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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the year ended December 31, 2002

or

For the transition period from           to      

Commission File Number: 0-25092

INSIGHT ENTERPRISES, INC.

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock
(Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based upon the closing price of the Registrant’s Common Stock as reported on the Nasdaq National Market on June 28, 2002, the last business day of the Registrant’s most recently completed second fiscal quarter, was $1,116,553,551. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.

     The number of outstanding shares of the Registrant’s Common Stock on February 28, 2003 was 46,101,041.

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DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive proxy statement relating to its 2003 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year to which this Report relates, are incorporated by reference into Part II, Item 5 and Part III of this Form 10-K.

FORWARD-LOOKING STATEMENTS

     Certain statements in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, among other things, projections of matters that affect sales, gross profit, operating expenses or net earnings; projections of capital expenditures; projections for growth; hiring plans; plans for future operations, including the execution of acquisition integration plans; financing needs or plans; plans relating to our products and services; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking information. Some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements include, but are not limited to, the following:

	•		risks associated with our integration and operation of past and future acquired businesses;
	•		reduced demand for products and services in our industry;
	•		current unfavorable economic conditions (including uncertainty created by military action);
	•		actions of competitors;
	•		changes in supplier reimbursement and buying programs;
	•		our ability to manage growth successfully;
	•		changing methods of distribution;
	•		risks associated with international operations;
	•		reliance on suppliers;
	•		reliance on information and telephone systems;
	•		reliance on our outsourcing clients;
	•		rapid changes in product standards;
	•		dependence on key personnel;
	•		availability of short-term financing arrangements;
	•		changes in state sales or use tax collection requirements;
	•		recently enacted and proposed changes in securities laws and regulations;
	•		results of litigation;
	•		and other risks that are otherwise described from time to time in our Securities and Exchange Commission reports, including but not limited to the items discussed in “Factors that Could Affect Future Results” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report.

We assume no obligation and do not intend to update any forward-looking statements.

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INSIGHT ENTERPRISES, INC.

FORM 10-K ANNUAL REPORT
Year Ended December 31, 2002

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PART I

Item 1. Business

General

     We were incorporated in Delaware in 1991 as the successor to the business that commenced operations in 1988.

     We are a leading provider of information technology (“IT”) products and services to businesses in the United States, Canada and the United Kingdom. Our offerings include brand name computing products, IT services and outsourcing of business processes. Our business is organized in the following four operating segments:

	•		Direct marketer of computing products and services – North America (referred to as “Insight North America”)
	•		Direct marketer of computing products and services – United Kingdom (referred to as “Insight UK”)
	•		Business process outsource provider (referred to as “Direct Alliance”)
	•		Other: Internet service provider – United Kingdom (referred to as “PlusNet”)

     Insight North America, Insight UK, Direct Alliance and PlusNet represented 83%, 13%, 3% and 1% of our net sales in 2002, respectively. As explained below under “Operating Segments,” we reorganized our operating segments in the fourth quarter of 2002. Prior to this reorganization, Insight North America, Insight UK and PlusNet were operated and reported as a single operating segment.

     We seek to become the best source for IT products and services in the United States, Canada and the United Kingdom, as well as the leading global provider of outsourced direct channel business processes. Accordingly, in 2002 we focused on strengthening our market position by expanding our customer base and strengthening our service capabilities.

Acquisitions

     In 1997, we expanded internationally by initiating operations in Canada. During 1998, we initiated operations in the United Kingdom and Germany, both through acquisitions. In the fourth quarter of 2001, we acquired additional computer direct marketers in Canada and the United Kingdom and closed down our operations in Germany to focus all of our European efforts on the United Kingdom.

     In April 2002, we acquired Comark, Inc. and Comark Investments, Inc. (collectively, “Comark”), which had net sales of $1.5 billion in its fiscal year ended December 31, 2001. Comark was a reseller of brand name computers, peripherals, networking products, storage products, software and accessories. Comark also provided services such as asset management, configuration and integration, network design and consulting, installation, moves, adds and changes, network monitoring, system integration, enterprise consulting, hardware maintenance and voice/video/data integration. Comark marketed to medium-to-large enterprises, educational customers, federal, state and local government agencies, small businesses and certain computer resellers in the United States. Their primary target customer was the medium-to-large enterprise business. Among the general strategic benefits we sought from the acquisition were to:

	•		solidify our position as a leading provider of IT products;
	•		enhance our existing customer base through strategically-located sales offices and access to larger enterprise customers;
	•		capitalize on our existing direct sales force that is experienced in servicing the corporate and public sector markets;
	•		become the primary source for all IT product and related service needs of the small- to medium-sized business;
	•		expand our vast product offerings into the medium-to-large enterprise business market;
	•		have the ability to deliver custom IT solutions, including complex systems integration and total project management, to all markets;
	•		increase penetration into the public sector, particularly federal government;
	•		increase buying power leverage with suppliers;
	•		realize cost savings through economies of scale and operational efficiencies;
	•		benefit from combined virtual and physical distribution capabilities; and
	•		add to the experience and depth of our senior management team.

Effective December 31, 2002, we ceased using the Comark trade name and are continuing to integrate the former Comark operations into the operating structure of Insight North America. We have integrated departments under one organization chart, consolidated employee benefits and finalized and communicated the final integration plans and operating strategy to our employees. The most significant remaining step to the integration is the conversion of our United States direct marketing operations onto one IT system, which we expect to complete by the end of 2003.

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Operating Segments

     During the fourth quarter of 2002, we reorganized our internal reporting structure in conjunction with the continuing integration of our acquisitions. As a result of this revised internal reporting structure, our increased focus on geographic information to make investment decisions and the investment community’s request to receive additional information, we reorganized our financial reporting, effective in the fourth quarter of 2002, into the following reportable operating segments:

	•		Insight North America
	•		Insight UK
	•		Direct Alliance
	•		PlusNet

     Insight North America, Insight UK, Direct Alliance and PlusNet are discussed below as separate operating segments for all periods presented to conform to their current reportable segment designation. Prior to the fourth quarter of 2002, the results of Insight North America, Insight UK and PlusNet were reported in a single operating segment. Results of operations for our operations in Germany are not included in the segment discussion below as we closed these operations in the fourth quarter of 2001. Future changes to our organizational structure and business operations may result in further changes to our reportable operating segments.

     The following discussion of our operating segments should be read in conjunction with the segment disclosures found in Note 19 to the Consolidated Financial Statements in Item 8 of this report. A discussion of factors potentially affecting our operations is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Factors that Could Affect Future Results” in Item 7 of this report which is incorporated herein by this reference.

Insight North America

     Insight North America, our primary operating segment representing 83% of net sales in 2002, has grown to be one of the largest IT products and services resellers in North America. The acquisition of Comark, as discussed previously, provided Insight North America with the additional service capabilities and expanded customer base to permit the adoption of a strategy of becoming the best source for business computing products and services. We believe that Insight North America has evolved from being a direct marketer of IT products into a leading reseller of IT products and services.

