Internet Security Systems Shares Sizzle

"Neither of these companies are particularly well known for their intrusion prevention software, and that's what ISS is good at," Jaquith says. "It would be a nice match and fill part of their portfolio."

John Pescatore, a security analyst with Gartner, says ISS has a large installed base and loyal customers, but the company is in a very competitive market with a lot of bigger, well-funded companies like Juniper Networks (JNPR) and Cisco (CSCO).

"I don't think there are any near-term problems" for ISS, he said. "Longer-term, if it can't broaden out into more product areas, then it's going to be tougher and tougher to grow."

For that reason, he suggests that companies which compete with Juniper and Cisco -- Nortel (NT) or Extreme Networks -- might make a sensible match.

However, a more immediate question for investors who have missed out on the recent volatility is whether the stock has any run-up left in it.

For Matrix USA, which downgraded the stock last week, it doesn't. The firm sees the recent gain in share price as an opportunity for investors to sell and take profits now, regardless of whether an acquisition materializes. Matrix said while ISS's fundamentals are improving, they "remain negative and lag the sector."

But other analysts say investors will have reason to be happy with the stock, as they see good things coming in the company's second-quarter earnings report on July 31.

"From the moment the company gave its guidance, the bears have been betting on a miss for the June quarter," and the Street was factoring that into ISS's stock price, says Daniel Ives at Friedman Billings Ramsey. "Based on our field checks, I believe the company was able to meet its aggressive guidance for the June quarter." His firm seeks to do banking with the companies it covers.

The company said in April that it expected to earn 21 cents to 23 cents a share before items on revenue of $84 million to $87 million.

"Investors are starting to realize they miscalculated the quarter," Ives says.

"We've noticed improving relationships in the channel over the last couple of quarters, validating what the management has been saying," Zambrano adds.

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