Investment Trends With...
Brian W. Ruttenbur
Senior Analyst
Morgan Keegan & Co, Inc.

1.SecurityStockWatch.com: Brian, please give us an overview of your background.

Brian W. Ruttenbur: I am an equity research analyst with Morgan Keegan, covering Homeland Security Technologies with 14 stocks under coverage. I have been an analyst since 1994 with over 10 years of experience in equity research on the sell side.

2. SecurityStockWatch.com: You recently published a 2004 Homeland Security Technologies Industry Overview. Frankly speaking, this 180+ page report of yours is one of the best, and most comprehensive, studies that we have seen. Would you kindly give our audience an overview of Homeland Security Opportunities and Drivers at the present time.

Brian W. Ruttenbur: Thank you, this summer we did published a Morgan Keegan Homeland Security Technology Industry Overview Book. The Book provides thorough analysis of the security industry trends, drivers, funding, growth prospects, and main players. We offer detailed information of our three coverage segments including descriptions of the macro environment, legislation, federal funding, overview of available technologies and products, competitive analysis, and operational and financial analysis on major competitors in each sector.

Our three coverage segments that represent significant business and investment opportunities are:

1. Tracking and Identifying Individuals & Equipment (current market size of approximately $4.8 billion; estimated to grow to approximately $10.7 billion in 2007): Smart cards: chip-based (contact and contactless), optical memory, others; Hardware (readers) and software used for smart card solutions and tracking transportation equipment; Biometrics: finger/hand, face, eye

2. Physical Security Technology (current market size of approximately $20.0 billion; estimated to grow to approximately $36.3 billion in 2007)
A. Physical Security Products (current market size of approximately $7.0 billion; estimated to grow to approximately $10.0 billion in 2007): Body armoring: protective gear, forensic gear, etc.; Vehicle armoring: military and commercial; Ballistic and blast protection equipment: doors, windows, other hardware; Non-lethal munitions: Beanbag rounds, rubber batons, conducted energy weapons, etc.

B. Detection and screening technologies and products (current market size of approximately $8.5 billion; estimated to grow to approximately $15.3 billion in 2007): Individual screening: explosives, metal and contraband; Cargo/baggage screening: parcel and checked-in luggage, large cargo screening; Air, food and water screening and detection (includes bioterrorism)

C. Surveillance and Monitoring (current market size of approximately $4.5 billion; estimated to grow to approximately $11.0 billion in 2007): Communication interception; Digital video surveillance; Infrared systems

3. Risk Mitigation (current market size of approximately $9.6 billion; estimated to grow to approximately $14.6 billion in 2007): Investigation and intelligence; Background screening; Executive protection; Restructuring and bankruptcy consulting

Our investment thesis for the Homeland Security sector is as follows:

• Large, fragmented industry with attractive growth prospects
- Total global security spending in excess of $100 billion
- Over $35 billion in estimated 2003 revenue within our specific coverage areas
- Compounded annual growth rate for our coverage over the next four to six years of 16%, growing to $64.6 billion in 2007
- Significant consolidation activity and opportunities

• Large funding expected for Homeland Security
- Federal spending on Homeland Security is expected to be $27 billion (plus another $20 billion from other agencies) in FY 2005
- Approximately 30% of federal funding is estimated to go to the private sector; however, we believe the long-term trend will decrease this portion to 20%
- The Federal Homeland Security Budget is expected to grow in line (or at a faster rate) with Department of Defense funding over the next five to eight years

• Underlying industry drivers remain solid
- Fear of additional terrorists attacks and therefore a focus on security technology
- Legislative mandates requiring increased security
- Increasing globalization of business has heightened corporate concerns regarding security issues both domestically and abroad.
- Technological advances continue to spawn innovative security solutions and introduce new security threats.

• Several growth areas are beginning to emerge
- Security technology hardware and software products show strong signs of rapid growth as the need to secure our physical surroundings becomes more vital.
- Tracking and identifying individuals, as well as enterprise/government equipment, shows long term promise as governments and corporate clients increase acceptance of this technology.
- Need to screen people, parcels, cargo and air, water, and food is growing
- Market for decision enabling software and hardware is growing rapidly
- Fraud prevention and risk mitigation providers are demonstrating positive momentum, especially background checking and investigative services.


