<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

         For the quarterly period ended September 30, 1998
                                        -------------------
                                       OR

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

         For the transition period from_________________ to ___________________

                             Commission File Number__________________

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

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


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


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


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



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

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

<TABLE>
<CAPTION>
                                                     Number of Shares Outstanding
         Title of each class                            as of November 3, 1998
   -------------------------------                   -----------------------------
   <S>                                               <C>
   Common Stock, $0.001 par value                               17,044,313
</TABLE>




                                      -1-
<PAGE>   2


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

         Consolidated Statements of Operations for the Three Months
         and Nine Months ended September 30, 1998 and September 30, 1997.....................3

         Consolidated Balance Sheets at September 30, 1998 and
         December 31, 1997...................................................................4

         Consolidated Statements of Cash Flows for the Nine
         Months ended September 30, 1998 and 1997............................................5

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

Item 2   Management's Discussion and Analysis of
         Financial Condition and Results of Operations......................................10

PART II. OTHER INFORMATION

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

Item 6   Exhibits and Reports on From 10-Q..................................................16
</TABLE>





                                      -2-
<PAGE>   3



                        ISS GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                   Three months ended               Nine months ended
                                                                      September 30,                    September 30,
                                                                 -----------------------          -----------------------
                                                                  1998            1997              1998           1997
<S>                                                              <C>            <C>               <C>            <C>
Revenues:
     Licenses                                                    $ 6,596        $  2,767          $17,030        $  6,789
     Subscriptions                                                 2,152             691            4,808           1,553
     Professional services                                           682              15              996              27
                                                                 -------        --------          -------        --------
                                                                   9,430           3,473           22,834           8,369
                                                                                                                 
Costs and expenses:                                                                                              
     Cost of revenues                                              1,559             176            2,964             400
     Research and development                                      2,541             895            6,009           1,957
     Sales and marketing                                           5,632           3,051           15,711           7,147
     General and administrative                                    1,046             443            3,127           1,064
                                                                 -------        --------          -------        --------
                                                                  10,778           4,565           27,811          10,568
                                                                 -------        --------          -------        --------
Operating loss                                                    (1,348)         (1,092)          (4,977)         (2,199)
Interest income, net                                                 765              66            1,672             169
                                                                 =======        ========          =======        ========
Net loss                                                         $  (583)       $ (1,026)          (3,305)       $ (2,030)
                                                                 =======        ========          =======        ========
                                                                                                           
Basic and diluted net loss per share of Common Stock             $ (0.03)       $  (0.13)         $ (0.23)       $  (0.26)
                                                                 =======        ========          =======        ========
                                                                                                                 
Weighted average number of shares used in calculating                                                            
   basic and diluted net loss per share of Common Stock           16,879           7,911           14,162           7,905
                                                                 =======        ========          =======        ========
                                                                                                  
Unaudited pro forma net loss per share of Common Stock                          $  (0.08)         $ (0.21)       $  (0.15)
                                                                                ========          =======        ========

Unaudited weighted average number of shares used in
   calculating pro forma net loss per share of Common
   Stock                                                                          13,648           15,904          13,294
                                                                                ========          =======        ========
</TABLE>






                                      -3-
<PAGE>   4


                        ISS GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)



<TABLE>
<CAPTION>
                                                                        SEPTEMBER 30, 1998      December 31, 1997
                                                                        ------------------      -----------------
<S>                                                                     <C>                     <C>
Current assets:
     Cash and cash equivalents                                                $ 59,846               $ 3,929
     Accounts receivable, less allowance for doubtful
        accounts of $258 and $292, respectively                                  7,334                 4,038
     Other current assets                                                          677                   281
                                                                              --------               -------
          Total current assets                                                  67,857                 8,248

Property and equipment:
     Computer equipment                                                          3,442                 1,688
     Office furniture and equipment                                                854                   268
     Leasehold improvements                                                        249                    15
                                                                              --------               -------
                                                                                 4,545                 1,971
     less accumulated depreciation                                               1,205                   402
                                                                              --------               -------
                                                                                 3,340                 1,569

