxes                                             2,968             2,758             6,302             5,273
                                                                    --------         ---------         ---------         ---------
Net income                                                          $  4,891         $   4,125         $  10,253         $   7,494
                                                                    ========         =========         =========         =========
Basic net income per share of Common Stock                          $   0.10         $    0.09         $    0.21         $    0.16
                                                                    ========         =========         =========         =========
Diluted net income per share of Common Stock                        $   0.10         $    0.08         $    0.21         $    0.15
                                                                    ========         =========         =========         =========
Weighted average shares:
   Basic                                                              49,510            48,340            49,249            47,924
                                                                    ========         =========         =========         =========
   Diluted                                                            50,452            48,927            49,934            48,773
                                                                    ========         =========         =========         =========
</TABLE>

                             See accompanying notes


                                       4
<PAGE>

                         INTERNET SECURITY SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                  SIX MONTHS ENDED
                                                                                                       JUNE 30,
                                                                                             -----------------------------
                                                                                                2003              2002
                                                                                             ----------         ----------
<S>                                                                                          <C>                <C>
OPERATING ACTIVITIES
Net income                                                                                   $   10,253         $    7,494
Adjustments to reconcile net income to net cash provided by operating activities:
         Depreciation                                                                             7,296              7,145
         Amortization of intangibles and stock-based compensation                                 2,729              2,960
         Accretion of discount on marketable securities                                             117                381
         Minority interest                                                                          102                207
         Income tax benefit from exercise of stock options                                        5,492              4,225
         Gain on issuance of subsidiary stock                                                       (66)                --
     Changes in assets and liabilities:
         Accounts receivable                                                                      5,389             (5,508)
         Inventory                                                                                  605               (388)
         Prepaid expenses and other assets                                                       (1,214)            (2,992)
         Accounts payable and accrued expenses                                                     (805)            (2,523)
         Deferred revenues                                                                       (2,467)             1,800
                                                                                             ----------         ----------
            NET CASH PROVIDED BY OPERATING ACTIVITIES                                            27,431             12,801
INVESTING ACTIVITIES
Net proceeds from maturity of marketable securities                                              31,563             64,396
Purchases of marketable securities                                                              (37,867)           (42,345)
Purchases of restricted marketable securities                                                       565                 --
Purchases of property and equipment                                                              (4,394)            (7,915)
Issuance of subsidiary stock                                                                         97                 --
                                                                                             ----------         ----------
            NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                 (10,036)            14,136
FINANCING ACTIVITIES
Proceeds from exercise of stock options                                                             317              2,756
Proceeds from employee stock purchase plan                                                          853              1,142
Purchases of treasury stock                                                                      (2,145)                --
                                                                                             ----------         ----------
            NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                    (975)             3,898
Foreign currency impact on cash                                                                     751              2,409
                                                                                             ----------         ----------
Net increase in cash and cash equivalents                                                        17,171             33,244
Cash and cash equivalents at beginning of period                                                148,317            108,038
                                                                                             ----------         ----------
Cash and cash equivalents at end of period                                                   $  165,488         $  141,282
                                                                                             ==========         ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Income taxes paid                                                                            $      590         $    2,502
                                                                                             ==========         ==========
</TABLE>

                             See accompanying notes


                                       5
<PAGE>

                         INTERNET SECURITY SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

         The consolidated financial statements of Internet Security Systems,
Inc. ("ISS" or the "Company") as of June 30, 2003 and for the three months and
six months ended June 30, 2003 and 2002 are unaudited and, in the opinion of
management, contain all adjustments, consisting of normal recurring items,
necessary for the fair presentation of the financial position and results of
operations for the interim periods. The consolidated financial statements
include the accounts of Internet Security Systems, Inc. and its majority-owned
subsidiaries. The consolidated balance sheet at December 31, 2002 has been
derived from the audited financial statements at that date but does not include
all of the footnotes required by accounting principles generally accepted in the
United States for complete financial statements.

         These consolidated financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2002. The results of
operations for the three months and six months ended June 30, 2003 are not
necessarily indicative of the results to be expected for the entire year. All
significant intercompany accounts and transactions have been eliminated.

         The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results may
differ from those estimates, and such differences may be material to the
consolidated financial statements.

GOODWILL AND INTANGIBLES

         Goodwill and intangible assets are comprised of the following, as of
the dates indicated (in thousands):

<TABLE>
<CAPTION>
                                                           JUNE 30, 2003                    DECEMBER 31, 2002
                                                 GROSS CARRYING      ACCUMULATED     GROSS CARRYING    ACCUMULATED
                                                     AMOUNT         AMORTIZATION         AMOUNT        AMORTIZATION
                                                 --------------     ------------     --------------    ------------
         <S>                                     <C>                <C>              <C>               <C>
         Unamortized intangible assets:
               Goodwill                             $ 228,245        $ (27,381)        $ 227,845        $ (27,381)
                                                    =========        =========         =========        =========
         Amortized intangible assets:
               Core technology                          3,853           (2,278)            3,853           (2,039)
               Developed technology                    16,857           (7,435)           16,857           (5,654)
               Work force                               1,407             (434)            1,407             (216)
               Customer relationships                   2,490           (1,571)            2,490           (1,314)
                                                    ---------        ---------         ---------        ---------
                     Total                          $  24,607        $ (11,718)        $  24,607        $  (9,223)
                                                    =========        =========         =========        =========
</TABLE>

The Company amortizes intangible assets over their estimated useful lives of
eight years for core technology, five years for developed technology, three to
six years for work force and three years for customer relationships.
Amortization expense of intangible assets is as follows (in thousands):

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                      JUNE 30,                    JUNE 30,
                                                               2003           2002           2003           2002
                                                             -------        -------        -------        -------
                  <S>                                        <C>            <C>            <C>            <C>
                  Core technology                            $   119        $   120        $   239        $   241
                  Developed technology                           891            890          1,781          1,781
                  Work force                                     109              9            218             18
                  Customer relationships                         128            110            257            218
                                                             -------        -------        -------        -------
                           Total                             $ 1,247        $ 1,129        $ 2,495        $ 2,258
                                                             =======        =======        =======        =======
</TABLE>


                                       6
<PAGE>

                         INTERNET SECURITY SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The estimated future amortization expense of intangible assets as of
June 30, 2003 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                      AMOUNT
                                                     -------
             <S>                                     <C>
             FISCAL YEAR:
                  2003 (remaining six months)        $ 2,463
                  2004                                 4,825
                  2005                                 4,370
                  2006                                 1,231
                                                     -------
                  Total                              $12,889
                                                     =======
</TABLE>

STOCK-BASED COMPENSATION

         Statement of Financial Accounting Standard 123, Accounting for
Stock-Based Compensation ("SFAS 123"), as amended by SFAS 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, establishes accounting and
reporting standards for stock-based employee compensation plans. As permitted by
SFAS 123, ISS continues to account for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and has elected the pro forma disclosure alternative of
SFAS 123.

         Although SFAS 123 allows the Company to continue to follow APB 25
guidelines, the following is pro forma net loss and pro forma net loss per share
for the periods indicated as if the Company had adopted SFAS 123. The following
table illustrates the effect on net income per share if the provisions of SFAS
123 had been applied. The pro forma impact of applying SFAS 123 as illustrated
below will not necessarily be representative of the pro forma impact in future
years. Pro forma information is as follows (amounts in thousands, except per
share amounts):

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                           JUNE 30,                          JUNE 30,
                                                                 ----------------------------      ----------------------------
                                                                    2003             2002             2003              2002
                                                                 -----------      -----------      -----------      -----------
<S>                                                              <C>              <C>              <C>              <C>
Net income, as reported                                          $     4,891      $     4,125      $    10,253      $     7,494
Pro forma stock compensation expense
  computed under the fair value method, net
  of income taxes                                                     (7,797)          (7,711)         (14,439)         (14,179)
                                                                 -----------      -----------      -----------      -----------
Pro forma net loss                                                    (2,906)          (2,349)          (4,186)          (6,685)
                                                                 ===========      ===========      ===========      ===========
Basic net income per share of Common
  Stock, as reported                                             $      0.10      $      0.09      $      0.21      $      0.16
                                                                 ===========      ===========      ===========      ===========
Diluted net income per share of
  Common Stock, as reported                                      $      0.10      $      0.08      $      0.21      $      0.15
                                                                 ===========      ===========      ===========      ===========
Pro forma basic and diluted net loss per
  share of Common Stock                                          $     (0.06)     $     (0.05)     $     (0.08)     $     (0.14)
                                                                 ===========      ===========      ===========      ===========
</TABLE>

RECENTLY ISSUED ACCOUNTING STANDARDS

         In November 2002, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") issued EITF 00-21, Revenue
Arrangements with Multiple Deliverables, which addresses certain aspects of the
accounting for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. Under EITF 00-21, revenue
arrangements with multiple deliverables should be divided into separate units of
accounting if the deliverables meet certain criteria, including whether the fair
value of the delivered items can be determined and whether there is evidence of
fair value of the undelivered items. In addition, the consideration should be
allocated among the separate units of accounting based on their fair values, and
the applicable revenue recognition criteria should be considered separately for
each of the separate units of accounting. EITF 00-21 is effective for revenue
arrangements we enter into after June 30, 2003. The Company will adopt EITF
00-21 effective July 1, 2003. Management believes that the adoption of this
statement will not have a material effect on the Company's financial position,
results of operations or liquidity.


