Dow Jones 9565.16 +41.89 10:06 am PST, September 3, 2003  NASDAQ 1858.94 +17.46 For info, visit access.smallcapnetwork.com S & P 500 1026.53 +4.54 To be removed, please click here Russell 2000 511.59 +4.09 VOLUME 03: ISSUE 50  Internet Security Systems: Invest in Viruses? Of the three under-performing stocks (out of 21) on our track record article last week, Internet Security Systems  (NASDAQ: ISSX) continues to look interesting. Although it dropped 16 percent between February 2003 ($13.50) and our track record piece ($11.25), the shares have improved slightly to currently trade at around $13. In light of recent high profile virus attacks, companies such as ISSX should remain prominent on investor radar screens.  Analysts and investors have been talking these shares down since they peaked at $25 and change in late 2002. Will the shares get to $10? Maybe. But the downside risk versus the upside potential should be noted. View the present weakness in the share price as an opportunity as opposed to the beginning of the end. Technically the shares look like a bargain. We would advise a stop at the $10.75 level, but the prospects appear intriguing and these are smart folks in a sector that can only grow--probably exponentially. Unfortunate for computer systems, but likely profitable for long-term investors. From mid cap acorns.... With a market cap of $642 million, ISSX is about 7 percent the size of sector behemoth Symantec (NASDAQ: SYMC). And while SYMC has moved from $20 to $55 in the last couple of years, ISSX moved from $10 to a level of $40 in January 2002, then back to the low teens. ISSX was named to Forbes list of 25 fastest growing tech companies for 2003, and the company's projected revenues and earnings per share (EPS) look interesting. That said, the shares have under-performed those of its peers. A recent downgrade by an analyst at Fulcrum Capital--the premises of which were widely refuted by ISSX management-- wasn't helpful in that respect. That analyst has a target price of $10. The shares have been pounded, but we believe the worst is over. ISSX management has provided guidance that fiscal 2003 revenues (as at December) should reach between $240-$250 million and EPS are projected at 50-57 cents. With the shares at $13, that evidences a price/earnings ratio of around 25 times. Symantec has a projected EPS of $1.97 for roughly the same period (as at March 2004) which gives those shares a p/e ratio of 30 times. ISSX's numbers and guidance have contracted slightly since our piece in February, but are still in a decent range to interest investors. Double threat  There are two things investors can be sure of in the Internet security space: computer threats will increase and so will competition--it's almost a self-fulfilling prophecy. As threats become more clever and invasive, the need for front line security to recognize and eradicate problems before they get into a network will emerge as the largest challenge facing everyone-- from the administrators of massive global networks to those of us toiling in front of our home PC's. And as with any growth industry, there will be intensifying competition and consistently better mousetraps. As companies such as Symantec evolve into massive entities, the general business caveat is that they eventually reach a critical mass. From there, they lose the ability to become nimble and innovate--innovation being a commodity that is crucial to keeping ahead of threat assessment and system compromise. The hackers (and terrorists) are getting smarter; finding  more and more holes in operating systems. The future of the sector depends on innovation and the ability to identify threats. ISSX has moved aggressively into this area from simple anti-virus software and while it has experienced some revenue challenges in the past several quarters, the horizon looks bright. Another ISSX strength is that the current price contains a cash component of nearly $4.50 per share. There's also quite a nifty short position of 2 million shares, or 4 percent of the 50 million shares outstanding; even a moderate short squeeze could propel the stock. The bottom line is that virus attacks are bound to increase in numbers, complexity and impact. ISSX has proven it can compete and has the size to be proactive and the products that will continue to be thorns in the sides of its larger competitors. I'm sure you'll have comments. Send them in here: Editor@smallcapnetwork.com Unsubscribe Here D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. 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