3. SecurityStockWatch.com: Now that the election is over, what does a 2nd term for President Bush with and a Republican House and Senate mean for the security industry?

Brian W. Ruttenbur: The overall sentiment brought with the election of President Bush for the second term is that the federal government will continue funding security initiatives as well as defense and war-related programs. We continue to see a strong and growing budget for both Departments - Homeland Security and Defense. Last month President Bush signed the 2005 Homeland Security Appropriations Act, which provides $28.0 billion in net discretionary spending for the DHS ($1.8 billion, or 6.6%, above 2004 level). The bill is primarily focused on border and port security and biodefense. The 2005 Department of Defense Appropriations Act provides $417.5 billion in funding. This legislation funds both core defense programs in the U.S. as well as ongoing operations in Iraq.

4. SecurityStockWatch.com: Which companies are you presently covering and may we have a brief overview of the strength of each company.

Brian W. Ruttenbur: As we mentioned earlier we cover 14 companies in this sector. It is important to note that we have three basic ratings: Outperform (O), Market Perform (M), and Under Perform (U). We also have three risk ratings, Speculative Risk (S), Market Risk (M), and Conservative (C). Below is a list of our Outperform rated coverage companies:

• American Science and Engineering (ASEI - O/S, $37.70) develops and manufactures inspection systems for detection and security applications that include drug and weapons smuggling, trade fraud, trafficking of illegal aliens, and anti-terrorism purposes. The company's product line includes 12 models that can be broadly categorized into three groups: CargoSearch systems, ParcelSearch systems, and a third division that provides services and support. The company's products utilize the company’s patented Z Backscatter technology and vary in price from $60,000 to $6 million. The company has deployed its systems around the world in high-threat and high-risk facilities including: the White House, U.S. Congress and Supreme Court, and 90 U.S. embassies. We would like to point out one of AS&E's products that has been driving growth recently - Z Backscatter Van. It was introduced to the market last year and since then the company sold over 50 Vans worldwide. Vans are adopted to screen cargo and vehicles at ports and borders as well as for anti-terrorism efforts by police and military forces.
• First Advantage (FADV- O/S, $16.52) is a provider of enterprise and consumer screening and risk management solutions to corporations and consumers globally. The company’s three operating segments – Enterprise Screening, Risk Mitigation, and Consumer Direct – serve an extensive clientele of employers, property managers, insurers, and consumers. Using its Web-based technology, proprietary systems and national data resources, First Advantage offers industry-leading information products and services, including: criminal record checks, drug-free workplace programs and other occupational health testing, investigative and digital data services, employment and education verification, credit reports, social security number verification, and motor vehicle records. Through the recent acquisition of CIC Enterprises, First Advantage has added the identification and processing of tax and incentive credits to its inventory of available services. First Advantage was formed in June 2003 when the First American Corporation’s Screening Technology Division merged with US SEARCH.com’s employment screening subsidiary. First Advantage has broadened its customer base and expanded business operations through many acquisitions, resulting in substantial growth for this maturing company. Since 1998, the company's formation, development, and growth have been significantly enhanced by 32 acquisitions.
• LaserCard (LCRD- O/S, $10.64), formerly Drexler Technology, is a provider of optical data storage products and systems, featuring its LaserCard optical memory cards and chip-ready Smart/Optical cards. The company's LaserCard optical memory cards are used for digital governance applications, such as immigration, border crossing visas, cargo manifests, motor vehicle registration, multi-biometric identification (ID) cards and other digital read/write card applications. The company's wholly owned subsidiary, LaserCard Systems Corporation (LSC), makes optical card read/write drives, develops optical card software and markets optical cards, read/write drives and related systems. We would like to highlight that LaserCard supplies its optical memory cards to several large programs including the following: green cards and border crossing cards for the U.S. government, cargo manifest cards for the U.S. military, permanent resident cards to Canadian government, national ID cards to the Italian and Saudi Arabian governments, and vehicle registration cards for the government of India. The company has no direct competition in optical memory card segment. It offers a broad portfolio of smart card products including a hybrid optical memory and chip (contact or contactless) card. LaserCard faces significant opportunities from both current secure ID programs that the company is already working on deploying and new business opportunities as many entities, primarily governments, are considering deploying secure ID programs like national ID card.
• OSI Systems (OSIS - O/S, $20.28) is a provider of security and inspection systems, medical monitoring and imaging products, and optoelectronic devices and value added subsystems, as well as engineering and manufacturing services. On the security side, OSI Systems is the leading provider of X-ray and metal detectors used to scan and inspect people, baggage, cargo and other objects for weapons, explosives, drugs, and contraband. The company, through its four brand names, Rapiscan, Aracor, Ancore, and Metor, are the cost leaders in the security sector. Optoelectric technology, the technology found in security devices of Rapiscan and Metor, has been used by the company in various other applications. Through its subsidiary Dolphin Medical, the technology is used to detect the amount of oxygen in the blood. Another medical application of optoelectric technology is detection of bone density to prevent the onset of osteoporosis, which the company does through its subsidiary Osteometer MediTech. In addition to the medical field, the company utilizes this technology in the military, telecommunications and various other applications. As of March 19, 2004, OSI Systems closed its acquisition of Spacelabs Medical, a manufacturer and distributor of patient monitoring and clinical information systems based in Issaquah, Washington. Spacelabs was integrated into OSI' healthcare/medical segment. OSI's management has been evaluating strategic restructuring alternatives for the company, one of which is two break security and healthcare segments into stand alone entities. On the security side, we are expecting the launch of operational PFNA screening systems at the U.S. - Mexico border in El Paso, Texas (expected early next year).

