A major US financial institution will test Apple's iPhone 2.0 beta for potential use by internal end users, despite raising red flags about inadequate security on the next-generation device three weeks ago.

"I'm awaiting my device as I type," said a high-ranking official at the financial company in an email Wednesday. The official, who asked not to be named and that the company remain unidentified because of corporate policies, said several users will test the device across various security, network and Microsoft Exchange support teams.

In March, the same official had said the institution's initial review of the 2.0 beta one week after it was announced left company officials "less optimistic" than when the beta was announced by Apple on 6 March, mainly because financial institutions face tough federal regulations on security of records.

But the financial institution undertaking the tests also allows its customers to use the first version of the iPhone to access their accounts and move funds, making a review for potential internal users more important.

"We have a lot of hits on iPhones each month for our mobile [transactions], so it is obviously a popular device," the official said. "We need to understand why this is so popular and revisit why we can't allow our associates to use it."

The official added that, upon review, "I still think [the iPhones] will be lacking" on security and other counts, "but we need to see first hand, understand their capabilities and articulate what is still lacking." With the benefit of a hands-on evaluation, the financial institution can then ask Apple to consider the company's needs in building future releases, the official added.

An Apple spokesman declined comment.

A clear concern is that iPhones 2.0 is likely to require using iTunes, given that the current version of the smart phone requires the Apple-built application. "We in the corporate space do not allow iTunes," the official said. Many companies fear that network and storage capacity will be sapped with songs and videos downloaded from iTunes accounts by end users. There are also concerns that re-use of copyrighted material could violate federal laws, some analysts said.

The official said that after using the 2.0 beta version for a while, a visit is planned to discuss it with iPhone developers at Apple's headquarters in Cupertino, Calif.

Security still a worry

Security concerns over iPhone 2.0 have been raised by some enterprises and analysts for regulated industries such as banks, hospitals and utilities. Among the concerns is that data on the device will not be totally encrypted, even though the 2.0 release calls for over-the-air encryption based on a Cisco Systems IPsec VPN. Apple has won some business IT backing because it adds ActiveSync within Microsoft Exchange to allow a remote wipe in case a device is stolen.

In addition to security, some IT managers are unhappy that iPhone is locked to a single carrier, AT&T, reducing their flexibility in picking carriers, and that the Safari browser is not standard enough to interoperate with already crafted custom applications.

The financial institution's interest in testing the iPhone 2.0 beta is shared by other companies, said Michael Gartenberg, an analyst at Jupiter Research, based on his communications with companies and Apple.

"I think there's a lot of active interest in 2.0 from a lot of organizations who want to interact internally or externally," he said. "It appears that Apple is providing the things they need to provide to win over hearts and minds where there's skepticism."

Even if IT managers are dead-set against iPhone adoption, "there's going to be a lot of push in organizations from users who want make sure this device is suitable and adopted," Gartenberg added.

On 18 March, Gartner issued a report raising its assessment of the device, saying that iPhone 2.0 "corrects the basic omissions of the first iPhone release and [becomes attractive to enterprises."

Ken Dulaney, one of the report's authors, said Wednesday that the generally positive Gartner report was bound to interest some large businesses in testing the 2.0 beta. Based on second-hand reports, Dulaney said beta testing has spotted some bugs in the 2.0 software, but called it normal.