                                       7
<PAGE>

         In November 2002, the FASB issued Financial Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN 45"), which is an
interpretation of SFAS Nos. 5, 57, and 107 and rescission of FASB Interpretation
No. 34. The Interpretation requires that a guarantor recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken by
issuing the guarantee. The Interpretation also requires additional disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees it has issued. The accounting
requirements for the initial recognition of guarantees are applicable on a
prospective basis for guarantees issued or modified after December 31, 2002. The
disclosure requirements were effective during the first quarter of 2003 for all
guarantees outstanding, regardless of when they were issued or modified. The
adoption of FIN 45 did not have a material effect on our condensed consolidated
financial statements for the first quarter of 2003. The following is a summary
of our agreements that we have determined are within the scope of FIN 45.

         Our sales agreements with customers generally contain infringement
indemnity provisions. Under these agreements, we agree to indemnify, defend and
hold harmless the customer in connection with patent, copyright or trade secret
infringement claims made by third parties with respect to the customer's
authorized use of our products and services. The indemnity provisions generally
provide for our control of defense and settlement and cover costs and damages
finally awarded against the customer, as well as our modification of the product
so it is no longer infringing or, if it cannot be corrected, return of the
product for a partial refund that reflects the reasonable value of prior use.
Our sales agreements with customers sometimes also contain indemnity provisions
for death, personal injury or property damage caused by our personnel or
contractors in the course of performing services to customers. Under these
agreements, we agree to indemnify, defend and hold harmless the customer in
connection with death, personal injury and property damage claims made by third
parties with respect to actions of our personnel or contractors. The indemnity
provisions generally provide for our control of defense and settlement and cover
costs and damages finally awarded against the customer. The indemnity
obligations contained in sales agreements generally have no specified expiration
date and no specified monetary limitation on the amount of award covered. We
have not previously incurred costs to settle claims or pay awards under these
indemnification obligations. As a result, we believe the estimated fair value of
these obligations is nominal. Accordingly, we have no liabilities recorded for
these agreements as of June 30, 2003.

         We warrant that our software products will perform in all material
respects in accordance with our standard published specifications in effect at
the time of delivery of the licensed products to the customer for ninety days.
Additionally, we warrant that our services will be performed consistent with
generally accepted industry standards or specific service levels through
completion of the agreed upon services. If necessary, we would provide for the
estimated cost of product and service warranties based on specific warranty
claims and claim history, however, we have not incurred significant recurring
expense under our product or service warranties. As a result, we believe the
estimated fair value of these agreements is nominal. Accordingly, we have no
liabilities recorded for these agreements as of June 30, 2003.

         Payments for certain operating leases for office space are secured by
collateralized standby letters of credit totaling $11.3 million at June 30,
2003. These standby letters of credit guarantee payments on certain lease
obligations and are renewed annually unless cancelled by either party. The lease
obligations have terms that expire at various dates through 2013. The
beneficiary of the standby letters of credit can draw on the letters of credit
if we default on the related lease obligation. Each standby letter of credit is
collateralized by securities. At June 30, 2003, $14.1 million of commercial
paper investments are pledged as collateral and are shown on the balance sheet
as restricted cash.

         In January 2003, the FASB issued Financial Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"), which addresses
consolidation by business enterprises of variable interest entities that either:
(1) do not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial support, or (2)
the equity investors lack an essential characteristic of a controlling financial
interest. We are currently evaluating the implications of the adoption of FIN 46
on our financial position, cash flows, and results of operation.

2.       INCOME TAXES

         The Company recorded tax provisions of $3.0 million and $2.8 million
for the three-month periods ended June 30, 2003 and 2002, respectively and tax
provisions of $6.3 million and $5.3 million for the six months ended June 30,
2003 and 2002, respectively. While income tax expense was recorded on domestic
income, domestic taxes payable was reduced by deductions related to the employee


                                       8
<PAGE>

exercise of stock options. The tax benefit of these deductions was recorded as
additional paid-in-capital. Taxes paid generally relate to foreign operations
and certain state taxes for which net operating loss deductions have been
suspended.

         The effective tax rate was approximately 38% and 40% for the quarters
ended June 30, 2003 and 2002, respectively and 38% and 41% for the six-month
periods ended June 30, 2003 and 2002, respectively. The effective rates differ
from the statutory rates due primarily to the impact of acquisition related
intangibles that are not deductible for income tax purposes.

         As of June 30, 2003, ISS had a net operating loss carryforward of
approximately $38.0 million. The tax benefit of this carryforward will be
recorded as additional paid-in-capital as realized. There are also approximately
$6.6 million of research and development tax credit carryforwards that expire
between 2011 and 2022 and foreign tax credit carryforwards of $2.5 million that
expire in 2006 and 2007.

3.       BUSINESS ACQUISITION

         In August 2002, Internet Security Systems KK ("ISS KK"), the Company's
Asia/Pacific subsidiary, acquired a primary ISS KK distributor in Singapore,
TriSecurity Holdings Pte Ltd. During the first quarter of 2003 ISS KK amended
its agreement with TriSecurity Holdings Pte Ltd. and agreed to make payment of
245 shares of ISS KK stock in each of the first quarters of 2004 and 2005,
relating to the annual contingent consideration payments defined in the 2002
purchase agreement. The additional consideration of $626,000, based on current
fair market value of the shares, was recorded as additional goodwill and
additional paid-in-capital during the first quarter of 2003. When such shares
are actually issued, a gain or loss will be recognized to the extent of any
difference between the $626,000 fair value of the shares to be issued and the
book value of those shares, in accordance with Staff Accounting Bulletin No. 51,
Accounting for Sales of Stock by a Subsidiary.

4.       COMPREHENSIVE INCOME

         The components of comprehensive income are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                   THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                                         JUNE 30,                JUNE 30,
                                                                                   -------------------     --------------------
                                                                                     2003       2002         2003        2002
                                                                                   -------     -------     --------     -------
                  <S>                                                              <C>         <C>         <C>          <C>
                  Net income, as reported                                          $ 4,891     $ 4,125     $ 10,253     $ 7,494
                  Change in cumulative translation adjustment                        1,066       3,094          717       2,409
                                                                                   -------     -------     --------     -------
                  Comprehensive income                                             $ 5,957     $ 7,219     $ 10,970     $ 9,903
                                                                                   =======     =======     ========     =======
</TABLE>

5.       INCOME PER SHARE

         The computation of net income per share is as follows (amounts in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                                   THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                                        JUNE 30,                JUNE 30,
                                                                                   -------------------     --------------------
                                                                                    2003        2002         2003         2002
                                                                                   -------     -------     --------     -------
                  <S>                                                              <C>         <C>         <C>          <C>
                  Basic net income per share:
                     Net income                                                    $ 4,891     $ 4,125     $ 10,253     $ 7,494
                     Weighted average number of common shares
                     outstanding during the period                                  49,510      48,340       49,249      47,924
                                                                                   -------     -------     --------     -------
                  Basic net income per share                                       $  0.10     $  0.09     $   0.21     $  0.16
                                                                                   =======     =======     ========     =======

                  Diluted net income per share:
                     Net income                                                    $ 4,891     $ 4,125     $ 10,253     $ 7,494
                     Weighted average number of common shares
                     outstanding during the period                                  49,510      48,340       49,249      47,924
                     Dilutive stock options                                            942         587          685         849
                                                                                   -------     -------     --------     -------
                     Total shares for purpose of calculating
                     diluted net income per share                                   50,452      48,927       49,934      48,773
                                                                                   -------     -------     --------     -------
                  Diluted net income per share                                     $  0.10     $  0.08     $   0.21     $  0.15
                                                                                   =======     =======     ========     =======
</TABLE>

6.       SEGMENT AND GEOGRAPHIC INFORMATION


                                       9
<PAGE>

         ISS conducts business in one operating segment, providing information
security management solutions. The Company does, however, prepare information
for internal use on a geographic basis. This information consists of the
operating results of each geographic segment. The segment operating costs
reported internally generally consist of direct sales expenses, an executive
team and infrastructure to support its employee and customer and partner base,
and supporting billing and financial systems. Unallocated corporate expenses
include research and development, general and administrative costs that support
the global organization and amortization of intangibles and stock-based
compensation.