Other assets                                                                       117                    49
                                                                              --------               -------

          Total assets                                                        $ 71,314               $ 9,866
                                                                              ========               =======

Current liabilities:
     Accounts payable                                                         $    857               $ 2,002
     Accrued expenses                                                            2,668                 1,798
     Deferred revenues                                                           4,904                 2,106
     Current portion of long term debt                                              --                    70
                                                                              --------               -------
          Total current liabilities                                              8,429                 5,976

Non-current liabilities                                                            133                    --
Long term debt                                                                      --                    70

Redeemable, Convertible Preferred Stock (5,737,000
     shares authorized):
Series A; $.001 par value; none issued or outstanding and
       3,650,000 issued and outstanding; (liquidation preference
       $1 per share)                                                                --                 3,621
Series B; $.001 par value; none issued or outstanding and
       2,087,000 issued and outstanding (liquidation preference
       $2.53 per share)                                                             --                 5,257
Stockholders' equity (deficit):
     Common stock, $.001 par value, 50,000,000 shares
       authorized, 16,877,000 and 7,921,000 issued and
       outstanding, respectively                                                    17                     8
     Additional paid-in capital                                                 72,107                   695
     Deferred compensation                                                        (842)                 (571)
     Cumulative adjustment for currency revaluation                                (36)                   --
     Accumulated deficit                                                        (8,494)               (5,190)
                                                                              --------               -------
          Total stockholders' equity (deficit)                                  62,752                (5,058)
                                                                              --------               -------

          Total liabilities and stockholders' equity:                         $ 71,314               $ 9,866
                                                                              ========               =======
</TABLE>






                                      -4-
<PAGE>   5


                        ISS GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                           For the Nine Months ended
                                                                                September 30,
                                                                       ---------------------------------
                                                                        1998               1997
<S>                                                                     <C>                 <C>
OPERATING ACTIVITIES
Net loss                                                                   $ (3,305)           $ (2,030)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation                                                                 803                 181
   Deferred compensation expense                                                540                   -
   Deferred rent                                                                133                   -
   Changes in assets and liabilities:
     Accounts receivable                                                     (3,296)             (1,932)
     Prepaid expenses and other assets                                         (464)               (165)
     Accounts payable and accrued expenses                                     (273)              1,499
     Deferred revenues                                                        2,798               1,061
                                                                         -------------------------------
Net cash used in operating activities                                        (3,064)             (1,386)
                                                                         
INVESTING ACTIVITIES                                                     
Purchases of property and equipment                                          (2,574)               (775)
                                                                         -------------------------------
Net cash used in investing activities                                        (2,574)               (775)
                                                                         
FINANCING ACTIVITIES                                                     
Payments on long term debt                                                     (140)                (53)
Net proceeds from Redeemable, Convertible                                
     Preferred Stock issuance                                                     -               5,253
Proceeds from exercise of stock options                                         184                   -
Net proceeds from initial public offering                                    61,547                   -
                                                                         -------------------------------
Net cash provided by financing activities                                    61,591               5,200
                                                                         
Foreign currency impact on cash                                                 (36)                  -
                                                                         -------------------------------
Net increase in cash and cash equivalents                                    55,917               3,039
Cash and cash equivalents at beginning of period                              3,929               2,007
                                                                         -------------------------------
Cash and cash equivalents at end of period                                 $ 59,846            $  5,046
                                                                         ===============================
                                                                         
                                                                         
SUPPLEMENTAL CASH FLOW DISCLOSURE                                        
Interest paid                                                              $     14            $      4
                                                                         ===============================
</TABLE>




                                      -5-
<PAGE>   6



                                 ISS GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Significant Accounting Policies

     The accompanying consolidated financial statements of ISS Group, Inc.
     ("ISS" or "Company") should be read in conjunction with the Company's
     consolidated financial statements for the year ended December 31, 1997.
     Significant accounting policies disclosed therein have not changed.