     Insight North America offers an extensive assortment of more than 200,000 SKUs of computer hardware and software, including such popular name brands as Hewlett-Packard, IBM, Microsoft, Toshiba, Cisco, 3Com, Lexmark and Sony. Insight North America also provides its United States customers IT services such as:

	•		custom configuration and advanced integration;
	•		network design and consulting; and
	•		asset management, deployment and disposal.

     Additionally, Insight North America offers third-party services including extended warranties, training, connectivity, and leasing. We believe that our knowledgeable sales force, targeted marketing strategies, streamlined distribution, and advanced services capabilities will further differentiate Insight North America from its competitors.

     Insight North America sells these products and services through a variety of means including:

	•		a staff of customer-dedicated account executives utilizing proactive outbound telephone-based sales;
	•		a customer-focused face-to-face field sales force;
	•		electronic commerce (primarily the Internet); and
	•		electronic marketing.

     Insight North America seeks to create strong, long-term relationships with its customers through the use of a well-trained, dedicated sales force whose goal is to increase penetration of existing accounts, encourage repeat buying and ensure customer satisfaction. Insight North America has increased its number of account executives over the last five years, from 588 in 1997 to 1,711 at the end of 2002, the majority of whom focus on outbound telemarketing.

     Insight North America targets small- to medium-sized businesses and large corporate enterprises, as well as governmental and educational entities. Insight North America markets its products and services principally under the name “Insight.”

     Our goal is to make Insight North America the best source for business computing products and services by providing a broad, competitively-priced product selection and personalized advanced integrated services to help our customers reduce the total cost of ownership and manage the technology lifecycle.

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Insight UK

     Insight UK, representing 13% of our net sales in 2002, offers an extensive assortment of more than 70,000 SKUs of computer hardware and software, including such popular name brands as Hewlett-Packard, IBM, Microsoft, Toshiba, Cisco, 3Com, Lexmark and Sony.

     Insight UK sells these products through a variety of means including:

	•		a staff of customer-dedicated account executives utilizing proactive outbound telephone-based sales;
	•		a customer-focused face-to-face field sales force;
	•		a comprehensive product catalog;
	•		electronic commerce (primarily the Internet); and
	•		electronic marketing.

     Insight UK seeks to create strong, long-term relationships with its customers through the use of a well-trained, dedicated sales force whose goal is to increase penetration of existing accounts, encourage repeat buying and ensure customer satisfaction. To that end, Insight UK has increased its number of account executives by 318% over the last four years, from 62 in 1998 to 259 at the end of 2002, the majority of whom focus on outbound telemarketing. Insight UK targets small- to medium-sized businesses, as well as governmental and educational entities. Insight UK markets its products and services under the name “Insight.”

     The business model for Insight UK is very similar to Insight North America. The primary differences between the two are:

	•		the advanced service offering capability in Insight North America;
	•		the focus on larger corporate enterprises in the United States; and
	•		the use of product catalogs in the United Kingdom.

     Our goal is to make Insight UK the leading direct marketer of IT products to small- and medium-sized businesses, including government and educational entities, in the United Kingdom by offering the broadest selection of competitively priced brand name products.

Direct Alliance

     Direct Alliance, representing 3% of net sales in 2002, is our business process outsourcing organization. Direct Alliance provides marketplace solutions in the areas of logistics and supply chain management, finance, direct sales, direct marketing and analytics using proprietary technology, infrastructure and processes. Direct Alliance’s services enable manufacturers of brand name products to sell directly to customers and support existing indirect sales channels in a cost-effective and timely manner. Direct Alliance operates as a “virtual division” of its clients, and provides its clients a comprehensive range of services, from customer acquisition to returns management. Direct Alliance’s unique combination of services, technology and direct channel expertise allows it to provide customized, vertically integrated outsourced programs for its clients. For the year ended December 31, 2002, one outsourcing client accounted for approximately 59% of Direct Alliance’s net sales and the three largest clients accounted for approximately 93% of net sales.

     Our goal is to make Direct Alliance the leading global provider of such outsourced business process services by enhancing existing client relationships, expanding market share in the computer industry, expanding its services into new industries, broadening its service offerings globally, developing strategic partnerships and continually improving its technology.

     In December 2000, we announced our intention to spin-off Direct Alliance in a tax-free distribution to our stockholders sometime in late 2001. Prior to the spin-off, it was our intent to complete an initial public offering of up to $50 million of Direct Alliance’s common stock, as detailed in the registration statement filed with the Securities and Exchange Commission on December 22, 2000. We withdrew our planned initial public offering and spin-off of Direct Alliance on June 6, 2001 due to declining economic conditions. Currently, we have no plans to spin-off Direct Alliance.

PlusNet

     PlusNet, representing less than 1% of our net sales in 2002, is our Internet service provider (“ISP”) in the United Kingdom that we acquired as part of the acquisition of a United Kingdom direct marketer in 1998. PlusNet offers dial-up and broadband Internet access to businesses and consumers in the United Kingdom. PlusNet targets the experienced and educated Internet user and sales are made via the Internet. The ISP market in the United Kingdom is continuing to evolve as dial-up customers are migrating to broadband Internet access. We believe PlusNet is well positioned to respond to this market shift. Although broadband Internet access is sold at a lower gross margin percentage than dial-up, it currently is providing an increase in net sales and earnings from operations for PlusNet. We will continue to operate PlusNet as a stand-

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alone operating segment. However, because Internet access is not part of our core operations, our long-term goal is to maximize shareholder value by divesting PlusNet through a sale, spin-off or another type of transaction.

Industry

     The market for IT products and services is served through a variety of distribution channels, and intense competition for market share has forced computer manufacturers to seek the most cost effective and efficient channels to distribute their products. We believe the industry is evolving and some of the roles defining the participants in the supply chain are becoming blurred. We believe three important trends have emerged. First, manufacturers are increasing their use of the direct channel, through direct marketers, such as Insight North America and Insight UK, and increasingly through their own internal resources, to market and sell products directly to customers in order to enhance sales growth and lower overall selling costs. Second, direct marketers are increasing their offerings to include IT services and complementing their outbound telesales organizations with face-to-face field sales. Third, larger resellers, such as Insight North America, are continuing to take market share away from smaller resellers.

     Demand for IT products over the past several years has decreased in North America and worldwide due to slowing economic growth and a lengthening of replacement cycles. This slowdown in spending was evident beginning in the fourth quarter of 2000 and has not shown any signs of improving in the near term. Prior to late 2000, the industry experienced strong growth rates amidst a healthy economic environment.

