Internet Security Systems (Nasdaq: ISSX) has begun a voluntary option exchange program. to reduce the number of outstanding options, while increasing long-term employee retention.

The terms of the program include stock options with exercise prices exceeding $30 per share are eligible. ISSX is currently trading around $17. The approximately 1.45 million option shares eligible under the exchange program have exercise prices between $30 and $83 per share.

The exercise price per share for new options will be priced at the market closing price approximately six months and a day after the cancellation of old options. The grant date of new options is currently expected to be May 27, 2004. Old options will be exchanged at the rate of 2.5 old option shares for one new option share.

New options will be subject to a new three year vesting period, regardless of whether old options were vested. New options will vest in equal quarterly installments beginning three months after the grant date of the new options.

“We are delighted to have the opportunity to offer this program to our valued employees who make this company a success,” said Tom Noonan, president, chairman and chief executive officer. “This program is intended to rebalance this important equity incentive for employee motivation and retention, while being responsive to shareholder interests.”

About 600 ISS employees worldwide are eligible to participate in the option exchange program. The company’s board of directors and five most senior executive officers, including the CEO, are not eligible to participate in the program.