     The accompanying consolidated financial statements are unaudited; however,
     in the opinion of management, they include all normal recurring adjustments
     necessary for a fair presentation of the consolidated financial position of
     the Company at September 30, 1998 and the consolidated results of its
     operations and cash flows for the nine months ended September 30, 1998 and
     1997. Results of operations reported for interim periods are not
     necessarily indicative of results for the entire year.

     The consolidated balance sheet at December 31, 1997 has been derived from
     the audited financial statements at that date but does not include all the
     footnotes required by generally accepted accounting principles for complete
     financial statements.

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

2.   Initial Public Offering

     On March 23, 1998, ISS completed an initial public offering of its Common
     Stock ("the IPO"). The Company's shares are traded on the National Market
     of the NASDAQ Stock Market under the ticker symbol "ISSX". A total of
     3,450,000 shares were sold in the IPO, including 3,070,000 newly issued
     shares by the Company and 380,000 outstanding shares sold by existing
     stockholders. The Company did not receive any of the proceeds from the sale
     of stock by the selling stockholders. The shares were sold to the
     underwriting group in the IPO at a price of $22.00 per share which, after
     underwriters' discount of $4,728,000 and offering expenses of $1,265,000,
     resulted in net proceeds to ISS of $61,547,000. The proceeds of the IPO
     have been used for general corporate purposes and at September 30, 1998 are
     invested in short-term interest-bearing investments.

     Under the conversion feature of the Company's previously outstanding
     Redeemable, Convertible Preferred Stock, all of the outstanding shares of
     preferred stock were automatically converted into an aggregate of 5,737,000
     shares of Common Stock upon the closing of the IPO.

     Additionally, the Company's repurchase rights with respect to 4,586,000
     shares that were originally issued to the Company's founder in 1994 in
     exchange for the assignment of technology previously developed and
     distributed by the founder as shareware expired as a result of the IPO.




                                      -6-
<PAGE>   7



                                 ISS GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


3.   Stock Option Plans

     During the fourth quarter of 1997 and the first quarter of 1998, the
     Company recorded deferred compensation related to stock options that were
     granted in December 1997 and in January and February 1998. The amount was
     determined by comparing the exercise price of the stock options to the fair
     value of the Common Stock on the respective dates of grant. The fair value
     for December grants was established based on the estimated price range for
     the IPO as set forth in the initial filing of the Company's Registration
     Statement on Form S-1 that was filed with the Securities and Exchange
     Commission (the "Commission") on January 20, 1998. The fair values for
     January and February 1998 grants were determined to be $20 based on the
     final estimated price range contained in the Company's March 1998
     pre-effective amendment to its Registration Statement for the IPO.

     Deferred compensation of $811,000 in the first quarter of 1998 and $571,000
     in the fourth quarter of 1997 has been reflected as a reduction of
     stockholders' equity in the accompanying consolidated balance sheets. The
     amounts are being charged to operations proportionately over the four-year
     vesting period of the related stock options. The statements of operations
     for the three months and nine months ended September 30, 1998 included
     $180,000 and $540,000, respectively, of compensation expense related to
     such amortization.

4.   Loss per share

     Basic and diluted historical net loss per share was computed by dividing
     net loss plus accretion of the Series A and Series B Redeemable,
     Convertible Preferred Stock by the weighted average number of shares of
     Common Stock outstanding. Common Stock equivalents were antidilutive and
     therefore were not included in the computation of weighted average shares
     used in computing diluted loss per share.

     Pro forma loss per share was computed by dividing net loss by the weighted
     average number of shares of Common Stock outstanding plus the conversion of
     the Redeemable, Convertible Preferred Stock into 5,737,000 shares of Common
     Stock as of the later of (i) the beginning of each period reported or (ii)
     the date of issuance of such preferred stock, instead of the date when such
     shares of preferred stock automatically converted into Common Stock (which
     occurred on March 27, 1998).