     We believe that we will continue to benefit from industry changes as a cost-effective provider of a full range of IT products and services. We believe that demand is no longer driven only by increased speed and functionality of basic desktop computers, but by the total cost of ownership and return on investment of capital IT expenditures. While purchase decisions will continue to be based on product selection and availability, price, convenience, service offerings, knowledge of sales executives and customer service, we believe businesses increasingly desire a total solution that includes products and services and focuses on minimizing the total cost of ownership. We believe that direct marketers, like Insight North America, have the ability to offer broader product selection and availability, lower prices, dedicated knowledgeable sales executives and greater purchasing convenience than traditional retail stores or value added resellers (“VARs”) and have the ability to offer the necessary support functions (e.g., dedicated account executives, purchases on credit terms and efficient return privileges), which Internet-only sellers do not usually provide. Additionally, manufacturers do not offer the breadth of multi-branded product offerings that direct marketers offer. We believe that business customers, including governmental and educational entities, increasingly desire a total package solution that includes not only competitively priced products backed by superior customer service, but also advanced services such as custom configuration, advanced integration and deployment. We believe that we are uniquely positioned to take advantage of this shift in customer needs, as our primary operating segment, Insight North America, has migrated from a direct marketer of IT products to a reseller of IT products and services. Insight North America provides customers with a single source for technology products, services, integration, configuration, deployment, installation and networking design. We do not believe that any of our competitors have the breadth of capabilities we have in the United States. This allows us to differentiate ourselves with a customer service strategy that spans the continuum from fast delivery of competitively priced products to advanced IT solutions. Finally, we believe that as more manufacturers desire to access the direct market, they may elect to outsource their business processes to companies such as Direct Alliance that offer fast deployment of direct marketing programs and cost-effective solutions. For a discussion of risks associated with the actions of our competitors, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – Actions of competitors,” in Item 7. For a discussion of risks associated with the changing methods of distribution, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – Changing methods of distribution,” in Item 7.

Operating Strategy

     Our objective is to become the best source for IT products and services in the United States, Canada and the United Kingdom. Additionally, we seek to become the leading global provider of outsourced direct business processes. The key elements of our strategy are as follows:

     Focus on Businesses and Public Sector. We target businesses as well as governmental and educational entities. Our target customer employs 50 to 5,000 people that regularly use computing products. We believe this is one of the most valuable segments of the IT products and services market because entities in this segment demand leading, high-performance technology products and services, purchase frequently, are value conscious, value well-trained account executives and are knowledgeable buyers that require less technical support than the average consumer. Our operating model positions us to serve this segment of the market more effectively through our competitive pricing, extensive product availability, advanced service capabilities, well-trained account executives, high levels of customer service, cost-effective distribution systems and technological innovation.

     Utilize Well-Trained Account Executives and Proactive Targeted Marketing. We offer our products through integrated direct sales and marketing that includes outbound and inbound telesales, face-to-face field sales personnel, electronic commerce and selectively targeted electronic direct marketing. The type of marketing model employed varies by operating

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subsidiary, with each focusing on specific customer segments. We focus our effort on outbound telemarketing and Insight North America and Insight UK had 1,970 accounts executives combined at December 31, 2002 compared to 1,518 at December 31, 2001. To support our marketing effort, in 2003, we will be increasing our traditional marketing efforts in the areas of brand building and demand generation, including some national advertising.

     Promote Use of E-Commerce and Electronic Marketing. We actively promote the use of e-commerce with our customers, including our websites and customer web pages. We believe that providing the customer with a seamless e-commerce system supported by well-trained account executives results in a highly efficient business model with high customer satisfaction. Through the promotion of e-commerce, we hope to increase sales and facilitate the customer’s ease of doing business with us. During 2002, Insight North America and Insight UK experienced a decrease in its unassisted web sales, those sales transacted without the assistance of an account executive, to 9.1% of sales in 2002 from 12.2% of sales in 2001. The decrease was due primarily to the acquisition of Comark, whose large corporate customers traditionally did not place orders directly through the website without the assistance of their account executives.

     Build Customer Loyalty. We strive to create a strong, long-term relationship with our business customers, which we believe increases the order sizes in our existing accounts, encourages repeat buying, and promotes customer satisfaction. We believe that a key to building customer loyalty is to provide customers with a team of knowledgeable account executives backed by a strong support staff. Most business customers are assigned a trained account executive who understands the customer’s technology needs and proactively identifies and processes orders for products and services that meet those needs. We believe these strong one-on-one relationships improve the likelihood that the customer will look to us for future purchases.

     Maintain Broad Selection of Branded Products. We provide the convenience of one-stop shopping by offering our customers a comprehensive selection of more than 200,000 brand name IT products. We offer products of major manufacturers including Hewlett-Packard, IBM, Microsoft, Toshiba, Cisco, 3COM, Lexmark and Sony. Our breadth of product offering combined with our efficient, high-volume and cost-effective direct sales and marketing allows us to offer competitive prices. We have developed “direct-ship” programs with many of our suppliers through the use of electronic data interchange links allowing us to further expand our product offerings without increasing inventory, handling costs or inventory risk exposure.

     Offer Advanced Services. We offer our customers a total package solution that includes comprehensive product selection and advanced services such as:

	•		Custom configuration and advanced integration;
	•		Network design and consulting; and
	•		Asset management, deployment and disposal.

     These product service offerings are supported by technical experts in select product and service areas that we refer to as “Centers of Excellence.” We currently have Centers of Excellence focused on the following specialized areas:

	•		Connectivity
	•		High Performance Systems
	•		International Shipments
	•		Networking
	•		Software Licensing
	•		Storage
	•		Warranty

     We believe that there is no other reseller with the same breadth and depth of IT products and services that we offer to our customers.

     Maintain Efficient Technology Driven Operations. We have developed an operating model which is supported by what we believe is an efficient fulfillment and distribution infrastructure. This operating model, which teams the flexibility of both physical and virtual inventory sourcing, yielded inventory turns of 40 and 80 times in 2002 and 2001, respectively. The decrease in annualized inventory turns resulted from a reduction in the percentage of direct shipments and corresponding increase in inventories due to the acquisition of Comark, increases in opportunistic purchases and changes in one manufacturer’s buying programs. We also use proprietary, real-time information systems to enhance the integration of our sales, distribution and accounting functions, with the goal of lowering operating expenses while at the same time improving customer service and satisfaction levels. To minimize our inventory exposure, we use a variety of inventory control procedures and policies, including automated “just-in-time” management and electronic “direct-ship” programs with suppliers. We shipped 63% of our orders in 2002 directly to the customer from our suppliers. In addition, we use other automated systems involving telephony, credit card processing and standard e-mail notification to further streamline operations, improve profitability and increase customer satisfaction.

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Growth Strategy

     Our growth strategy is to increase sales and earnings by:

     Increasing Penetration of Our Existing Customer Base. We seek to become the primary provider of IT products and services for our customers by investing in the development and training of our account executives and providing the tools to effectively sell the best IT solution, including products and services, to our customers. We believe proactive account management and assignment of specific account executives dedicated to developing closer relationships with active business customers will enable us to increase the volume, frequency, and breadth of sales to these customers. We continue to refine and analyze our customer database to better understand and service our customer, which results in long-term customer relationships. In addition, we are focused on improving account executive productivity by providing a comprehensive, on-going training program to our account executives, implementing incentive programs that focus on rewarding and retaining top performers and automating routine processes. We will also be increasing our marketing initiatives in 2003 relating to brand awareness and service capabilities.