Below is a list of other stocks that we cover:
• ActivCard (ACTI - M/S, $7.75) - provider of software for smart card deployments (CAC deployment)
• Armor Holdings (AH - M/S, $42.18) - provider of body and vehicle armoring for law enforcement, military, and commercial customers (up-armors HMMWVs at a record rate of 450 vehicles per month)
• CompuDyne (CDCY - M/S, $7.23) - provider of physical security products including blast resistant windows and doors, attack resistant equipment, products for corrections industry, and public security and safety systems (U.S. embassies)
• Digimarc (DMRCE - M/S, $9.48) - provider of secure identification products and watermarking solutions (over 60% market share in the U.S. drivers' licenses market)
• FLIR Systems (FLIR - M/S, $59.78) - provider of infrared solutions for imaging and thermography applications
• Identix (IDNX - M/S, $7.46) - provider of finger/hand, face, and skin biometric solutions (US-VISIT program)
• I.D. Systems (IDSY - M/S, $17.51) - provider of smart RF wireless systems for asset management for industrial vehicles, airports' and ports' equipment, and rental car fleet management
• InVision Technologies (INVN - NR, $48.25) - provider of computed tomography-based detection products used by the aviation industry to screen baggage
• TASER International (TASR - M/S, $59.66) - provider of less-lethal conducted energy weapons (M-26 and X-26 models; military products)
• Verint Systems (VRNT - M/S, $39.09) - provider of communication interception, digital video security surveillance, and digital video and communication business intelligence platforms


5. SecurityStockWatch.com: We have seen some consolidation in the security industry….do you expect that trend to continue?

Brian W. Ruttenbur: The Homeland Security technologies market remains highly fragmented, even amidst continuing consolidation. This industry has experienced a great deal of M&A activity over the past several years. Based on transactions involving companies monitored by Morgan Keegan, approximately $13 billion in aggregate consideration has been paid in over 100 transactions since 1997, excluding the IT security products and services sector.

Customers’ increasing demands for global and integrated security solutions have encouraged industry participants to expand their capabilities and pursue strategic alliances. According to the Hallcrest Report, there are 30,000 security companies worldwide. Given the fragmented nature of the security industry, we anticipate numerous acquisition opportunities for leaders in these sectors. Meanwhile, we believe that increasing demand within the security industry will spur internal growth for the leading companies.