                                      -7-
<PAGE>   8


                                 ISS GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     The following tables set forth the computation of basic, diluted and
     unaudited pro forma net loss per share for the three months and nine months
     ended September 30:


<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED SEPTEMBER 30
                                                                                1998                   1997
                                                                            ------------          -------------
          <S>                                                               <C>                   <C>
          Numerator:
                 Net loss                                                   $   (583,000)         $  (1,026,000)
                 Accretion of Series A and Series B Redeemable,
                    Convertible Preferred Stock                                       --                 (3,000)
                                                                            ------------          -------------
                                                                            $   (583,000)         $  (1,029,000)

          Denominator:
                 Denominator for basic and diluted net loss per
                    share - weighted average shares                           16,879,000              7,911,000

                 Redeemable, Convertible Preferred Stock                                              5,737,000
                                                                                                  -------------
                 Weighted average shares for pro forma net loss per
                 share                                                                               13,648,000

          Basic net loss per share                                          $      (0.03)         $       (0.13)
          Diluted net loss per share                                        $      (0.03)         $       (0.13)
          Pro forma net loss per share                                      $      (0.03)         $       (0.08)
     </TABLE>



<TABLE>
<CAPTION>
                                                                                    NINE MONTHS ENDED SEPTEMBER 30
                                                                                     1998                  1997
                                                                                 ------------          ------------
          <S>                                                                    <C>                   <C>
          Numerator:
                 Net loss                                                        $ (3,305,000)         $ (2,030,000)
                 Accretion of Series A and Series B Redeemable
                    Convertible Preferred Stock                                            --                (8,000)
                                                                                 ------------          ------------
                                                                                 $ (3,305,000)         $ (2,038,000)

          Denominator:
                 Denominator for basic and diluted net loss per
                    share - weighted average shares                                14,162,000             7,905,000
                 Redeemable, Convertible Preferred Stock                            1,742,000             5,215,000
                                                                                 ------------          ------------
                 Weighted  average  shares  for pro  forma  net loss per
                 share                                                             15,904,000            13,294,000

     Basic net loss per share                                                    $      (0.23)         $      (0.26)
     Diluted net loss per share                                                  $      (0.23)         $      (0.26)
     Pro forma net loss per share                                                $      (0.21)         $      (0.15)
</TABLE>

Options aggregating 2,525,000 and 1,157,000 at September 30, 1998 and September
30, 1997, respectively are not included in the above calculations as they are
anti-dilutive.



                                      -8-
<PAGE>   9

                                 ISS GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


5.   Commitments & Contingencies

     In the first quarter of 1998, ISS entered into a noncancellable operating
     lease for new headquarters and research and development facilities in
     Atlanta, Georgia. The lease expires in June 2002 and provides for minimum
     annual lease payments of approximately $842,000.

     On July 7, 1998, Network Associates, Inc. ("Network Associates"), a
     competitor of the Company, filed a patent infringement suit against ISS in
     the Federal District Court for the Northern District of California. This
     suit alleges that ISS' product, RealSecure, violates certain patent claims
     issued for Network Associates' intrusion detection technology. ISS believes
     the lawsuit is without merit, and intends to defend against it vigorously.
     However, there can be no assurance that the Network Associates lawsuit will
     not have or result in a material adverse effect on the Company's business,
     operating results or financial condition. See also Exhibit 99 to this
     Quarterly Report on Form 10-Q.





                                      -9-
<PAGE>   10



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


The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. Except for the historical financial information
contained herein, the matters discussed in this Quarterly Report on Form 10-Q
may be considered "forward-looking" statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include declarations regarding
the intent, belief or current expectations of the Company and its management.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. Among the important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements are the risk factors included under Exhibit 99 at the end of this
Quarterly Report on Form 10-Q, as well as the risk factors identified in the
Company's Registration Statement on Form S-1 as filed with the Securities and
Exchange Commission ("the Commission") and available at the Commission's Web
site at www.sec.gov.