     Expanding Our Customer Base. We intend to increase our direct sales and targeted marketing efforts in each of our customer segments: small-to medium-sized businesses, large corporate enterprises, and governmental and educational institutions. We seek to acquire new account relationships through proactive outbound telesales, face-to-face field sales, electronic commerce, targeted electronic direct marketing and increased advertising.

     Capitalizing on Global Presence. We seek to expand our global presence in an effort to achieve our goal of becoming a global leader for IT products and services. To that end, we have established operations in Canada and the United Kingdom. Our presence in these countries was expanded in 2001 as we completed acquisitions in both Canada and the United Kingdom during the fourth quarter of 2001. These acquisitions provide Insight North America and Insight UK with an increased customer base, expanded product offerings and the ability to leverage their existing infrastructure and supplier relationships. Our operation in Germany was closed during the fourth quarter of 2001 and presently we are focusing all of our European efforts on the United Kingdom. We intend eventually to continue expanding in Europe through the expansion of our existing infrastructure in the United Kingdom. Additionally, Direct Alliance offers multi-lingual, multi-currency capabilities that assist its clients as they expand into European and Asian markets.

     For the year ended December 31, 2002, 86% of our net sales were generated from North American subsidiaries with the remaining 14% from United Kingdom subsidiaries. A summary of our North American and United Kingdom net sales and long-lived assets is set forth in Note 19 to our Consolidated Financial Statements in Item 8. For a discussion of risks associated with our international operations, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – Risks associated with international operations,” in Item 7.

     Leveraging and Improving Our Existing Infrastructure. We have expended considerable resources to develop our infrastructure to support planned growth. As part of the integration of Comark, we are migrating the United States operations of Insight North America to one system platform. We call this new system “Maximus.” The plan for the new Maximus system is to not only retain all of the functionality currently available in our two separate systems necessary to properly service our customers’ needs and desires, but to add additional functionality that will enable us to exceed our customers’ expectations and further differentiate us from our competitors. The benefits we expect to see from the Maximus system will be: an integrated sales and support engine; an efficient, reliable and consistent system to support our business needs; more robust reporting capabilities with more internal controls and analysis ability; and a significant increase in functionality from a sales perspective to exceed our customers’ needs and expectations. We expect to complete this system conversion by the end of 2003. For a discussion of risks associated with our system conversion, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – Reliance on information and telephone systems,” in Item 7.

     We believe that our investments, primarily in facilities and technology, will ultimately allow us to increase sales at a higher rate than operating expenses. We expect to reduce operating expenses as a percent of sales, thereby improving profitability, through migration onto one system platform in the United States operation of Insight North America, increased productivity of account executives, cost-effective marketing, utilization of electronic commerce and economies of scale. Specifically, migration onto one system platform will allow us to reduce headcount in support functions such as accounting and information systems. In addition, our relationships with our suppliers will continue to offset certain expenses through the receipt of supplier reimbursements. We intend to continue to leverage our core operations by offering outsourcing of direct marketing services to leading manufacturers of brand name products.

     Expanding Our Existing Client Relationships and Outsourcing Clients. We currently provide outsourcing services to several large manufacturers of name brand computers and related products. We believe there will continue to be growth within our current client programs as well as opportunities to obtain new clients in this industry. Additionally, we actively solicit new customers from outside the computer industry. For a discussion of risks associated with our reliance on

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outsourcing clients, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – We rely on outsourcing clients,” in Item 7.

Marketing

     We sell our products and services primarily through the direct marketing channel. Our marketing programs are designed to attract new customers and to stimulate additional purchases from existing customers. Through our marketing programs, we emphasize our broad product and service offering, competitive pricing, fast delivery, customer support and multiple payment options. We use a variety of marketing techniques to reach existing and prospective customers including outbound telemarketing, face-to-face field sales, electronic marketing and communications, catalogs, advertising and specialty marketing programs.

     Sales Force. Our outbound telemarketing account executives contact customers on a systematic basis to generate additional sales. In addition, these account executives utilize various prospecting techniques in order to increase the size of our customer base. We believe that small- and medium-sized businesses respond favorably to a one-on-one relationship with personalized service from well-trained outbound telemarketing account executives. Once established, these one-on-one relationships are primarily maintained and enhanced through frequent telecommunications supplemented by e-marketing materials designed to meet each customer’s specific computing needs. We also enhance our telemarketing operations by maintaining smaller groups of face-to-face field sales executives in several cities throughout the United States and in London, England. These account executives typically service larger corporate accounts, government accounts or accounts that have advanced system and service needs. At December 31, 2002, Insight North America and Insight UK employed 1,970 account executives, most of whom are focused on outbound telemarketing, an increase of 30% from 1,518 account executives at December 31, 2001. This increase is due to approximately 750 account executives added with the acquisition of Comark, offset partially by headcount reductions in Insight North America after the acquisition in response to declining demand for IT products and services.

     Electronic Marketing and Communications. We maintain web sites that feature customizable web interaction and reporting, current product offerings, special promotions, technical product specifications and other useful information. Customers may place orders while at one of the sites using a credit card or electronic purchase order. Unassisted web sales, those sales transacted without the assistance of an account executive, for Insight North America and Insight UK represented 9.1% of our net product sales in 2002. We believe this percentage will increase as businesses and electronic customers increase their use of the web to procure computing products.

     Our account executives encourage customers to utilize our web sites for placing orders, and we offer selected businesses customized web pages, called “myInsight,” that are designed by our electronic marketing team. These customized web pages allow businesses to procure computing products from us at pre-negotiated volume pricing. We also create awareness of our products to an audience of electronically-savvy customers and prospects through graphically rich electronic catalogs, electronic postcards and other branded sales messages transmitted via e-mail.

     Catalogs. We have not used catalogs to solicit sales for Insight North America over the past few years but may do so in the future. With respect to our acquisition in the United Kingdom in late 2001, we are continuing to provide a catalog to acquired customers. These catalogs are selectively mailed to customers and each catalog provides detailed product descriptions, manufacturers’ specifications, pricing and service and support features. As part of our outsourcing services, we may produce catalogs for certain manufacturers.

     Advertising. We selectively place targeted advertisements in trade publications in the United States, Canada and the United Kingdom. These color advertisements provide detailed product descriptions, manufacturers’ specifications and pricing information and emphasize Insight’s service and support features. Additionally, the Insight logo and telephone number are included in promotions by selected manufacturers. We have hired an outside advertising firm to assist with branding initiatives and to launch some traditional marketing campaigns, which may include some national advertising in the United States in 2003.

     Specialty Marketing. We continue to increase our national exposure, promote local interest, and increase traffic on our web site through sponsorship of the “Insight Bowl,” a post-season intercollegiate football game. During the 2002 Insight Bowl, which was telecast live by ESPN on December 26, 2002, we aired television commercials showcasing Insight and its products. These 15-second spots were designed to introduce the Insight brand to prospective customers and encourage high-technology business buyers to visit Insight’s web site at www.insight.com.