Examples of the most recent acquisitions in our sector are: GE acquiring InVision Technologies for $900 million, Marsh & McLennan acquired Kroll for $1.9 billion, Verint Systems acquired ECTel for $35 million, FLIR Systems acquired Indigo Systems for $190 million, and Armor Holdings acquired Simula for $110.5 million, among other examples. We would like to highlight that most companies under our research coverage represent attractive opportunities for acquirers as they offer various venues to get exposure in homeland security efforts. These opportunities have been especially attractive to large defense contractors and system integrators.

6. SecurityStockWatch.com: Brian, many thanks for your time today. Are there any closing comments you would like to make?
Thank you for the time. We believe the Homeland Security sector outlook remains positive and will remain one of the focal agenda items in the Federal government. We would like to mention that Morgan Keegan will host its annual Homeland Security Conference in NYC on May 23, 2005. If you are interested in attending this event, please contact a Morgan Keegan institutional sales person for more details.

Please see the disclosures below

ADDITIONAL INFORMATION AVAILABLE UPON REQUEST
For important information about our disclosures http://mk.bluematrix.com/bluematrix/Disclosure

As of the date of this report, Morgan Keegan & Co., Inc. makes a market in these securities: ACTI, CDCY, DMRC, LCRD, FADV, FLIR, IDNX, IDSY, OSIS, TASR, VRNT and INVN
Morgan Keegan & Co., Inc. has managed or co-managed a public offering of equity securities for LCRD and CDCY in the past 12 months.
Morgan Keegan & Co., Inc. has received compensation for investment banking services from LCRD and CDCY in the past 12 months.
Morgan Keegan & Co., Inc. expects to receive or intends to seek compensation for investment banking services from these companies in the next 3 months: ACTI, AH, ASEI, CDCY, DMRC, LCRD, IDNX, IDSY, OSIS, TASR and VRNT
A company affiliated with Morgan Keegan & Co., Inc. holds warrants of IDNX.

MK PERFORMANCE RATINGS
O-Outperform (Expected to outperform the S & P 500* over the next 6 months)
M-Market Perform (Expected to perform the S & P 500* over the next 6 months)
U-Underperform (Expected to underperform the S & P 500* over the next 6 months)
*REIT’s performance benchmark is total return to the NAREIT Equity Index.

MK SUITABILITY RATINGS
S-Speculative (Business or balance sheet risk materially above that of the average U.S. public company)
M-Market Risk (Business or balance sheet risk not materially different from that of the average U.S. public company)
C-Conservative (Business or balance sheet risk materially below that of the average U.S. public company)

DISCLOSURE STATEMENT: The information contained in this report is based on sources considered to be reliable but is not represented to be complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice. This report does not constitute an offer to sell or a solicitation of an offer to buy any securities. Morgan Keegan & Co., Inc., a subsidiary of Regions Financial Corporation, and its officers, directors, shareholders and employees, other than the research analyst responsible for the preparation of this report, and affiliates and members of their families may have positions in these securities and may, as principal or agent, buy and sell such securities before, after or concurrently with the publication of this report. In some instances, such investments may be inconsistent with the opinions expressed herein. An employee, other than the research analyst responsible for the preparation of this report, may be a member of the board of directors for companies referred to in this report. The research analyst responsible for the preparation for this report is compensated based in part on the firm's investment banking revenue but is not compensated upon specific investment banking services transactions. Morgan Keegan & Co., Inc., member NYSE, NASD and SIPC, is a registered broker-dealer subsidiary of Regions Financial Corporation. Investments are NOT FDIC INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE. For more information about Morgan Keegan disclosures, please go to http://mk.bluematrix.com/bluematrix/Disclosure? To obtain a copy of the most recent disclosure information regarding the individual securities mentioned in this compendium report, please write to us at the following address: Equity Research Department Attn: Director of Research Morgan Keegan & Co., Inc. 50 N. Front Street - 13th floor Memphis, TN 38103