Integrated Information Systems Issues Letter to Shareholders

Business Wire, Jan 9, 2003

Business Editors

TEMPE, Ariz.--(BUSINESS WIRE)--Jan. 9, 2003

Integrated Information Systems Inc. ("IIS") (NASDAQ: IISCD) announced today that Jim Garvey, chairman, chief executive officer and president, issued the following letter to shareholders:

As we start a new year, I want to personally take this opportunity to provide you with an update on the exciting developments at Integrated Information Systems, and our company's strategy for becoming the top Microsoft-focused information technology services and consulting firm, serving the needs of middle market enterprises. I also feel an update on the state of our Turnaround Plan is appropriate. Our Turnaround Plan involves several key initiatives. The first step in our plan was to right-size the organization and eliminate the overhang existing from the heady over-expansion in 1999 and early 2000. In addition, I am happy to report our company reached a major milestone in October. IIS completed a comprehensive financial restructuring and financing event which removed many of the remaining obstacles impeding its ability to rebuild shareholder value. These crucial steps are the first of many to build the new IIS. The other important aspects of our Turnaround Plan include:

-- The Continued Acquisition of Top Microsoft Partners: We are the only pure play public company executing on a strategy to consolidate the Microsoft Partner Channel. Carefully acquiring like-minded Microsoft Gold Certified Partners -- the creme of the crop -- is an excellent strategy, as it is perfectly aligned with the needs and direction of the largest software company in the world. Microsoft has spent a decade building a partner channel for services and consulting. While other large competitors of Microsoft, such as Sun Microsystems, Oracle, and IBM, have large services and consulting organizations (e.g., IBM generates nearly half of its revenue from services), Microsoft needs national partners to implement its increasingly complex enterprise level information technology solutions. Our plan of selectively combining top regional Microsoft partners into one "super partner" is working well in this consolidating marketplace. We closed two acquisitions last year, one triple Gold certified Microsoft partner in the Midwest and a double Gold certified partner in the Southwest. We expect to close one or two additional Microsoft partner acquisitions in the first quarter of 2003. In all, we have successfully completed six acquisitions in our consolidation plan; these added markets comprise more than 70 percent of our revenue and cost shareholders less than 260,000 shares of restricted stock, plus the assumption of some debt.

-- Focus on Security and Information Infrastructure: We believe that the focus of business spending in the IT arena over the next 18 to 24 months will be on creating a secure infrastructure that is easy and inexpensive to extend and maintain. This heavy spending on security and infrastructure will be followed by the true integration of information systems in the value chain. A large percent of this integration in middle market enterprises will be implemented with Microsoft .NET technology. We are currently positioning ourselves through the acquisition plan to take advantage of the short-term spending plans of our customers and the long-term inter-organizational integration wave which we believe will bring double-digit growth back into our business by the end of 2004. Other macro forces are in our favor. For example, government spending on IT security is set to dramatically increase and the new Homeland Security Department has a $38 billion budget, 5 percent of which is earmarked for IT services, software and hardware.

-- Solution-Focused Selling: We have developed many of our solution offerings around security, and those offerings are now generating sales opportunities in a tough environment. In the fourth quarter of 2002, historically the toughest quarter for closing business, we closed roughly twice the dollar value of customer engagements over the new contract results of the third quarter. Our new "National Security Practice" marketing effort is proving highly effective at generating sales, building brand awareness and ensuring consistent quality throughout all IIS divisions.

-- Incentive-Based Pay for our Consultants: In today's environment we need to fire on all cylinders. Everyone in the organization needs to focus on adding extra client value to drive more revenues and profits. As part of our plan, we have implemented an incentive-based pay plan for all of our consultants. This helps protect our gross margins as underutilized consultants will receive less compensation.

-- Low G&A and Fixed Costs: In the third quarter of 2002, we announced a 72 percent reduction in G&A from the third quarter of 2001. We have continued to aggressively reduce fixed costs while keeping our structure as flexible as possible. For example, we expect that office rental expense will be reduced by 72 percent in the calendar year 2003 from 2002. Additionally, our tax loss carry-forward creates a potential tax benefit that should give us a 40 percent earnings and cash benefit for years to come. Thus, we are truly pursuing a business model where, long-term, we believe we can consistently deliver earnings to shareholders in a dynamic and changing environment.