         The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. There are no intersegment
sales. The chief executive officer and chief financial officer of ISS evaluate
performance based on operating profit or loss from operations and trade accounts
receivable for each segment. Other than trade accounts receivable, assets and
liabilities are not discretely allocated or reviewed by segment. Goodwill is
allocated to the segments in accordance with the requirements of SFAS 142,
Accounting for Goodwill and Other Intangibles. The Company does not allocate or
review goodwill by segment for internal reporting purposes.

    The following table presents ISS's revenues, operating expenses and
operating income (loss) by reportable operating segment (in thousands):

<TABLE>
<CAPTION>
                                                             AS OF AND FOR THE THREE MONTHS ENDED
                                                                            JUNE 30, 2003
                                             ---------------------------------------------------------------------
                                             AMERICAS         EMEA      ASIA/PACIFIC    UNALLOCATED         TOTAL
                                             --------       -------     ------------    -----------        -------
<S>                                          <C>            <C>         <C>             <C>                <C>
Revenues from external customers:
   Product licenses
     and sales ......................        $17,002        $ 4,248        $ 3,099        $     --         $24,349
   Subscriptions ....................         20,434          4,891          2,601              --          27,926
   Professional services ............          4,529          1,021          1,300              --           6,850
                                             -------        -------        -------        --------         -------
Total revenue .......................         41,965         10,160          7,000              --          59,125
Cost of revenues:
   Product licenses and sales .......          1,587             77            140              --           1,804
   Subscriptions and professional
     services .......................          8,301          1,842          2,396              --          12,539
                                             -------        -------        -------        --------         -------
Total cost of revenues ..............          9,888          1,919          2,536              --          14,343
Operating expenses ..................         14,487          5,054          1,454          16,885          37,880
                                             -------        -------        -------        --------         -------
Total expenses ......................         24,375          6,973          3,990          16,885          52,223
Segment operating income (loss) .....        $17,590        $ 3,187        $ 3,010        $(16,885)        $ 6,902
                                             -------        -------        -------        --------         -------
Accounts receivable, net ............        $31,286        $ 9,672        $10,353        $     --         $51,311
                                             -------        -------        -------        --------         -------

<CAPTION>

                                                             AS OF AND FOR THE THREE MONTHS ENDED
                                                                          JUNE 30, 2002
                                             --------------------------------------------------------------------
                                             AMERICAS        EMEA       ASIA/PACIFIC   UNALLOCATED         TOTAL
                                             --------       -------     ------------   -----------        -------
<S>                                          <C>            <C>         <C>            <C>                <C>
Revenues from external customers:
   Product licenses
     and sales ......................        $20,272        $ 4,534        $5,381        $     --         $30,187
   Subscriptions ....................         17,642          3,095         2,051              --          22,788
   Professional services ............          4,750          1,464           842              --           7,056
                                             -------        -------        ------        --------         -------
Total revenue .......................         42,664          9,093         8,274              --          60,031
Cost of revenues:
   Product licenses and sales .......          1,344             --            --              --           1,344
   Subscriptions and professional
     services .......................          9,067          2,185         2,110              --          13,362
                                             -------        -------        ------        --------         -------
Total cost of revenues ..............         10,411          2,185         2,110              --          14,706
Operating expenses ..................         16,781          4,734         2,387          17,117          41,019
                                             -------        -------        ------        --------         -------
Total expenses ......................         27,192          6,919         4,497          17,117          55,725
Segment operating income (loss) .....        $15,472        $ 2,174        $3,777        $(17,117)        $ 4,306
                                             -------        -------        ------        --------         -------
Accounts receivable, net ............        $35,973        $10,137        $9,657        $     --         $55,767
                                             -------        -------        ------        --------         -------
</TABLE>

<TABLE>
<CAPTION>
                                                                 AS OF AND FOR THE SIX MONTHS ENDED
                                                                           JUNE 30, 2003
                                             ----------------------------------------------------------------------
                                             AMERICAS         EMEA      ASIA/PACIFIC    UNALLOCATED         TOTAL
                                             --------       -------     ------------    -----------        --------
<S>                                          <C>            <C>         <C>             <C>                <C>
Revenues from external customers:
   Product licenses
     and sales ......................        $35,055        $ 9,212        $ 6,346        $     --         $ 50,613
   Subscriptions ....................         40,568          9,068          5,188              --           54,824
   Professional services ............          8,518          2,058          2,565              --           13,141
                                             -------        -------        -------        --------         --------
Total revenue .......................         84,141         20,338         14,099              --          118,578
Cost of revenues:
   Product licenses and sales .......          3,003             77            165              --            3,245
   Subscriptions and professional
     services .......................         16,536          3,794          4,557              --           24,887
                                             -------        -------        -------        --------         --------
Total cost of revenues ..............         19,539          3,871          4,722              --           28,132
Operating expenses ..................         28,775         10,144          3,252          33,500           75,671
                                             -------        -------        -------        --------         --------
Total expenses ......................         48,314         14,015          7,974          33,500          103,803
Segment operating income (loss) .....        $35,827        $ 6,323        $ 6,125        $(33,500)        $ 14,775
                                             -------        -------        -------        --------         --------
Accounts receivable, net ............        $31,286        $ 9,672        $10,353        $     --         $ 51,311
                                             -------        -------        -------        --------         --------

<CAPTION>

                                                                 AS OF AND FOR THE SIX MONTHS ENDED
                                                                             JUNE 30, 2002
                                              ---------------------------------------------------------------------
                                              AMERICAS         EMEA       ASIA/PACIFIC    UNALLOCATED       TOTAL
                                              --------       -------      ------------    -----------       -------
<S>                                           <C>            <C>          <C>             <C>               <C>
Revenues from external customers:
   Product licenses
     and sales ......................         $41,122        $ 8,864        $10,414        $     --         $60,400
   Subscriptions ....................          33,424          5,682          4,004              --          43,110
   Professional services ............           9,860          2,801          2,237              --          14,898
                                              -------        -------        -------        --------         -------
Total revenue .......................          84,406         17,347         16,655              --         118,408
Cost of revenues:
   Product licenses and sales .......           3,629             --             42              --           3,671
   Subscriptions and professional
     services .......................          17,629          4,361          3,881              --          25,871
                                              -------        -------        -------        --------         -------
Total cost of revenues ..............          21,258          4,361          3,923              --          29,542
Operating expenses ..................          33,206          9,162          4,221          32,664          79,253
                                              -------        -------        -------        --------         -------
Total expenses ......................          54,464         13,523          8,144          32,664         108,795
Segment operating income (loss) .....         $29,942        $ 3,824        $ 8,511        $(32,664)        $ 9,613
                                              -------        -------        -------        --------         -------
Accounts receivable, net ............         $35,973        $10,137        $ 9,657        $     --         $55,767
                                              -------        -------        -------        --------         -------
</TABLE>

7.       CONTINGENCIES

         Beginning on September 28, 2001, the Company and certain of its
officers and directors were named as defendants in several lawsuits alleging
violations of the federal securities laws, including Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. Six
such actions were filed in the United States District Court for the Northern
District of Georgia. All six actions have been consolidated into a single case
and the court has appointed lead plaintiffs and lead plaintiffs counsel. The
consolidated amended complaint was filed October 9, 2002 and purports to be
brought on behalf of a class of investors who purchased the Company's stock
during the period from April 5, 2001 through August 14, 2001 (the "Class
Period"). The complaint generally alleges that the Company and the individual
defendants violated the anti-fraud provisions of the federal securities


                                       10
<PAGE>

laws and caused the Company's stock to trade at artificially high prices by
making misrepresentations relating to the Company's financial condition and
prospects during the Class Period. The complaint seeks damages in an unspecified
amount. On December 11, 2002, the Company and the individual defendants moved to
dismiss the consolidated amended complaint under the Private Securities
Litigation Reform Act of 1995. The Court has not yet ruled on that motion. The
Company believes that it has meritorious defenses and intends to defend the
actions vigorously.


                                       11
<PAGE>

                         INTERNET SECURITY SYSTEMS, 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
current intent, belief or 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 in this Quarterly Report on Form 10-Q, as filed
with the Securities and Exchange Commission and available at the SEC's Web site
at www.sec.gov.