OVERVIEW

Internet Security Systems ("ISS" or "the Company") is the leading provider of
network security monitoring, detection and response software that protects the
security and integrity of enterprise information systems, according to various
market share reports, including a July 1998 report by The Yankee Group. The
Company's products rely on an innovative Adaptive Security Management ("ASM")
approach to network security which entails continuous security risk monitoring
and responses to develop an active and informed network security policy.

The Company continues to generate a substantial portion of its revenues from the
license and related maintenance of its SAFEsuite products. The Company has also
derived a portion of its revenues from responses to customer requests for
training and implementation services, typically billed on a time-and-materials
basis, to assist in the successful deployment of its products within customer
networks, development of customers' security policies and assessment of security
policy decisions. The Company believes that each of its current products and
products in development, together with professional services, will represent
important revenue sources in the future.

The market for the Company's products has recently emerged and studies indicate
that substantial growth may occur in this market. The ability of the Company to
sustain a leading position in its market is critical to its long-term success.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the early stage of
development, particularly companies in new and rapidly evolving markets. There
can be no assurance that the Company will be successful in addressing such risks
or difficulties or that ISS will achieve profitability in the future. See the
risk factors included as Exhibit 99 to this Quarterly Report on Form 10-Q



                                      -10-
<PAGE>   11



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

RESULTS OF OPERATIONS

The following table sets forth certain consolidated historical operating
information for the Company, as a percentage of total revenues, for the three
months and nine months ended September 30, 1998 and 1997.

<TABLE>
<CAPTION>
                                            Three months ended                 Nine months ended
                                                September 30                      September 30
                                           1998             1997             1998              1997
                                           ----             ----             ----              ----
<S>                                        <C>              <C>              <C>               <C>
Licenses                                         69.9%          79.7%               74.6%          81.1%
Subscriptions                                    22.8%          19.9%               21.1%          18.6%
Professional services                             7.2%            .4%                4.4%            .3%
                                           --------------------------------------------------------------
   Total revenues                               100.0%         100.0%              100.0%         100.0%
                                           --------------------------------------------------------------
                                           
Costs of revenues                                16.5%           5.1%               13.0%           4.8%
Research and development                         26.9%          25.8%               26.3%          23.4%
Sales and marketing                              59.7%          87.8%               68.8%          85.4%
General and administrative                       11.1%          12.8%               13.7%          12.7%
                                           --------------------------------------------------------------
   Total costs and expenses                     114.3%         131.4%              121.8%         126.3%
                                           --------------------------------------------------------------
                                           
Operating loss                                  (14.3)%        (31.4)%             (21.8)%        (26.3)%
Interest income, net                              8.1%           1.9%                7.3%           2.0%
                                           --------------------------------------------------------------
Net loss                                         (6.2)%        (29.5)%             (14.5)%        (24.3)%
                                           --------------------------------------------------------------
</TABLE>


REVENUES

The Company's revenues increased 172% to $9,430,000 for the three months ended
September 30, 1998 and 173% to $22,834,000 on a year-to date basis compared with
the same periods in the prior year. Perpetual license revenues continued to be
the primary source of revenue generation, but decreased as a percentage of total
revenues from approximately 80% and 81% of revenues in the three months and nine
months ended September 1997, respectively, to 70% and 75% in the three months
and nine months ended September 30, 1998, respectively. The Company's suite of
product offerings continues to provide increased product diversification,
especially due to significant increases in the sale of licenses for RealSecure,
the Company's network-based intrusion detection product offering. While sales of
licenses for Internet Scanner continued to grow and accounted for the majority
of license revenues, it decreased from 78% of new license revenues in the three
months ended September 30, 1997 to 57% of revenues in the three months ended
September 30, 1998.