     Supplier Reimbursements. We obtain supplier reimbursements from certain product manufacturers. We typically receive reimbursements from suppliers based upon the volume of sales or purchases of the suppliers’ product. In other cases, such reimbursements may be in the form of discounts, advertising allowances, price protection or rebates. Additionally, manufacturers may provide mailing lists, contacts or leads. We believe that supplier reimbursements increase our marketing reach and strengthen relationships with leading suppliers. These reimbursements are important to us and any elimination or substantial reduction would increase our marketing expenses and decrease our operating earnings. For a discussion of risks associated with changes in supplier reimbursement programs, see “Management’s Discussion and Analysis of Financial

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Condition – Factors That May Affect Future Results and Financial Condition – Reliance on suppliers; Changes in supplier reimbursement programs,” in Item 7.

     Customers. We maintain an extensive database of customers and potential customers. During 2002, approximately 99% of consolidated net sales for 2002 were to business customers, including governmental and educational institutions. No single customer accounted for more than three percent of our consolidated net sales during 2002, although for the year ended December 31, 2002, Direct Alliance had one outsourcing client that accounted for approximately 59% of the its net sales.

Sales

     We believe that our ability to establish and maintain long-term relationships and to encourage repeat purchases is dependent, in part, on the strength of our account executives. Over 85% of our orders in Insight North America are from customers who have purchased from us within the past 24 months. Because our customers’ primary contact with us is through our account executives, we are committed to maintaining a qualified and knowledgeable sales staff.

     We focus on recruiting, training and retaining high-quality personnel. New account executives are required to participate in Insight University, an extensive training program, to develop proficiency in and knowledge of our products. This program consists of class work focusing on technical product information, sales and customer service, and supervised inbound and outbound sales experience. Additionally, in conjunction with product manufacturers and distributors, we sponsor weekly training sessions introducing new products and emphasizing fast-selling products. We also have training programs that seek to refine sales skills and introduce new policies and procedures.

     Each account executive is responsible for building a customer base and proactively servicing the needs of those established customers. Most first time callers are assigned to an account executive, and subsequent incoming calls from that customer are then directed to their account executive. Our information system allows on-line retrieval of relevant customer information, including the customer’s history and product information, such as list price, cost and availability, as well as up-selling and cross-selling opportunities. Additionally, we use data mining tools and analytics to help the account executive to establish a portfolio of customers that will provide the best selling opportunities. Account executives are empowered to negotiate sales prices within limits established by us, and a large part of their compensation is based upon the gross profit dollars generated. The more experienced the sales executive, the greater the latitude to make decisions and the higher the percentage of total compensation that is based on gross profit dollars generated. Incentive plans, including compensation and stock options, are designed to promote and reward top performers in the organization.

     We attribute our high outbound call volume and favorable repeat orders in part to the strength of our account executives. We have established dedicated sales divisions focusing on small and medium-sized businesses (less than 1,000 PC’s) larger corporate businesses (at least 1,000 PC’s) and public sector (including governmental and educational entities). Account executives in these divisions have demonstrated the ability to interact with sophisticated purchasing agents and the information management staffs of organizations. Additionally, we have face-to-face field sales executives that primarily service larger corporate accounts or accounts with advanced system and service needs. We also have a group of knowledgeable account executives dedicated to taking inbound calls.

     Information regarding tenure of account executives at Insight North America and Insight UK combined at December 31, 2002 and 2001 follows:

     Increase in tenure is important to our business as our statistics show that account executive productivity increases with experience. The increase in tenure is due to the addition of more tenured account executives with the acquisition of Comark, increased retention efforts, including performance based incentives and enhanced training programs, the overall sluggish economy resulting in a less favorable job market and headcount reductions within Insight North America.

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Products

     We sell computers, hardware and software products. The following chart provides sales information by product category for Insight North America and Insight UK during 2002 and 2001:

     The largest product category continues to be computers for Insight North America and Insight UK, representing 31% and 27% of product net sales in 2002, respectively. The slight increase in Insight North America computer sales is due primarily to the acquisition of Comark, which historically sold more computers as a percentage of net sales. The decrease in Insight UK computer sales as a percentage of overall product sales is due to the slowing of demand for desktops and notebooks, a lengthening of replacement cycles attributable to a decline in the general economy and an increase in demand for other product categories. Insight North America’s highest growth category was printers, which increased 2% over 2001 due primarily to the increased sales of color printers, which have a higher average selling price than other types of printers. Insight UK’s highest growth category was software, which increased over 2001 due primarily to increased sales of software licenses to small- and medium-sized businesses. We believe the strength in software license sales was a result of Microsoft’s July 31, 2002 deadline for its upgrade program, anti-piracy campaigns, reductions in license seat requirements and additional subscription products offered by certain software manufacturers.

     We select our products based upon existing and proven technology. We normally will not introduce a new product until we believe that a sufficient market opportunity exists. Our product managers and buyers evaluate the effectiveness of new and existing products and select those products for inclusion in our product offerings based upon market demand, product features, quality, reliability, sales trend, price, margins and warranties. Because our goal is to offer the latest in technology, we quickly replace slower selling products with new products. We offer more than 200,000 SKUs of computer and related products.

Service and Support

     We believe we achieve high levels of customer satisfaction. More than 85% of Insight North America’s orders in 2002 were placed by customers who had previously purchased products from us within the past 24 months. Our dedication to prompt, efficient customer service is an important factor in customer retention and overall satisfaction.

     Fast Product Delivery. Utilizing our proprietary information system, customer orders are sent to one of our distribution centers or to one of our “direct ship” suppliers for processing immediately after credit approval. We have integrated labeling and tracking systems with major carriers into our information system to ensure prompt delivery. Additionally, we have integrated our information system with our “direct ship” suppliers. As a result, shipments from these suppliers are virtually transparent to our customers. We ship most of our orders on the day the orders are received and credit is approved.

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     Email Communications. Our employees use the Internet to enhance customer support and inter-business correspondence. The Internet provides a convenient communication device enabling customers to contact their sales, customer service and technical support representatives via e-mail messages. The customer may elect to receive a message via e-mail automatically upon shipment to confirm that the order has been shipped.

     Warranties and Product Returns. Most of the products we market are warranted by the manufacturer. We usually request that customers return their defective products directly to the manufacturer for warranty service. On selected products, and for selected customer service reasons, we accept returns directly from the customer and then either credit the customer or ship a replacement product. We generally offer a limited 15- to 30-day return policy for unopened products and certain opened products, which is consistent with manufacturers’ terms; however, certain products are subject to restocking fees. Products returned opened are quickly processed and returned to the manufacturer or supplier for repair, replacement, or credit to us. We resell all unopened products returned to us. Products that cannot be returned to the manufacturer for warranty processing, but are in working condition, are promptly sold to inventory liquidators or end users or are sold through other channels, which helps us minimize losses from returned products. Direct Alliance also provides returns management as an outsource service offering to its clients.