OVERVIEW

         We are a global leader in information protection solutions dedicated to
protecting online assets. Our proactive line of defense solutions protects
networks, servers and desktops against an ever-changing spectrum of threats,
with a comprehensive line of products and services designed specifically for the
particular needs of enterprise, service provider and risk management markets.
These threat protection solutions go beyond basic access control to deliver
multiple layers of defense that detect, prevent and respond to threats prior to
those threats causing damage to our customers' business operations.

         We provide a wide range of proactive protection solutions that span
networks, servers and desktops, built around the need for comprehensive,
cost-effective detection, prevention and response arising from attacks, misuse
and security policy violations, all while promoting the confidentiality,
privacy, integrity and availability of proprietary information.

         Our 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 line of products is designed specifically for the
particular needs of enterprise, service provider, risk management, small
business and consumer markets.

         Our managed protection services offerings provide remote management of
our best-of-breed security technology, focusing on security assessment and
intrusion detection systems, and also includes firewalls, VPNs, anti-virus and
URL filtering software. We focus on serving as the trusted security provider to
our customers by maintaining within our existing products the latest
counter-measures to security risks, creating new innovative products based on
our customers' needs and providing professional and managed services.

         Many factors affect financial performance, and past performance is no
assurance of similar future performance. We expect, in the long-term, to
continue to expand our domestic and international sales and marketing
operations; increase our investment in product development including our
proprietary threat and vulnerability database and managed services capabilities;
seek acquisition candidates and alliances with partners whose products,
technologies or services capabilities are complementary to our solutions; and
improve our internal operating and financial infrastructure in support of our
strategic goals and objectives. At the same time, we expect to adjust our
organization size in light of changing economic conditions and maintain emphasis
on controlling discretionary spending and capital expenditures. While we believe
in the long-term success of our business solutions, our prospects must be
considered in light of the experience, risks and difficulties that are
frequently encountered by companies in new and rapidly evolving markets. See
"Risk Factors".

CRITICAL ACCOUNTING POLICIES

         The consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States. As such,
management is required to make certain estimates, judgments and assumptions it
believes are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:


                                       12
<PAGE>

Revenue recognition

         Revenue is recognized under Statement of Position ("SOP") 97-2 as
modified by SOP 98-9, when the following criteria have been met:

         -        persuasive evidence of an arrangement exists;

         -        delivery has occurred or services have been rendered;

         -        price is fixed or determinable; and

         -        collection is probable.

         We recognize perpetual license revenues upon (1) delivery of software
or, if the customer has evaluation software, delivery of the software key and
(2) 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 become due and payable. Product sales consist of (1) appliances sold in
conjunction with ISS licensed software and (2) software developed by third-party
partners, combined in some instances with associated hardware appliances and
partner product support services. These sales are recognized upon shipment to
the customer provided all other revenue recognition criteria are met.

         License sales of enterprise products are generated both through direct
sales to end users as well as through various partners, including system
integrators, value-added resellers and distributors. License revenue is
recognized when the sale has occurred for an identified end user, provided all
other revenue recognition criteria are met, with the sale identified through
electronic delivery of a software key that is necessary to operate the product.
At the point of key delivery, the end-user has no right of return.

         Subscription revenues include product support, term licenses, and
managed service arrangements. Annual renewable product support is a separate
component of each perpetual license agreement and appliance sold in conjunction
with ISS products with revenue recognized ratably over the product support term.
Term licenses allow customers to use our products and receive product support
coverage for a specified period, generally 12 months. We recognize revenues from
these term agreements ratably over the subscription term. Security monitoring
services of information assets and systems are part of managed services and
revenues are recognized as such services are provided.

         Professional services revenues include fee-based service engagements
and training. Service engagements, typically billed on a time-and-materials
basis, primarily focus on security assessments of customer networks and the
development of customers' security policies. We recognize such professional
services revenues as the related services are rendered.

         Multiple element arrangements can include any combination of hardware,
software or services. When some elements are delivered prior to others in an
arrangement, revenue is deferred until the delivery of the last element unless
there is all of the following:

         -        vendor specific objective evidence (VSOE) of fair value of the
                  undelivered elements;

         -        the functionality of the delivered elements is not dependent
                  on the undelivered elements; and

         -        delivery of the delivered elements represents the culmination
                  of the earnings process.

         Our historical rate of return for our software products is negligible.
We offer demonstration software available via download from our website that
allows potential customers to see the functionality of the products on their own
networks. We did not have any transactions in the first six months of either
2003 or 2002 involving reciprocal arrangements where goods or services were
purchased from an organization at the same time that we licensed software or
provided services to that organization.

Allowance for doubtful accounts

         Our sales are global, with customers located in the United States,
Europe, Latin America and the Asia/Pacific regions. We perform periodic credit
evaluations of our customer's financial condition and do not require collateral.
We provide for estimated credit losses as such losses become probable. We
evaluate specific accounts when we become aware of a situation where a customer
may not be


                                       13
<PAGE>

able to meet its financial obligations due to deterioration of its liquidity or
financial viability, credit ratings or bankruptcy. The allowance for doubtful
accounts is established based on the best facts available to us and is
reevaluated and adjusted as additional information is received. At June 30,
2003, the allowance for doubtful accounts totaled 6.3% of the $54.8 million of
total trade receivables.

         While actual credit losses have historically been within the provisions
established based on management's expectations, we cannot guarantee that we will
continue to experience the same credit loss rates we have in the past. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

Impairment of goodwill

         We review goodwill for impairment on an annual basis or on an interim
basis whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. All other long-lived and intangible
assets are reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. Such impairment
loss would be measured as the difference between the carrying amount of the
asset and its fair value based on the present value of estimated future cash
flows. Significant judgment is required in the forecasting of future operating
results, which are used in the preparation of projected cash flows. Due to
uncertain market conditions and potential changes in our strategy and products,
it is possible that forecasts used to support our intangible assets may change
in the future which could result in significant non-cash charges that would
adversely affect our results of operations and financial condition.

         We currently have intangible assets related to goodwill of
approximately $201 million, with $195 million related to our June 2001
acquisition of Network ICE. The determination of whether or not this asset is
impaired involves significant judgments based upon short and long-term
projections of future performance. We have concluded that this amount is
realizable based on forecasted discounted cash flows through 2006 and on our
stock market valuation. Neither method indicated that our goodwill had been
impaired and as a result, we did not record any impairment losses related to
goodwill during the quarters or six-month periods ended June 30, 2003 and 2002.

RESULTS OF OPERATIONS

The following table sets forth our consolidated historical operating
information, as a percentage of total revenues, for the periods indicated:

<TABLE>
<CAPTION>
                                                                                 THREE MONTHS ENDED          SIX MONTHS ENDED
                                                                                       JUNE 30,                   JUNE 30,
                                                                                 -------------------         -------------------
                                                                                  2003         2002          2003          2002
                                                                                 -----         -----         -----         -----
                  <S>                                                            <C>           <C>           <C>           <C>
                  Consolidated Statements of Operations Data:
                  Product licenses and sales                                        41%           50%           43%           51%
                  Subscriptions                                                     47%           38%           46%           36%
                  Professional services                                             12%           12%           11%           13%
                                                                                 -----         -----         -----         -----
                     Total revenues                                                100%          100%          100%          100%
                                                                                 -----         -----         -----         -----
                  Cost of revenues:
                     Product licenses and sales                                      3%            2%            3%            3%
                     Subscriptions and
                       professional services                                        21%           22%           21%           22%
                                                                                 -----         -----         -----         -----
                     Total cost of revenues                                         24%           24%           24%           25%
                  Research and development                                          17%           15%           17%           15%
                  Sales and marketing                                               36%           41%           36%           40%
                  General and administrative                                         9%           11%            9%           10%
                  Amortization of intangibles and stock-based compensation           2%            2%            2%            2%
                                                                                 -----         -----         -----         -----
                     Total costs and expenses                                       88%           93%           88%           92%
                                                                                 -----         -----         -----         -----
                  Operating income                                                  12%            7%           12%            8%
                                                                                 =====         =====         =====         =====
</TABLE>

REVENUES

Product licenses and sales

         Product licenses and sales, including perpetual licenses and sales of
partner software and hardware appliances, represented 41% of total revenues for
the three month period ended June 30, 2003 and 50% for the corresponding period
in 2002. Product licenses and


                                       14
<PAGE>

sales represented 43% for the six months ended June 30, 2003 and 51% for the
comparable period of 2002. We believe that the general economic slowdown in
information technology spending contributed to the decrease in product licenses
and sales. Our software products, by their nature, involve a high ongoing labor
component to provide the security for which they are designed. We believe that
tight spending conditions had a negative effect on our product licenses and
sales.