Subscriptions revenues, consisting of maintenance and annual licenses of product
usage, accounted for 23% and 21% of total revenues in the three month and nine
month periods ended September 30, 1998, respectively. Professional services is
the smallest category of revenue but has grown from less than 1% of revenues
throughout 1997 to 7% of revenues in the three months ended September 30, 1998,
due primarily to continuation of the Company's 1998 initiative to




                                      -11-
<PAGE>   12


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


build its capabilities to address the demand from its customers for
implementation, training and consultative services.

Geographically, the majority of the Company's revenues were from sales to
customers within North America; however, international operations continued to
be a significant contributor to revenues as revenues from customers outside of
North America represented 19% of revenues in the first nine months of 1998,
compared to 21% of total revenues for the full year in 1997.

COSTS AND EXPENSES

Costs of revenues include packaging and distribution costs for the Company's
software products which, since the Company uses the Internet to provide product
updates and keys necessary to activate a customer's software, is a minor cost.
The category also includes the costs related to the Company's professional
services offerings, which were provided by a dedicated employee group. During
1998, expenses included the recruitment and compensation of a professional
services management team and a larger billable consulting staff. As a result,
the growth in professional services revenues as a percentage of total revenues
during 1998 caused gross margin, represented by total revenues less costs of
revenues, to trend downward to 83% of total revenues for the three months ended
September 30, 1998 from 95% for the three months ended September 30, 1997.

Research and development expenses consist of salary and related costs of
research and development personnel, including costs for employee benefits,
depreciation on computer equipment and support services used in product and
technology development. This includes the "X-Force," a team composed of security
experts dedicated to understanding, documenting and coding new vulnerability
checks, real-time threats and attack signatures and developing solutions to
address global security issues. ISS continued to increase these expenditures as
it perceives primary research and product development as essential ingredients
for retaining its leadership position in its market. Additionally, the Company
began development efforts in connection with OEM arrangements that were entered
into during the third quarter of 1998 for which no revenues have yet been
generated. Accordingly, research and development expenses increased from
$895,000, or 26% of revenues, in the quarter ended September 30, 1997 to 
$2,541,000, or 27% of revenues, in the comparable quarter in 1998. On a
year-to-date basis, research and development expenses increased 207% to
$6,009,000 in 1998 from $1,957,000 in 1997. These increases were due, in
principal part, to increases in research and personnel in Atlanta and the
establishment of a development team in Mountain View, California during the
first quarter of 1998.

Sales and marketing expenses consist primarily of salaries, travel expenses,
commissions, advertising, maintenance of the ISS Web site, trade show expenses,
personnel recruiting costs and costs of marketing materials. Sales and marketing
expenses continued to increase in absolute dollars, but showed leverage in the
quarter ended September 30, 1998 as a higher percentage of the ISS enterprise
sales force had been employed by ISS for a sufficient period of time to achieve
productivity. In the quarter ended September 30, 1998 sales and marketing
expenses were $5,632,000, or 60% of revenues, compared with $3,051,000, or 88%
of revenues, in the quarter ended September 30, 1997. For the nine months ended
September 30, these expenses totaled $15,711,000, or 69% of revenues, in 1998
compared with $7,147,000, or 85% of revenues, in 1997. The dollar increases
have occurred principally from higher personnel head counts, which have
increased each quarter since early 1997 both domestically and internationally.



                                      -12-
<PAGE>   13

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


General and administrative expenses in the quarter ended September 30, 1998
increased to $1,046,000 from $443,000 in the comparable quarter in 1997. For the
nine months ended September 30 these expenses totaled $3,127,000 in 1998 and
$1,064,000 in 1997. Such expenses included salaries and other personnel-related
costs for the Company's executive, administrative, finance and human resources
personnel, support services and professional services fees. In the first half of
1998, the Company successfully implemented upgrades to its internal financial
reporting systems and expects to continue these efforts to enhance management's
ability to obtain and analyze information about its domestic and international
operations. In addition, ISS incurred approximately $250,000 of expense in the
first half of 1998 in connection with the Company's relocation of its
headquarters and research and development facilities to a new location in
Atlanta. Also, in the first nine months of 1998 the Company incurred
approximately $540,000 of amortization of deferred compensation related to the
valuation of stock options to employees and directors granted around the time of
the Company's initial public offering of shares of Common Stock in March 1998
(the "IPO"), the majority of which is recorded in the general and administrative
expense category.