Technology Based Operations

     We believe our implementation of advanced technological systems provides a barrier to new entrants into our market and a competitive advantage by increasing the productivity of our account executives, delivering more efficient customer service and reducing order processing and inventory costs. Our account executives can access our information systems to obtain a wide range of information, including, in part, the following:

	•		customer information;
	•		product information;
	•		product pricing, gross profit and availability;
	•		product compatibility and alternative product offerings and accessories; and
	•		order status.

     We believe that the information available to our account executives allows them to make better decisions regarding product recommendations and pricing, provide superior customer service, and increase overall profitability. We believe that our investment in information technology will continue to improve efficiency.

     We have systems that integrate our sales, distribution, inventory, and accounting functions. Utilizing our proprietary information systems, orders are electronically sent to one of our distribution centers or to a “direct ship” supplier for processing immediately upon credit approval. All products received in our distribution centers have a standard UPC code, manufacturer bar code, or supplier bar code, or are issued a bar code. We scan orders to ensure accurate fulfillment prior to shipping, then record the reduction in inventories. We have implemented a re-ordering system that calculates lead times and, in some instances, automatically re-orders from certain suppliers. Our system accepts price quotes from several competing suppliers and in most cases automatically re-orders from the supplier with the most competitive price. We have integrated our order processing, labeling, and tracking systems with major carriers to ensure prompt delivery. Additionally, we have implemented an on-line, real time credit card address verification and approval system through a third-party provider with Visa®, MasterCard®, American Express® and Discover® to instantaneously match the address provided by the customer with the specific credit card billing address and obtain transaction approval.

     Our telephone system can automatically route calls, depending on their originating data, to specific sales groups, or to the specific account executives. Our telephone system also uses menu systems that permit the customers to route themselves to the appropriate service or sales area, or to their assigned account executives. For a discussion of risks associated with our information and telephone systems, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – Reliance on information and telephone systems,” in Item 7.

Purchasing and Distribution

     Purchasing/Suppliers. During 2002, we purchased products from approximately 1,257 suppliers. Approximately 49% (based on dollar volume) of these purchases were directly from manufacturers, with the balance from distributors. Historically, we have also purchased from and sold to other computer resellers in order to offer our customers favorable pricing, or to balance our inventory to minimize inventory risk. Purchases from our largest supplier, Ingram (a distributor), accounted for approximately 20.4% of our total product purchases in 2002. Our top five suppliers as a group (Ingram; Tech Data Corporation (a distributor); Hewlett-Packard Company (a manufacturer); Synnex Information Technologies, Inc. (a distributor); and IBM (a manufacturer)) accounted for approximately 68.5% of our total product purchases during 2002. Although brand names and individual products are important to our business, we believe that competitive sources of supply are available in substantially all of our product categories and therefore we are not dependent on any single supplier. We believe that the majority of computer purchases by our customers are made without regard to brand. For a discussion of risks associated with our reliance on suppliers, see “Management’s Discussion and Analysis of Financial Condition – Factors That

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May Affect Future Results and Financial Condition – Reliance on suppliers; Changes in supplier reimbursement programs,” in Item 7.

     Inventory Management. We utilize a virtual distribution model complemented by physical distribution capabilities. We utilize “just-in-time” inventory management and “direct ship” relationships with suppliers to reduce inventory costs. Our order fulfillment and inventory controls allow us to forecast and order products “just-in-time” for shipping. We promote the use of electronic data interchange with our suppliers, which helps to reduce overhead, simplifies the order fulfillment cycle and reduces the use of paper in the ordering process. Additionally, some suppliers will “direct ship” products directly to the customer, which eliminates physical handling by us. We “direct shipped” 63% percent of our orders from supplier distribution facilities in 2002. Such “direct shipments” are virtually transparent to the customer. Our physical distribution capabilities allow us to inventory product as needed to take advantage of product allocations, opportunistic purchases or to meet the service requirements of our customers. Our inventory management techniques allow us to offer a greater range of products without increased inventory requirements, and to have reduced inventory exposure and faster order fulfillment time, resulting in inventory turns of 40 and 80 times for 2002 and 2001, respectively. The increase in inventories and corresponding decline in inventory turns is due to the acquisition of Comark, increases in opportunistic purchases and changes in a manufacturer’s buying programs.

     Distribution Center. The majority of our United States distribution operations are conducted at our 323,000 square foot shipping facility in Hanover Park, Illinois. Effective March 1, 2003, we closed our 178,000 square foot distribution facility in Indianapolis, Indiana and leased an additional 72,500 square foot distribution facility in Hanover Park, Illinois in order to consolidate our United States distribution in Illinois. Activities performed in our Illinois distribution center include receipt and shipping of inventory and returned product processing. Additionally, this distribution center houses our advanced integration and custom configuration labs. Orders are transmitted electronically from account executives to the distribution center upon credit approval, where a packing slip is automatically printed for order fulfillment. All inventory items are bar coded and placed in designated bin locations that are marked with both readable and bar coded identifiers. Product movement is computer directed and radio frequency scanned for verification. Radio frequency technology also is used to perform daily inventory cycle counts to ensure inventory accuracy. We also use our scanning process to ensure accurate order fulfillment. We also have distribution facilities in Arizona, Canada and the United Kingdom.

Outsourcing

     We seek to leverage our core competencies in direct marketing by providing outsourced direct marketing services to third parties through Direct Alliance. We believe that our unique combination of services, proprietary technology and direct channel expertise allows us to provide our clients with the following:

	•		profitable sales growth;
	•		cost-effectiveness;
	•		fast deployment of direct marketing programs;
	•		improved customer satisfaction; and
	•		system capabilities for international and domestic operations.

     Our customized programs encompass a full range of services from customer acquisition to returns management and generally can be grouped into the following five key components of the direct marketplace:

	•		supply chain logistics and management;
	•		financial services;
	•		direct sales and channel management;
	•		direct marketing; and
	•		analytics.

     We currently provide business process outsourcing services to certain brand name computer product and consumer electronic manufacturers. Presently, the majority of our outsourcing arrangements are service fee based whereby we derive net sales based primarily upon a cost plus arrangement, in which we earn a percentage of the sales price from products sold. Revenues from service fee based programs and direct costs related to the generation of those revenues are included in our net sales and cost of goods sold, respectively. As an accommodation to select service fee based program clients, we also purchase and immediately resell products to our clients for ultimate sale to their customers. These pass through product sales are completed at little or no gross margin and are included in net sales and cost of goods sold. Under certain outsourcing arrangements, Direct Alliance may take title to inventories of products and assume credit risk associated with sales to the end user. Revenues and the related costs from the sales of such products are included in our net sales and cost of goods sold, respectively. The rate of our net sales growth in the future may be affected by the mix of type of outsourcing arrangements that are in place from time to time. Additionally, some of the programs may be seasonal in nature, if the manufacturers’ target customers have cyclical buying patterns. Although we are presently focused on computer and consumer electronic-related products, we intend to evaluate opportunities to leverage our sales, marketing, analytics, financial services and logistics capabilities in other industries.