         In the second quarter of 2003, we began to ship our first network
protection appliance, the Proventia A series, to customers. Proventia appliances
feature unified, multi-function protection capabilities designed to identify and
prevent many forms of attack with minimal user intervention. They are designed
to operate in demanding network environments while being easy to deploy, easy to
use and centrally managed, all in an effort to make our solution more
cost-effective. Revenues from our Proventia appliance represented 6% of total
revenues in the second quarter of 2003. We have also announced plans to ship
future series of Proventia appliances with different functionality in future
quarters of 2003 and 2004.

         Our present product roadmap focuses our development on product
offerings and enhancements providing more central control and manageability,
easier deployment and more refined information. We expect that this focus will
make our products more cost effective to implement and increase the future level
of product licenses and sales, especially in the current challenging market
conditions.

Subscriptions

         Subscriptions revenue represented 47% of total revenues in the three
months ended June 30, 2003 increasing from 38% of total revenues in the three
months ended June 30, 2002. For the six months ending June 30, 2003,
subscriptions revenue increased to 46% from 36% in the six months ended June 30,
2002. Subscriptions revenue consists of product content and support, term
licenses of product usage and security-monitoring fees for managed services
offerings. The increase in subscriptions revenue as a percentage of total
revenues was primarily due to an increase in product content and support
revenues, the largest component, which grew from 26% of total revenues in the
three months ended June 30, 2002 to 32% in the comparable period of 2003 and
from 26% for the six months ended June 30, 2002 to 31% in the comparable period
of 2003. Product content and support includes software updates, technical
support and security content, including advisory updates from the X-Force, our
internal team of security experts, and hardware support of our Proventia
appliances. We continue to increase our software client base that generates
product content and support revenues, through a combination of contracts
associated with new product licenses and renewal of existing contracts.

         Managed services revenue accounted for 11% of total revenues for the
quarter ended June 30, 2003, as compared with 7% in the corresponding period of
2002. On a year-to-date basis, managed services revenue has increased from 7% in
2002 to 11% in 2003. We believe these increases are due to a strong demand in
the market for proven, financially sound, managed security service providers. We
expect sales of managed services to continue to increase as a percentage of
total revenues as we focus our efforts on marketing new, innovative offerings,
such as our Managed Protection Services, to new and existing customers. Managed
Protection Services is a premium service combining vulnerability assessment,
managed protection, and other professional services.

Professional services

         Professional services revenue represented 12% of total revenues in both
the three months ended June 30, 2003 and 2002. For the six months ended June 30,
2003, professional services was 11% of revenue decreasing from 13% in the
corresponding period of 2002. We believe that entities continue to curtail costs
and limit spending of discretionary dollars on professional services in current
economic times, which resulted in flat to lower levels of demand for these
services.

         Although we continue to offer training classes at our Atlanta
headquarters and customers' premises, our primary focus is to deliver course
materials to our customers through authorized training centers. By working with
training facilities throughout the country, we provide education consistent with
our standards, but which is now available at several additional locations.

Geographic regions

         Geographically, we derived the majority of our revenues from sales to
customers within the Americas region. Revenues by region represented the
following percentages of total revenues for the periods indicated:


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED        SIX MONTHS ENDED
                                                         JUNE 30,                  JUNE 30,
                                                    ------------------        -----------------
                                                    2003         2002         2003         2002
                                                    ----         ----         ----         ----
                  <S>                               <C>          <C>          <C>          <C>
                  Americas                           71%          71%          71%          71%
                  EMEA                               17%          15%          17%          15%
                  Asia/Pacific Rim                   12%          14%          12%          14%
</TABLE>

         Revenues in EMEA benefited from a strengthening currency in both the
three and six-month periods ended June 30, 2003, since products are sold in the
Euro currency. Asia/Pacific Rim revenue decreased to 12% of total revenues in
both the three months and six months ended June 30, 2003. While this is a
decrease from 14% in the corresponding periods of 2002, it is an increase from
10% in the fourth quarter of 2002. Asia/Pacific Rim experienced difficult
economic conditions in portions of the region beginning in the latter part of
2002, which have continued to a lesser degree into 2003. The SARS epidemic had a
negative impact in certain markets within the Asia/Pacific region in the second
quarter of 2003. The financial data for each segment can be found in Note 6 to
the Consolidated Financial Statements.

COSTS AND EXPENSES

Cost of product licenses and sales

         Cost of product licenses and sales consists of several components.
Costs associated with licensing our software products are minor. The substantial
portion of cost of product licenses and sales represents the hardware cost of
our Proventia appliances and payments to partners for their products that we
sell or integrate with our managed service offerings.

         Costs of product licenses and sales as a percentage of total revenues
increased from 2% in the three months ended June 30, 2002 to 3% for the
comparable period in 2003. For the six months periods ended June 30, 2002 and
2003, costs of product licenses and sales remained flat at 3% of total revenues.
An increase was expected with the introduction of the Proventia appliance line
in the second quarter and we expect the increase in cost of product licenses and
sales to continue to increase in future periods as sales of the Proventia
appliances increase. The impact of costs related to Proventia was offset by our
movement away from the direct sales of third-party products, except where
related to our managed services or associated with the delivery of our products.

Cost of subscriptions and professional services

         Cost of subscriptions and professional services includes the cost of
our technical support personnel who provide assistance to customers under
product support agreements, the security operations center ("SOC") costs of
providing managed security monitoring services and the costs related to our
professional services and training. These costs as a percentage of total
revenues decreased from 22% to 21% in the three months ended June 30, 2003 and
2002 and exhibited the same trend in the six months ended June 30, 2003 and
2002.

         Costs associated with our technical support personnel and our security
operations centers increased to handle our increasing customer base. As our
subscription revenue base increased, we added personnel to handle additional
customers under product support agreements and under managed security monitoring
services, but at a much lower rate than revenue growth. We gained efficiencies
in our security operations centers and restructured our support groups to be
more productive. While we continue to seek increased productivity, we do expect
to increase costs with a continued increase in revenues in the future.

         Offsetting this increase of costs associated with our technical support
personnel and our security operations centers is a decrease in costs associated
with our professional services and education services. As a result of our effort
to focus on core professional services related to ISS product offerings combined
with the difficult economic conditions, costs associated with our professional
services and education services decreased both in absolute dollars and as a
percentage of total revenues from the quarter ended June 30, 2002 to the
comparable quarter of 2003 and from the six month period ended June 30, 2002 to
the comparable period of 2003. Costs were controlled through a continued
narrowing of our consulting offerings to focus on services that directly
contribute to our protection platform strategy, the outsourcing of educational
training outside of Atlanta to authorized partners, and a decrease in the number
of training classes related to third-party products.

Research and development

         Research and development expenses consist of salary and related costs
of research and development personnel, including costs for employee benefits,
and depreciation on computer equipment. These costs include those associated
with maintaining and expanding the


                                       16
<PAGE>

X-Force, our internal team of security experts. We believe our primary research
and product development and managed service offerings are important to retaining
our leadership position in the market.

         Research and development expenses increased in absolute dollars from
$8.8 million in the three months ended June 30, 2002 to $10.1 million in the
three months ended June 30, 2003. On a year-to-date basis, these costs increased
in absolute dollars from $17.4 million in 2002 to $19.8 million in 2003.
Research and development expenses represented 17% of total revenues in the three
and six months ended June 30, 2003, and 15% in the three and six months ended
June 30, 2002. These increases in absolute dollars and percentages of total
revenues are due to the increases in the number of development personnel focused
on our best-of-breed products, enterprise applications, such as Proventia,
managed services offerings and research for future product offerings.

         We continue to add functionality to our product family, providing
network, server and desktop-based solutions, as well as to our security
management applications. In the first six months of 2003, we released the first
of our Proventia series of appliances and provided the following major
enhancements to our RealSecure Protection platform:

         -        Proventia A Series models (A201, A604 and A1204) - network
                  threat protection for aggregate network bandwidth from 200
                  Mbps to 1200 Mbps on 1 to 4 network segments.

         -        RealSecure Server Sensor 7.0 - assesses host security to
                  detect and report system security weaknesses, and provides
                  intrusion prevention and response;

         -        SiteProtector(TM) Third Party Module 1.0 - allows
                  organizations to automatically collect audit and intrusion
                  detection events from firewalls into SiteProtector's central
                  management application for analysis in conjunction with
                  RealSecure(R), Proventia(TM), Internet Scanner(R) and System
                  Scanner(TM) security events;

         -        RealSecure(R) Desktop 7.0 - provides protection against
                  malicious activity by analyzing application and network
                  (including VPN) behavior on desktops;

         -        RealSecure Internet Scanner 7.0 - added improved accuracy and
                  new ease-of-use features to our network assessment solution;

         -        RealSecure(R) SiteProtector(TM) 2.0 - unifies the management
                  of protection across networks, servers and desktops to
                  increase customers' ability to effectively detect, prevent and
                  respond to today's ever-changing spectrum of threats; and

         -        RealSecure Fusion version 2.0. - provides additional features
                  that allow customers to automate the processes of security
                  monitoring and correlation of security events against known
                  vulnerabilities.

