TWST: Please begin with a brief overview of your coverage areas, including the specific names you follow in the Internet services space.

Mr. Ives: At FBR I cover security and infrastructure software, which include a whole gamut of software companies, including the likes of Amdocs (DOX), Nuance (NUAN), Riverbed (RVBD), Blue Coat (BCSI) as well as a number of the security guys - Symantec (SYMC), McAfee (MFE), Websense (WBSN) - as well as virtualization players, like Citrix (CTXS), and storage vendors, like EMC (EMC).

TWST: Looking at your coverage universe, what type of growth do you expect among security software companies in 2010? What factors will drive that growth?

Mr. Ives: In 2010 we are looking for an improvement in spending, although I would believe modest. I think growth depends on which company you are talking about. I think in general, we will be looking at a 5% to 10% growth from most of the companies that we cover, although that can vary depending on economy and spending.

TWST: For the security software companies, what would you say will be the main drivers of the growth?

Mr. Ives: I think it's a combination. I think security software is benefiting from being a defensive type of purchase in a tough spending environment. They have navigated the downturn, I think, better than many pockets of software. So I think they will benefit from a better spending environment. But in particular they are also benefiting from what I call "outdated security" - infrastructure out there that's long overdue for an upgrade. So there is a really a massive upgrade cycle going on as well, which I think security benefits from.

TWST: On the flip side, what are the biggest risks for the group as a whole at this point? Which names are best positioned to mitigate those risks this year?

Mr. Ives: I think the risks are more macro because if - I think most of the IT forecasts, including our recent survey results, hint at a modest overall spending improvement. And I think the cost structure is overall built on that premise. So I think if the spending environment does not improve modestly throughout the year, I think that would be the biggest risk to most companies in our sector. Now to that extent, that's why I think you are going to focus on defensive players with offensive characteristics - some of the bigger vendors, more visibility, bigger cash flow, strong customer bases. So they are names like Symantec, McAfee and then to a lesser extent, something like Check Point (CHKP) stick out as a ways to play that theme.

TWST: Would you talk a little bit about what kind of M&A activity we might see in 2010?

Mr. Ives: I would expect to see more consolidation take hold in 2010, both on the public and private sides. I think it's a ripe time for consolidation. You saw a bit of that take place during the course of 2009; I expect to see more of it in 2010. I would expect within security software, areas such as next-generation virtualization as well as areas such as speech recognition technology, I think those are broadly defined, three strong areas that lend itself to consolidation.

TWST: You wrote in your report that you remain on the sidelines about Citrix. Why is that? What changes in the microenvironment or within the company would alter your view?

Mr. Ives: A lot of this was just valuation based. I mean, obviously the stock has performed well and I think did reflect a lot of good news in the name. But look, with that said, if our checks and spending show the improvement and you see more reception for desktop virtualization as they continue to execute in the field throughout the year, you can easily see more multiple expansion, and the stock would react accordingly. If checks improve, I think that would be the most telling variable we will be watching.

TWST: On Websense, you wrote the strong December results are a step in the right direction by regaining investor confidence. What else will investors need to see out of Websense in 2010 to continue building that confidence?

Mr. Ives: It's really about consistency. I mean that's been their Achilles heel - been one step forward, two steps back. They had some acquisitions and execution issues, even though it's a renewal-based business, which has been under pressure because of the macro. I think with them, it's really about clear execution on the product as well as in the strategy - not making any more bigger acquisitions, and just focusing on blocking and tackling rather than hitting the home runs.

TWST: Considering Digital River's recent loss of Symantec as a customer, what do you think 2010 is going to look like for them?

Mr. Ives: I think 2010 is a transition year for Digital River (DRIV). I mean, as this Symantec contract rolls out, obviously growth and the bottom line gets hit. I think investors that are positive on it, you kind of need to look at core earnings power in 2011. I think they are doing all the right things they need to do in terms of walking investors through as well as their own employees. I do believe that in next quarter or two, you will have a much clearer picture as to how the contract is going to roll off and what type of impact there is to the model.

TWST: What do you like about McAfee right now and some of the key changes you would like to see management make in 2010.

Mr. Ives: McAfee, they have performed extremely well. It's one of our favorite names for the year. They are really front-center as a beneficiary in terms of strong secular trends in security. They have been very large deal focused; I think investors have paid very close attention to that metric. They need to continue to show margin expansion. They have had some overhangs in some lingering OEM issues with Dell (DELL) and HP (HPQ). So I think as they start to remove those overhangs, continue to execute and continue to make acquisitions but smaller acquisitions, I think this could be a very good year for McAfee.

TWST: If you are an investor who is new to the space, which key concepts do you must you understand before putting money into these companies?

Mr. Ives: I would focus on - there are a lot of technologies, but I think you have got to separate the legacy technologies versus some of the next-generation technologies as to where some of the companies are heading and more importantly where customers are buying. I think three big areas in the space for 2010 are going to be areas such as virtualization, WAN optimization as well as speech recognition technology. I think when you think about names that are beneficiaries from some of those trends, you have the Citrix, EMC, Nuance, Blue Coat and Riverbed. Because 2009 was about survival, 2010 is going to be more about where technology is heading, who are the beneficiaries in the next cycle. So security vendors are extremely well positioned. But I think peeling away the onion, and trying to look at the subsectors and which companies benefit, I think that's the key.

TWST: Based on current valuations and the outlook for 2010, which names are your top picks right now and why?

Mr. Ives: On the security side, we continue to really like names such as Symantec and McAfee. Symantec, it's a recovery story, but I think they are seeing significant execution improvement, strong product cycle, earnings and are very well positioned on this kind of next leg of the security upgrade cycle. I just looked at valuation - I mean, it's still very attractive relative to where its growth rate is, and I think it's a name that will continue grow into a higher multiple. With McAfee, it's more of a high-growth name, but they are more of a pure-play way to play security software. I think they have probably one of the strongest product cycles out there and just an excellent management team, and I think one that should be a big beneficiary of better spending in 2010.

And then when we talk about some of the next-generation technologies, I think the best way to play that is Nuance, a pure-play speech recognition vendor seeing broad-based adoption across verticals such as health care, call centers and mobile. I believe Nuance, especially now as they have so much more visibility with a hosted model, they are really benefiting not just in the top-line growth category, but they have done a great job on cost structure. So you could really see an improving margin/growth story with Nuance in the next year or two, which makes them one of our favorite names this year.

TWST: Is there anything that we didn't touch on that you would like to add?

Mr. Ives: I think across the space, investors need to try to focus on the technologies that are really going to lead us into this next growth cycle. I think a big area is around virtualization. Virtualization is a very big technology area. I think really doing homework, trying to dig into who are the beneficiaries, how it's going to affect the enterprise, how a Windows 7 upgrade cycle is going to affect adoption of virtualization, I think that's just a broader trend, that's important.

TWST: Thank you. (MES)

Note: Opinions and recommendations are as of 01/11/10.

DANIEL IVES

Senior Vice President & Senior Analyst

FBR Capital Markets & Co.

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