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Shares of

Internet Security Systems


sank Tuesday after an analyst downgraded the stock to a sell rating, citing more intense competition in the intrusion-detection market and customer dissatisfaction.

The downgrade brought a heated rebuttal from the company's CEO, who claimed the note was laden with inaccuracies.

ISSX shares fell as much as 8.2% Tuesday beforeclosing down 70 cents, or 5.5%, at $12.09. Shares wereat $12.06 in after-hours trading.

Tuesday morning Fulcrum Global Partners analystAlan Weinfeld lowered his rating on ISSX to sell fromneutral for the second time this year. Weinfeld notedthat the intrusion-detection market once dominated byISSX has attracted at least a dozen public and privatevendors in the last two years.

Until 2002, Weinfeld wrote, most other intrusion-detection systems were not fast enough or generated too many false positives to compete with ISSX. Butemerging competition from private companies such as



Intruvert Networks

, bought by

Network Associates


, surpassed the functionality of ISSX's latest product, released in July, while largerrivals such as

Cisco Systems

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can use their resources to eat away at ISSX's market share.

Weinfeld wrote that the company's "recognizedlicensed-software intrusion-detection business has notgrown in the last seven quarters." Seven quarters ago, the fourth quarter of 2001, ISSX posted $30.7 million in license revenue, while in its latest quarter, the second quarter of 2003, the company's license revenue rang in at $24.3 million.

"We think the best way to participate in thegrowth in intrusion detection is as part of a largerenterprise security offering in companies such asSymantec and Network Associates," advised Weinfeld in his note. He hasbuy ratings on both Symantec and Network Associates.His firm does not do investment banking andhe does not own any shares of Symantec, Network Associatesor ISSX.

However, in an interview Tuesday, ISSX CEO TomNoonan said the company has been competing againstCisco since the company entered the market through an acquisition in 1997. Despite those six years of competition, Noonan said, research firm IDC still shows ISSX's market share at double that of Cisco.

"The more relevant point, which he doesn't make inhis report but is very, very clear, is the traditionallegacy security companies ... have realized theinadequacies of that technology and they'redesperately trying to acquire start-up companies ...because the intrusion prevention is the future ofsecurity, and we invented it," Noonan said.

But Weinfeld said his firm's proprietary survey of50 ISSX users found that more than 34% of customersare currently highly dissatisfied or will remove ISSXsoftware. Among the complaints: an inability to useISSX software with other products and unhelpful techsupport. "Especially damning to ISSX's industrystanding was the fact that its product failed todetect Code Red," Weinfeld added, referring to thedisruptive worm that hit in 2001. In a phoneinterview, he said at least one customer in the surveyreported such an experience with Code Red.

Noonan also rebutted those charges, saying hiscompany's technology detected and prevented Code Redbefore the attack occurred. ISSX was part of aconsortium of companies and government groups thatissued a public warning on Code Red in July 2001.

Noonan said ISSX is trying to get a copy ofWeinfeld's survey and noted that the analyst has nevertalked to any officials at ISSX. He also cast doubt onthe survey by noting that his company spends an entirequarter trying to reach 30 to 40 customers for its owninternal surveys.

"I have no idea what the motive is for thisreport, but it is littered with inaccuracies," Noonansaid. "There are no facts to support them."

But in a telephone interview Weinfeld stuck by hisreport and insisted he has tried contacting thecompany's chief financial officer, only to be told bya secretary that he won't speak with Weinfeld. Inaddition, he said he has never been able to ask aquestion on the company's earnings calls.

"We're standing by what we said in January,throughout the year and today," he said.

Weinfeld issued his first sell rating on ISSX onJan. 23, a day after the stock closed at $20.47. Heraised the rating to neutral based on valuation onFeb. 24, when shares fell into the $12 range. Weinfeldsaid the stock's current valuation, trading at 25.8times his 2003 estimate and 22 times his 2004estimate, is expensive. He set a price target of $10.

Weinfeld believes ISSX can meet third-quarterconsensus estimates, which peg earnings at 11 cents ashare on $59.2 million in revenue, according toThomson First Call. But he said he is concerned aboutthe company's fourth-quarter pipeline and its abilityto win new customers with a recently launched,unproven intrusion-detection appliance. Analysts are forecasting that the company's revenue will grow 10.8% in the seasonally strong fourth quarter.

"As consolidation is rapidly taking place in thisindustry, to be a long-term winner, ISSX must, webelieve move away from just the best-of-breed approachand show a greater vision in the next year or twobeyond a multiclass appliance that may not work,"Weinfeld wrote.