         While we are committed to continue our investment in X-Force research
and development capabilities that we believe to be a differentiator for ISS, we
intend to seek leverage in the research and development area while enhancing
current technologies and developing new technologies.

Sales and marketing

         Sales and marketing expenses consist of salaries, travel expenses,
commissions, advertising, maintenance of our Website, trade show expenses, costs
of recruiting sales and marketing personnel and costs of marketing materials.

         Sales and marketing expenses were $21.0 million in the three months
ended June 30, 2003 and $23.9 million in the corresponding period of 2002.
Gaining leverage in sales and marketing has been a key objective for us as
evidenced by the decrease in these expenses as a percentage of total revenues
from 41% in the three months ended June 30, 2002 to 36% in the three months
ended June 30, 2003. The same trend was exhibited on a year-to-date basis as
sales and marketing expenses decreased from 40% of total revenues in the six
months ended June 30, 2002 to 36% in the corresponding period of 2003.

         The decrease in absolute dollars in sales and marketing was the result
of the changes in headcount along with lower commissions due to the decrease in
product license and sales and lower marketing costs. Marketing costs for print
and media advertising were lower in the first half of 2003 compared to the first
half of 2002 when we launched our first television and print advertising
campaign designed to demonstrate the multitude of threats that can compromise
the security of a company's networks, servers or desktops.

         In areas where revenue demand did not support our cost base, such as
Latin America and Europe, we reduced headcount throughout 2002. At the same
time, we have increased headcount where we believe there are long and near-term
opportunities, such as our United States public sector, which handles
opportunities on the federal, state and local levels. We expect to continue to
achieve leverage in our sales efforts by focusing our sales force on large
customers that are served either directly by us or through large system
integrators. The channel, which includes system integrators, value-added
resellers and distributors, continues to be an important source


                                       17
<PAGE>

of global revenue for us as we use its capabilities to reach not just
departmental and small companies through distributors and resellers, but larger
customers through joint selling efforts.

General and administrative

         General and administrative expenses consist of personnel-related costs
for executive, administrative, finance and human resources, internal information
systems and other support services costs, and legal, accounting and other
professional service fees.

         General and administrative expenses of $5.4 million in the second
quarter of 2003 and $6.8 million in the second quarter of 2002 represented 9% of
total revenues in 2003 and 11% in 2002. For the six months ended June 30, 2003,
general and administrative expenses were $11.0 million, or 9%, of total revenues
and $12.2 million, or 10%, in the corresponding period of 2002. The second
quarter of 2002 included non-recurring expenses related to the relocation of our
Asia-Pacific headquarters in Tokyo during that period, which resulted in a
decrease in general and administrative expenses in absolute dollars and as a
percentage of total revenues from 2002 to 2003.

Amortization

         We incurred amortization expense related to intangible assets and
stock-based compensation of $1.3 million and $1.5 million in the three months
ended June 30, 2003 and 2002, respectively, and $2.7 million and $3.0 million in
the six months ended June 30, 2003 and 2002, respectively. These intangible
assets and stock-based compensation resulted from acquisitions accounted for
under the purchase method of accounting and are amortized over their estimated
useful lives.

Interest income

         The market rate of interest paid on investment-quality commercial paper
and similar investments dropped from approximately 2.1% during the second
quarter of 2002 to approximately 1.2% in the second quarter of 2003. As a
result, interest income decreased despite an increase in total cash and cash
equivalents and interest bearing marketable securities. Specifically, interest
income decreased from $872,000 in the quarter ended June 30, 2002 to $737,000 in
the comparable quarter of 2003 and from $1.6 million in the six months ended
June 30, 2002 to $1.4 million in the corresponding period of 2003.

Foreign currency exchange gain (loss)

         The exchange gains of $225,000 in the three months ended June 30, 2003
and $469,000 in the six months ended June 30, 2003 and the exchange losses of
$100,000 in the three months ended June, 2002 and $77,000 in the six months
ended June 30, 2002, are a result of fluctuations in currency exchange rates
between the U.S. dollar and other currencies, primarily the Japanese yen and the
euro, and changes in value of assets and liabilities that are denominated in
foreign currencies.

Provision for income taxes

         Our effective tax rate was 38% and 40% for the quarters ended June 30,
2003 and 2002, respectively, and 38% and 41% for the six months ended June 30,
2003 and 2002, respectively. The effective rate differs from the statutory rate
primarily due to the impact of acquisition related intangibles that are not
deductible for income tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

         We satisfy our working capital needs and capital equipment needs with
cash provided by operations. Net cash provided by operations in the first six
months of 2003 was $27.4 million. The major components of cash flows provided by
operating activities in the first six months of 2003 were net income of $10.3
million, non-cash depreciation and amortization expense charges of $10.0
million, income tax benefit from employee exercises of stock options of $5.5
million and decrease in accounts receivable of $5.4 million.

         Investing activities in the first six months of 2003 included purchases
of equipment totaling $4.4 million as we provided existing and new personnel
with improved computer hardware. The other activities include the purchase of
$37.9 million of intermediate term marketable securities, primarily
interest-bearing government obligations and commercial paper, offset by net
proceeds from the


                                       18
<PAGE>

maturity of marketable securities of $31.6 million. These assets have quality
characteristics similar to cash equivalents, except their maturities when we
acquire them are longer than three months.

         Our financing activities in the first six months of 2003 included the
purchase of 173,000 shares of our common stock on the open market at an
aggregate cost of $2.1 million under our previously announced stock repurchase
plan. In July 2003, our Board extended this program through the second quarter
of 2004 with authorization to use up to approximately $46 million of cash to
repurchase our common stock. This use in the first six months of 2003 was
partially offset by financing activities that generated funds, namely the
exercise of stock options by our employees and the issuance of common stock
through our employee stock purchase plan.

         Other than our non-cancelable operating leases for office space, we
have no off-balance sheet financing arrangements, any relationships with
"structured finance" or "special purpose" entities, or any contractual
obligations that would impact our liquidity. Payments for certain operating
leases are secured by five collateralized stand-by letters of credit totaling
approximately $11.3 million. The stand-by letters of credit are annually
renewable over the duration of the applicable leases. We do not anticipate
utilizing these stand-by letters of credit to meet any liquidity needs.

         As of June 30, 2003, we had $225.7 million of cash and cash equivalents
and marketable securities, consisting primarily of money market accounts and
investment grade commercial paper. An additional $14.1 million of commercial
paper investments are pledged as collateral for stand-by letters of credit
related to the operating leases of our facilities and are shown on the balance
sheet as restricted cash. We believe that such cash and cash equivalents and
marketable securities will be sufficient to meet our working capital needs and
capital expenditures for the foreseeable future. Furthermore, we are not aware
of any trends, events or uncertainties that are reasonably likely to result in
any significant changes to our liquidity. From time to time we evaluate possible
acquisition and investment opportunities in businesses, products or technologies
that are complimentary to ours. In the event we determine to pursue such
opportunities, we may use our available cash and cash equivalents and marketable
securities. Pending such uses, we will continue to invest our available cash in
investment-grade, interest-bearing investments.

RISK FACTORS

         Forward-looking statements are inherently uncertain as they are based
on various expectations and assumptions concerning future events and are subject
to known and unknown risks and uncertainties. Our forward-looking statements
contained in this Quarterly Report and elsewhere should be considered in light
of the following important risk factors. Variations from our stated intentions
or failure to achieve objectives could cause actual results to differ from those
projected in our forward-looking statements. With respect to our business
outlook published in our earnings press release each quarter, you may continue
to rely on the revenue and earnings expectations prior to the start of our
"quiet period" unless we have published a notice stating otherwise. Toward the
end of each quarter, we have a "quiet period" when we will not comment
concerning the previously published financial expectations, and we disclaim any
obligation to update during the quiet period. The public should not rely on
previously published expectations during the "quiet period". The "quiet period"
runs from the 15th of the last month of the quarter until our earnings release
during the first month of the following quarter. We otherwise undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.

We Operate in a Rapidly Evolving Market

         We operate in a new and rapidly evolving market and must, among other
things:

         -        respond to competitive developments;

         -        continue to upgrade and expand our product and services
                  offerings; and

         -        continue to attract, retain and motivate our employees.