No provision for federal, state or foreign income taxes has been recorded
because the Company had a net loss for the 1997 and 1998 periods. The Company
has not recognized any benefit from the future use of loss carryforwards for
these periods or any other periods since inception because management's
evaluation of all the available evidence in assessing the realizability of the
tax benefits of such loss carryforwards indicates that the underlying
assumptions of future profitable operations contain risks that do not provide
sufficient assurance to recognize such benefits currently.

CAPITAL RESOURCES AND LIQUIDITY

Net cash used in operations in the first nine months of 1998 of $3,064,000
resulted from the net loss of $3,305,000 in the period offset by non-cash
expense charges plus an increase in working capital. Accounts receivable
increased by $3,296,000 at September 30, 1998 commensurate with the growth in
the Company's business, which was largely offset by an increase of $2,798,000 in
the deferred revenue account balance. The increase in deferred revenue was due
to growth in annual maintenance contracts, the upfront billing of multi-year
maintenance arrangements with certain customers and growth in term licenses.

Investment in equipment totaled $2,574,000 in the first nine months of 1998 as
ISS provided existing and new personnel with the necessary hardware and software
tools to perform their job. This included a new telephone switch and engineering
lab equipment installed at the time of the relocation of the Company to its new
headquarters facilities.

Cash provided by financing activities of $61,592,000 was primarily the result of
the IPO that was consummated in March 1998. Additionally, upon consummation of
the IPO, all shares of the Company's Convertible, Redeemable Preferred Stock
automatically converted into shares of ISS Common Stock, removing the
possibility of any redemption requirements in the future with respect to such
shares.

As of September 30, 1998, the Company had $59,846,000 of cash and cash
equivalents, consisting primarily of money market accounts and short-term,
commercial paper carrying the highest investment grade rating. The Company
believes that these investments will be sufficient to fund its anticipated
operating losses and to meet its working capital needs and capital expenditures
for the foreseeable future. On October 6, 1998, the Company used $4,750,000 in





                                      -13-
<PAGE>   14


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


cash to acquire March Information Systems, Limited. The Company expects to
evaluate other acquisition and joint venture opportunities from time to time
although there any no other current agreements or negotiations with respect to
any such transactions that would utilize any significant amount of the Company's
cash. In the event ISS determines to pursue such opportunities, it may use its
available cash and cash equivalents. Pending such uses, cash will continue to be
invested in short-term, investment grade, interest-bearing investments.


Year 2000

The Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct, patch or replace their current software
systems to achieve Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products and services offered by the
Company. Other potential customers may also defer purchasing Year 2000 compliant
products until they believe it is absolutely necessary, thus resulting in
potentially deferred sales. Conversely, Year 2000 issues may cause other
companies to accelerate purchases of the Company's products. In addition to
identifying potential security weaknesses that may be caused by Year 2000
programming efforts, the Company's products can reduce the exposure of customer
networks to security weaknesses, thereby reducing the uncertainty of whether
problems that might occur upon the arrival of Year 2000 are due to security
breaches or non compliant software programs. These Year 2000 issues could
materially affect the Company's business, financial condition and results of
operations.

The Company has reviewed its products offered to customers and believes that
these products are designed to properly function through and beyond the year
2000. Furthermore, because the nature of the Company's products require
customers to use the current version of the product to obtain the value that the
software is intended to provide, the Company only supports the current and the
next most recently released version of its products. While the Company has
conducted tests of its software and asserted compliance to its customers, there
can be no absolute assurance that the Company's products contain all date code
changes necessary to ensure Year 2000 compliance, particularly when such
products incorporate third party software.