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     For a discussion of risks associated with our reliance on outsourcing clients, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – We rely on outsourcing clients,” in Item 7.

Competition

     The IT products and services industry is highly competitive. We compete with a large number and wide variety of marketers and resellers of IT products and services, including:

	•		product manufacturers, such as Dell, Hewlett-Packard and IBM;
	•		national direct marketers, such as Computer Discount Warehouse;
	•		national and regional resellers, including value-added resellers and specialty retailers, aggregators, distributors, and national computer retailers, computer superstores, Internet-only computer providers, consumer electronics and office supply superstores, and mass merchandisers.

     Product manufacturers, in particular, have been increasing their efforts to sell directly to the business customer, particularly larger corporate customers and thus have become more of a competitive threat to us than in the past.

     We believe that new entrants into the direct marketing channel must overcome a number of significant barriers to entry including:

	•		the time and resources required to build a customer base of sufficient size and a well-trained account executive sales base;
	•		the significant investment required to develop an information and operating infrastructure;
	•		the advantages enjoyed by established larger competitors with purchasing and operating efficiencies;
	•		the reluctance of manufacturers and distributors to allocate product and cooperative advertising funds; and establish electronic transactional relationships with additional participants; and
	•		the difficulty of identifying and recruiting qualified management personnel.

     Certain of our competitors have longer operating histories and greater financial, technical, marketing and other resources than us. In addition, some of these competitors may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Many current and potential competitors also have greater name recognition and engage in more extensive promotional activities, offer more attractive terms to customers and adopt more aggressive pricing policies than we do.

     As stated earlier in the Industry discussion, we believe we are differentiating ourselves from our competitors by adopting a customer service strategy that spans the continuum from fast delivery of competitively priced products to advanced IT solutions. We do not believe that any of our competitors have the breadth of capabilities we have in the United States.

Sales or Use Tax

     We presently collect sales or use taxes in virtually all states which impose such taxes; however, the requirement to collect varies by each subsidiary’s activities. For subsidiaries targeting small-to-medium sized business (businesses with less than 1,000 computers), we collect sales or use tax in Arizona, California, Illinois, Indiana and Tennessee. In our subsidiaries targeting larger corporate enterprises (businesses with at least 1,000 computers) and governmental entities, we collect sales or use tax in most states. Various states have sought to impose on direct marketers the burden of collecting state sales or use taxes on the sales of products shipped to that state’s residents. On November 12, 2002, representatives of over thirty states voted to approve the Streamlined Sales and Use Tax Agreement (the “Agreement”), an agreement between states to simplify sales and use tax compliance for all sellers and to encourage and incent voluntary collection by remote sellers. The Agreement is only effective after at least ten states, comprising at least twenty percent of the total population of states with a sales tax, become members of the Agreement. The United States Supreme Court has affirmed its position that, under the Commerce Clause of the United States Constitution, a state cannot constitutionally impose sales or use tax collection obligations on an out-of-state mail order company whose only contacts with the state are the distribution of catalogs and other advertising materials through the mail and the subsequent delivery of purchased goods by United States mail or by interstate common carrier from a point outside of the state. While the Agreement cannot force direct marketers to collect tax, states hope it may aid their efforts to win Congressional approval of the power to require remote sellers to collect tax. If the Supreme Court changes its position or if legislation is passed to overturn the Supreme Court’s decision, the imposition of a sales or use tax collection obligation on the subsidiaries which do not currently collect sales or use tax may result in additional administrative expenses, price increases to the customer or otherwise have a material adverse effect on our business. We also collect goods and services taxes in all provinces in Canada and value-added tax in the United Kingdom.

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Patents, Trademarks and Licenses

     We do not maintain a traditional research and development group, but work closely with computer product manufacturers and other technology developers to stay abreast of the latest developments in computer technology. We have obtained licenses for certain third-party provided technology. We conduct our direct marketing business under the trademark and service marks “Insight,” “Insight Corporate Solutions,” “Insight Public Sector,” “PC Wholesale,” “Insight Global Finance,” “Insight Services Corporation” and their related logos. We conduct our outsourcing business under the trademark “Direct Alliance” and its related logo. We conduct our United Kingdom ISP business under the trademarks “PlusNet,” “Force9,” “Freeonline” and their related logos. We believe our trademarks and service marks have significant value and are an important factor in the marketing of our products, and we intend to protect them.

Employees

     We believe our employee relations are good. Our employees are not represented by any labor union, and we have not experienced any work stoppages. At December 31, 2002, we had 4,424 employees as follows:

     We have invested in our employees’ future and our future through an ongoing program of internal and external training. The training programs include a new hire orientation program, a sales training program, general industry and computer education as well as ongoing employee and management development programs. Insight’s Sales Training Program is dedicated to ensuring quality sales and customer services. The Sales Training Program encompasses a six-week extensive product, system and procedural training program. Ongoing sales skill classes target the positions of sales management, account executives and sales support by providing new skills for the entire sales process. Management development is a focus and provides each manager with development opportunities through classes relevant to his/her needs.

Regulatory and Legal Matters

     We are subject to regulations promulgated by the Federal Trade Commission and various regulatory authorities in Arizona and other states where our customers purchase products. We believe we are in compliance with such regulations and have implemented programs and systems to assure our ongoing compliance.

Available Information

     Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.insight.com, as soon as reasonably practicable after we electronically file with, or furnish to, the Securities and Exchange Commission (“SEC”). Additionally, the public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the operation of the SEC’s Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov, that contains all of information we file with, or furnish to, the SEC.

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Item 2. Properties

     Our principal executive offices are located at 1305 West Auto Drive, Tempe, Arizona 85284. We conduct sales, distribution, services, and administrative activities in owned and leased facilities. Some of our face-to-face sales executives conduct business out of their home offices. We have renewal rights in most of our property leases. We anticipate that we will be able to extend these leases on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms. We believe our facilities are in good condition and are suitable to our needs. Information about sales, administration and distribution facilities in use as of December 31, 2002 is summarized in the following table:

     We also have several leased facilities that are no longer in use due to the integration of the acquisitions of Action and Kortex during the fourth quarter of 2001 and the acquisition of Comark in the second quarter of 2002. These properties are not included in the table above. In addition to those listed above, Insight North America has leased sales offices ranging in size from 180 square feet to 15,000 square feet in various cities across the United States. Effective March 1, 2003, we closed our 178,000 square foot distribution facility in Indianapolis, Indiana and leased an additional 72,500 square foot distribution facility in Hanover Park, Illinois in order to consolidate our United States distribution in Illinois.

     ⁽¹⁾ These properties are encumbered by mortgages.