         We cannot be certain that we will successfully address these issues. As
a result, we cannot assure our investors that we will be able to continue to
operate profitably in the future.

         We introduced our new Proventia appliance line in April 2003. As a
result of our limited history with these products, it may be difficult to plan
project our revenues accurately. The revenue and income potential of these
products is unproven and the markets addressed by these products are volatile.
If these products fail to gain market acceptance, our revenue could be below
our expectations and our operating results could be adversely affected.

Our Future Operating Results Will Likely Fluctuate Significantly


                                       19
<PAGE>

         We cannot predict our future revenues and operating results with
certainty. However, we do expect our future revenues and operating results to
fluctuate due to a combination of factors, including:

         -        the growth in the acceptance of, and activity on, the Internet
                  and the world wide web, particularly by corporate,
                  institutional and government users;

         -        the extent to which the public perceives that unauthorized
                  access to and use of online information are threats to network
                  security;

         -        the volume and timing of orders, including seasonal trends in
                  customer purchasing;

         -        our ability to develop new and enhanced product and managed
                  service offerings and expand our professional services
                  capabilities;

         -        the introduction and acceptance rate of ISS branded
                  appliances, including increased cost of goods sold;

         -        our ability to provide scalable managed services offerings
                  through our partners in a cost effective manner;

         -        foreign currency exchange rates that affect our international
                  operations;

         -        product and price competition in our markets; and

         -        general economic conditions, both domestically and in our
                  foreign markets.

         We increasingly focus our efforts on sales of enterprise-wide security
solutions, which consist of our entire product suite and related professional
services, and managed security services, rather than on the sale of component
products. As a result, each sale requires substantial time and effort from our
sales and support staff. In addition, the revenues associated with particular
sales vary significantly depending on the number of products licensed by a
customer, the number of devices used by the customer and the customer's relative
need for our professional services. Large individual sales, or even small delays
in customer orders, can cause significant variation in our revenues and results
of operations for a particular period. The timing of large orders is usually
difficult to predict and, like many software and services companies, many of our
customers typically complete transactions in the last month of a quarter.

         We cannot predict our operating expenses based on our past results.
Instead, we establish our spending levels based in large part on our expected
future revenues. As a result, if our actual revenues in any future period fall
below our expectations, our operating results likely will be adversely affected
because very few of our expenses vary with our revenues. Because of the factors
listed above, we believe that our quarterly and annual revenues, expenses and
operating results likely will vary significantly in the future.

         We currently purchase some Proventia appliance components and contract
manufacture from single or limited sources. We carry little inventory of our
appliance products and we rely on suppliers to deliver necessary components to
our contract manufacturer in a timely manner based on the forecasts we provide.
If shortages occur, supplies are interrupted, or we under forecast sales, we may
not be able to deliver products to our customers and our revenue and operating
results would be adversely affected. Because our supply of hardware is based on
short-term forecasts and purchase orders, our contract manufacturer is not
obligated to purchase components for greater quantities over longer periods. We
provide six-month forecasts of our demand to our contract manufacturer. If we
overestimate our requirements, our contract manufacturer many have excess
inventory, which could increase our costs. If we underestimate our requirements,
our contract manufacturer may have an inadequate component inventory and, based
on lead times, this could interrupt manufacturing and result in delays in
shipments and revenues.

         Our ability to provide timely guidance and meet the expectations of
investors with respect to our operating and financial results is impacted by the
tendency of a majority of our sales to be completed in the last month of a
quarter. We may not be able to determine whether we will experience material
deviations from guidance or expectations until the end of a quarter.

We Face Intense Competition in Our Market

         The market for network security monitoring, detection and response
solutions is intensely competitive, and we expect competition to increase in the
future. We cannot guarantee that we will compete successfully against our
current or potential competitors, especially those with significantly greater
financial resources or brand name recognition. Our chief competitors generally
fall within one of five categories:

         -        internal information technology departments of our customers
                  and the consulting firms that assist them in formulating
                  security systems;

         -        relatively smaller software companies offering relatively
                  limited applications for network and Internet security;


                                       20
<PAGE>

         -        large companies, including Symantec Corp., Cisco Systems, Inc.
                  and Network Associates, Inc., that sell or have announced
                  competitive products and offerings, as well as other large
                  software companies that have the technical capability and
                  resources to develop competitive products;

         -        software or hardware companies like Cisco Systems, Inc. that
                  could integrate features that are similar to our products into
                  their own products; and

         -        small and large companies with competitive offerings to
                  components of our managed services offerings.

         Mergers or consolidations among these competitors, or acquisitions of
small competitors by larger companies, represent risks. For example, Symantec
acquired Recourse Technologies and Riptech Inc. in the third quarter of 2002 and
Cisco acquired Psionic Software, Inc. and Okena, Inc. in 2003. Also, Network
Associates, Inc. acquired Intruvert Networks and Entercept Security Technologies
in the second quarter of 2003.These acquisitions will make these entities
potentially more formidable competitors to us if such products and offerings are
effectively integrated. Large companies may have advantages over us because of
their longer operating histories, greater name recognition, larger customer
bases or greater financial, technical and marketing resources. As a result, they
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements. They can also devote greater resources to the promotion
and sale of their products than we can. In addition, these companies have
reduced and could continue to reduce, the price of their security monitoring,
detection and response products and managed security services, which increases
pricing pressures within our market.

         Several companies currently sell software products (such as encryption,
firewall, operating system security and virus detection software) that our
customers and potential customers have broadly adopted. Some of these companies
sell products that perform the same functions as some of our products. In
addition, the vendors of operating system software or networking hardware may
enhance their products to include the same kinds of functions that our products
currently provide. The widespread inclusion of comparable features to our
software in operating system software or networking hardware could render our
products obsolete, particularly if such features are of a high quality. Even if
security functions integrated into operating system software or networking
hardware are more limited than those of our software, a significant number of
customers may accept more limited functionality to avoid purchasing additional
software.

         For the above reasons, we may not be able to compete successfully
against our current and future competitors. Increased competition may result in
price reductions, reduced gross margins and loss of market share.

We Face Rapid Technological Change in Our Industry and Frequent Introductions of
New Products

         Rapid changes in technology pose significant risks to us. We do not
control nor can we influence the forces behind these changes, which include:

         -        the extent to which businesses and others seek to establish
                  more secure networks;

         -        the extent to which hackers and others seek to compromise
                  secure systems;

         -        evolving computer hardware and software standards;

         -        changing customer requirements; and

         -        frequent introductions of new products and product
                  enhancements.

         To remain successful, we must continue to change, adapt and improve our
products in response to these and other changes in technology. Our future
success hinges on our ability to both continue to enhance our current line of
products and professional services and to introduce new products and services
that address and respond to innovations in computer hacking, computer technology
and customer requirements. We cannot be sure that we will successfully develop
and market new products that do this. Any failure by us to timely develop and
introduce new products, to enhance our current products or to expand our
professional services capabilities in response to these changes could adversely
affect our business, operating results and financial condition.

         Our products involve very complex technology, and as a consequence,
major new products and product enhancements require a long time to develop and
test before going to market. Because this amount of time is difficult to
estimate, we have had to delay the


                                       21
<PAGE>

scheduled introduction of new and enhanced products in the past and may have to
delay the introduction of new and enhanced products in the future.

         The techniques computer hackers use to gain unauthorized access to, or
to sabotage, networks and intranets are constantly evolving and increasingly
sophisticated. Furthermore, because new hacking techniques are usually not
recognized until used against one or more targets, we are unable to anticipate
most new hacking techniques. To the extent that new hacking techniques harm our
customers' computer systems or businesses, affected or prospective customers may
believe that our products are ineffective, which may cause them or prospective
customers to reduce or avoid purchases of our products.

Risks Associated with Our Global Operations

         The expansion of our international operations includes our presence in
dispersed locations throughout the world, including throughout Europe and the
Asia/Pacific and Latin America regions. Our international presence and expansion
exposes us to risks not present in our U.S. operations, such as:

         -        the difficulty in managing an organization spread over various
                  countries located across the world;

         -        compliance with, and unexpected changes in, a wide range of
                  complex regulatory requirements in countries where we do
                  business;

         -        increased financial accounting and reporting burdens and
                  complexities and potentially adverse tax consequences;

         -        excess taxation due to overlapping tax structures;

         -        fluctuations in foreign currency exchange rates resulting in
                  losses or gains from transactions and expenses denominated in
                  foreign currencies;

         -        reduced protection for intellectual property rights in some
                  countries;

         -        reduced protection for enforcement of creditor and contractual
                  rights in some countries; and

         -        import and export license requirements and restrictions on the
                  import and export of certain technology, especially encryption
                  technology and trade restrictions.