In addition, the Company relies to a significant extent upon several internal
management and other information systems that are used to monitor and operate
the business. Since the Company has experienced most of its growth in systems
and personnel since January 1, 1997, purchases and upgrades of systems have
occurred principally during that period. Internal systems for financial, human
resources and sales reporting, as well as telephone, voice mail and other office
support systems, have all been purchased during 1998 and are reflected in either
the balance sheet as property and equipment or expensed under Company policy.
The selection process of these systems included ascertaining Year 2000
compliance.

The Company is in the process of contacting providers of various tools used in
its product development process and the providers of desktop systems, primarily
Microsoft, to determine that these systems (such as NT and Windows 98) will be
Year 2000 compliant with appropriate fixes. The Company does not depend on any
suppliers or manufacturers whose failure to be Year 2000 compliant would have
any significant impact on the Company's financial condition or results of
operations. The Company expects to complete its Year 2000 project for these
remaining items by the middle of 1999. The Company does not expect to expend any
significant funds to correct Year 2000 issues. Any minor expenses will be funded
through operating cash flows.



                                      -14-
<PAGE>   15


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


Based on available information, the Company does not believe any material
exposure to significant business interruptions exists as a result of Year 2000
compliance issues, or that the cost of remedial actions will have a material
adverse effect on its business, financial condition or results of operations.
Accordingly, the Company has not adopted any formal contingency plan in the
event its Year 2000 compliance project is not completed in a timely manner.

Subsequent event - Acquisition of March Information Systems Limited

On October 6, 1998, the Company acquired privately held March Information
Systems, a United Kingdom-based developer of Windows NT and Unix-based security
assessment technologies. Under the terms of the agreement, ISS acquired all of
the outstanding stock of March Information Systems in exchange for $4.75 million
in cash and 120,000 shares of the Company's common stock. The transaction has
been accounted for using the purchase method of accounting and the results of
March Information Systems will be included in future results of the Company from
October 6, 1998, the closing date of the transaction. In its most recent fiscal
year ended March 31, 1998 March Information Systems reported revenues of
approximately $2 million.




                                      -15-
<PAGE>   16




ITEM 1.    LEGAL PROCEEDINGS

         On July 7, 1998, Network Associates, Inc. ("Network Associates"), a
     competitor of the Company, filed a patent infringement suit against ISS in
     the Federal District Court for the Northern District of California. This
     suit alleges that ISS' product, RealSecure, violates certain patent claims
     issued for Network Associates' intrusion detection technology. ISS believes
     the lawsuit is without merit, and intends to defend against it vigorously.
     However, there can be no assurance that the Network Associates lawsuit will
     not have or result in a material adverse effect on the Company's business,
     operating results or financial condition.

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

 (d)     Use of Proceeds.

         (1)      On March 23, 1998 the Company's Registration Statement on Form
                  S-1, SEC Registration No. 333-44529 was declared effective by
                  oral order of the SEC. Net proceeds to the Company from the
                  Offering were $61,547,200. Through September 30, 1998, the
                  Company used $1,701,000 of the proceeds from the offering for
                  general corporate purposes, including working capital. The
                  remaining $59,846,000 of proceeds remains in temporary
                  investments consisting of money market accounts available on a
                  daily basis and short-term commercial paper.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 10-Q

(a)      Exhibits.

         27       Financial Data Schedule (for SEC use only). 
     
         99       Private Securities Litigation Reform Act of 1995 Safe Harbor
                  Compliance Statements for Forward-Looking Statements




                                      -16-
<PAGE>   17




                                 ISS GROUP, INC.
                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                             ISS GROUP, INC.
                                             (Registrant)



Date: November 13, 1998        By /s/ Richard Macchia
     -------------------          --------------------------------------------
                                  Chief Financial Officer
                                  (Principal Financial and Accounting Officer)



                                      -17-