         We rely on distributors extensively in the Asia/Pacific region for the
sale and distribution of our products. Further, countries in the Asia/Pacific
region, particularly China, Japan and Korea, have experienced weakness in their
currency, banking and equity markets. These weaknesses could continue to
adversely affect our distributors' ability to pay us and adversely affect demand
for our products in the Asia/Pacific region. Despite these risks, we believe
that we must continue to expand our operations in international markets to
support our growth. To this end, we intend to establish additional foreign sales
operations, expand our existing offices, hire additional personnel, expand our
international sales channels and customize our products for local markets. If we
fail to execute this strategy, our international sales growth will be limited.

Our Networks, Products and Services May be Targeted by Hackers

         Like other companies, our websites, networks, information systems,
products and services may be targets for sabotage, disruption or
misappropriation by hackers. As a leading network security solutions company, we
are a high profile target. Although we believe we have sufficient controls in
place to prevent disruption and misappropriation, and to respond to such
situations, we expect these efforts by hackers to continue. If these efforts are
successful, our operations, reputation and sales could be adversely affected.

We Must Successfully Integrate Acquisitions

         As part of our growth strategy, we have and may continue to acquire or
make investments in companies with products, technologies or professional
services capabilities complementary to our solutions. When engaging in
acquisitions, we could encounter difficulties in assimilating or completing the
development of the technologies, new personnel and operations into our company.
These difficulties may disrupt our ongoing business, distract our management and
employees, increase our expenses and adversely affect our


                                       22
<PAGE>

results of operations. These difficulties could also include accounting
requirements, such as impairment charges related to goodwill or expensing
in-process research and development costs, such as those incurred in the fourth
quarter of 2002 related to the acquisition of vCIS, Inc. We cannot be certain
that we will successfully overcome these risks with respect to any future
acquisitions or that we will not encounter other problems in connection with our
recent or any future acquisitions. In addition, any future acquisitions may
require us to incur debt or issue equity securities. The issuance of equity
securities could dilute the investment of our existing stockholders.

We Depend on Our Intellectual Property Rights and Use Licensed Technology

         We rely primarily on copyright, trademark, patent and trade secrets
laws, confidentiality procedures and contractual provisions to protect our
proprietary rights. We have obtained one United States patent and have a number
of patent applications pending, as well as numerous trademarks and trademark
applications pending. We believe that the technological and creative skills of
our personnel, new product developments, frequent product enhancements, our name
recognition, our professional services capabilities and delivery of reliable
product support are essential to establishing and maintaining our technology
leadership position. We cannot assure you that our competitors will not develop
technologies that are similar to ours.

         Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult. While we cannot determine the extent to which piracy of
our software products occurs, we expect software piracy to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States,
and many foreign countries do not enforce these laws as diligently as U.S.
government agencies and private parties.

Some Provisions in the ISS Certificate of Incorporation and Bylaws Make a
Takeover of ISS Difficult

         Our certificate of incorporation and bylaws contain provisions that
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of ISS.
These provisions:

         -        establish a classified board of directors;

         -        create preferred stock purchase rights that grant to holders
                  of common stock the right to purchase shares of Series A
                  Junior Preferred Stock in the event that a third party
                  acquires 20% or more of the voting power of our outstanding
                  common stock;

         -        prohibit the right of our stockholders to act by written
                  consent;

         -        limit calling special meetings of stockholders; and

         -        impose a requirement that holders of 66-2/3% of the
                  outstanding shares of common stock are required to amend the
                  provisions relating to the classification of our board of
                  directors and action by written consent of stockholders.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We have no material changes to the disclosure on this matter made in
our Annual Report on Form 10-K for the year ended December 31, 2002.

ITEM 4.  CONTROLS AND PROCEDURES

         As required by SEC rules, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this quarterly report. This evaluation was carried out
under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer. Based on this
evaluation, these officers have concluded that the design and operation of our
disclosure controls and procedures are effective. There were no significant
changes to our internal controls during the second quarter of 2003 that
materially affected or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.

         Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities and Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include,


                                       23
<PAGE>

without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding disclosure.

         PART II. OTHER INFORMATION

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

         The Annual Meeting of Stockholders of Internet Security Systems, Inc.
was held on Wednesday, May 28, 2003.

         The following three directors were elected to serve a three-year term
ending in the year 2006: (a) Thomas E. Noonan, 36,579,639 votes for and
8,610,477 votes withheld, (b) Sam Nunn, 28,428,524 votes for and 16,761,592
votes withheld, and (c) David N. Strohm, 35,740,468 votes for and 9,449,648
votes withheld.

         A proposal was submitted to amend our Restated 1995 Stock Incentive
Plan to change the Automatic Option Grant Program for non-employee directors by
(i) increasing the initial option grant to non-employee directors from an option
to purchase 20,000 shares to an option to purchase 40,000 shares of common stock
to be granted on the date the individual first becomes a non-employee member of
the Board and (ii) increasing the annual grant to non-employee directors from an
option to purchase 10,000 shares to an option to purchase 20,000 shares of
common stock to be granted at each annual stockholders meeting if the
non-employee director continues to serve on the Board. The vote was as follows:
(a) Voting For: 21,926,131, (b) Voting Against: 23,240,338, (c) Abstentions:
23,647. There were no broker non-votes for purposes of this proposal.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits.

         3.1      Restated Certificate of Incorporation (filed as Exhibit 3.1 to
                  the Company's Quarterly Report on Form 10-Q, dated November
                  14, 2000 and incorporated by reference herein).

         3.2      Bylaws (filed as Exhibit 3.2 to the Company's Registration
                  Statement on Form S-1, Registration No. 373-44529 and
                  incorporated by reference herein).

         3.3      Certificate of Designations of Series A Junior Participating
                  Preferred Stock dated July 24, 2002 (filed as Exhibit 3.3 to
                  the Company's Annual Report on Form 10-K, filed March 28, 2003
                  and incorporated by reference herein).

         4.1      Specimen Common Stock certificate (filed as Exhibit 4.3 to the
                  Company's Registration Statement on Form S-8, Registration No.
                  333-100954, filed November 1, 2002 and incorporated by
                  reference herein).

         4.2      Form of Rights Certificate (filed as Exhibit 4.2 to the
                  Company's Current Report on Form 8-K filed July 24, 2002 and
                  incorporated by reference herein.

         4.3      See Exhibits 3.1 and 3.2 for provisions of the Certificate of
                  Incorporation and Bylaws of the Company defining the rights of
                  holders of the Company's Common Stock.

         4.4      1999 Network ICE Stock Option Plan, incorporated by reference
                  to Exhibit 4.1 to Form S-8, Registration No. 333-62658, filed
                  on June 8, 2001.

         4.5      Restated 1995 Stock Incentive Plan (as amended and restated as
                  of May 23, 2001) incorporated by reference to Exhibit 4.2 to
                  Form S-8, Registration No. 333-62658, filed June 8, 2001.

         4.6      Netrex, Inc. 1998 Stock Plan incorporated by reference to
                  Exhibit 99.15 to Form S-8, Registration Statement No.
                  333-89563, filed October 22, 1999.


                                       24
<PAGE>

         4.7      vCIS, Inc. 2001 Stock Plan incorporated by reference to
                  Exhibit 4.1 to Form S-8, Registration Statement No.
                  333-100954, filed November 1, 2002.

         11       Computation of Per Share Earnings *

         31.1     Certification of principal executive officer pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.

         31.2     Certification of principal financial officer pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002.

         32.1     Certification pursuant to 18 U.S.C. Section 1350, as adapted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

         32.2     Certification pursuant to 18 U.S.C. Section 1350, as adapted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

         *        Data required by SFAS No. 128, "Earnings Per Share", is
                  provided in Note 5 to the consolidated financial statements in
                  this report

(b)      Reports on Form 8-K.

         ISS filed the following reports on Form 8-K during the reporting
period:

         -        On April 3, 2003 ISS filed a report on Form 8-K relating to a
                  press release updating its earnings guidance for the quarter
                  ended March 31, 2003

         -        On April 21, 2003 ISS filed a report on Form 8-K relating to a
                  press release regarding its financial results for the quarter
                  ended March 31, 2003 and providing its Business Outlook for
                  the quarter ending June 30, 2003 and fiscal year ending
                  December 31, 2003.


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<PAGE>

                                   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.

                            INTERNET SECURITY SYSTEMS, INC.
                                          (Registrant)

Date: August 8, 2003        By /s/ Richard Macchia
                               -------------------------------------------------
                               Senior Vice President, Finance and Administration
                               and Chief Financial Officer



                            By /s/ Maureen Richards
                               -------------------------------------------------
                               Vice President and Corporate Controller


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