Item 3. Legal Proceedings

     We are a defendant in a lawsuit pending in the United States District Court, District of Arizona which alleges violations of Section 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5. Three separate lawsuits filed by stockholders have been consolidated into a single action. The plaintiff in this action alleges we and certain of our officers made false and misleading statements pertaining to our business, operations and management in an effort to inflate the price of our common stock. The lawsuit also names as co-defendants: Eric J. Crown, the Chairman of our Board of Directors; Timothy A. Crown, our Chief Executive Officer and a director; and Stanley Laybourne, a director and our Executive Vice President, Chief Financial Officer and Treasurer. In the consolidated complaint, which was filed in December 2002, the plaintiff seeks class action status to represent all buyers of our common stock from September 3, 2001 through July 17, 2002. We intend to defend the lawsuit vigorously, and in February 2003 filed a motion to dismiss. The costs associated with defending the allegations in these lawsuits and the potential outcome cannot be determined at this time and, accordingly, no estimate for such costs, other than the deductible amount under our directors and officers liability insurance policies, have been included in these consolidated financial statements.

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     We are also party to various legal proceedings arising in the ordinary course of business. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us, as well as adequate provisions for any probable and estimable losses. It is possible, nevertheless, that the results of our operations or cash flows could be affected in any particular period by the resolution of a legal proceeding.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of our security holders during our fourth quarter of 2002.

     PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

     Market Information

     Our Common Stock is traded on the Nasdaq National Market under the symbol “NSIT.” The following table shows, for the calendar quarters indicated, the high and low closing price per share for our Common Stock as reported on the Nasdaq National Market.

     As of February 28, 2003, we had 46,101,041 shares of common stock outstanding held by approximately 203 stockholders of record. There are approximately 5,700 beneficial holders of our Common Stock.

     Dividends. We have never paid a cash dividend on our Common Stock and our credit facility prohibits the payment of cash dividends without the lender’s consent. We intend to retain all of our earnings for use in our business and currently do not intend to pay any cash dividends in the foreseeable future.

     All share amounts, share prices and net earnings per share in this Annual Report on Form 10-K have been retroactively adjusted to reflect 3-for-2 stock splits affected in the form of stock dividends on September 18, 2000 and February 18, 1999.

     Securities Authorized for Issuance Under Equity Compensation Plans. The information included under the captions “Securities Authorized for Issuance Under Equity Compensation Plans” in our definitive Proxy Statement for our Annual Meeting of Stockholders to be held May 14, 2003 (the “Proxy Statement”) is incorporated herein by reference. We anticipate filing our Proxy Statement within 120 days after December 31, 2002. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K, the Proxy Statement is not being filed as a part hereof.

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Item 6. Selected Consolidated Financial Data

     The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and the Notes thereto, and Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data presented below under the captions “Consolidated Statements of Operations Data” and “ Consolidated Balance Sheet Data” as of and for each of the years in the five-year period ended December 31, 2002 are derived from the consolidated financial statements of the Company, which have been audited by KPMG LLP, independent certified public accountants. The consolidated financial statements as of December 31, 2002 and 2001, and for each of the years in the three-year period ended December 31, 2002 and the independent auditors’ report thereon, are included elsewhere in this report.

		(1)Our consolidated financial statements above include results of the Action, Kortex and Comark acquisitions from their respective acquisition dates. See further discussion in the Notes to the Consolidated Financials Statements in Item 8.
		(2) Certain reclassifications have been made to prior year balances in order to conform to current year presentation.
		(3) Share amounts and earnings per share have been retroactively adjusted to reflect 3-for-2 stock splits effected in the form of stock dividends on September 18, 2000 and February 18, 1999.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this report.

Critical Accounting Policies and Estimates

     General

     Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements.

     Sales Recognition

     The majority of our sales are product sales. Sales are recognized when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable and collectibility is reasonably assured. The majority of our sales are product sales recognized upon shipment. Usual sales terms are FOB shipping point, at which time title and risk of loss has passed to the customer. From time to time, we enter into contracts to sell our products and services, and, while the majority of our sales agreements contain standard terms and conditions, there may be agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation may be required to determine the appropriate accounting, including how the price should be allocated among the deliverable elements if there are multiple deliverables, whether undelivered elements are essential to the functionality of delivered elements, and when to recognize revenue. We recognize revenue for delivered elements only when the following criteria are satisfied:

	•		Undelivered elements are not essential to the functionality of delivered elements;
	•		Uncertainties regarding customer acceptance are resolved;
	•		No significant obligations remain; and
	•		The fair value of each undelivered element is known.

Changes in the allocation of the sales price between deliverables might affect the timing of revenue recognition, but would not change the total revenue recognized on the contract.

     We also sell certain third-party service contracts and software assurance for which we are not the primary obligor. These sales do not meet the criteria for gross sales recognition and thus are recorded on a net sales recognition basis. As we enter into contracts with third-party service providers or vendors, we must evaluate whether the subsequent sales of such services should be recorded as gross sales or net sales. Under gross sales recognition, the entire selling price is recorded in sales and our cost to the third-party service provider or vendor is recorded in costs of goods sold. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to sales resulting in net sales equal to the gross profit on the transaction and there is no costs of goods sold.

     We make provisions for estimated product returns that we expect to occur under our return policy, based upon historical return rates. Should customers return a different amount of product than originally estimated, our future net sales are adjusted to reflect historical return rates.

     Business Combinations

     We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The determination of fair values requires us to make significant estimates and assumptions, especially with respect to acquired intangible assets. We engaged an independent third-party appraisal firm to assist us in determining the fair values of intangible assets acquired in connection with the acquisition of Comark. The fair values assigned to the identified intangible assets in connection with the acquisition of Comark are discussed in detail in Note 15 to the Consolidated Financial Statements in Item 8.

     Critical estimates in valuing certain intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, brand awareness and market position, as well as assumptions about the period of time the

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brand will continue to be used in our product portfolio and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

     Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. In addition, liabilities to integrate or restructure acquired organizations, including the termination of employees, are subject to change as we continue our assessment of operations and execute the approved plan.

     Valuation of Long-Lived Assets Including Purchased Intangible Assets and Goodwill

     We review property, plant and equipment, and purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates.

     We assess whether goodwill is impaired on an annual basis. Upon determining the existence of goodwill impairment, we measure that impairment based on the amount by which the book value of goodwill exceeds its implied fair value. The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the book value of goodwill has been impaired.

     Such evaluations of impairment of long-lived assets including goodwill and purchased intangible assets are an integral part of, but not limited to, our strategic reviews of our business and operations performed in conjunction with restructuring actions. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Deterioration of our business in a geographic region or within a business segment in the future could also lead to impairment adjustments as such issues are identified.

     Allowances for Doubtful Accounts

     We maintain allowances for doubtful accounts for estimated losses on customer and vendor receivables based on historical write-offs, evaluation of the aging of the receivables and the current economic environment. Should actual collections of customer and vendor receivables differ from our estimates, adjustments to the provision for losses on accounts receivable and the related allowances for doubtful accounts would be necessary.

     Provisions for Inventories

     We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal margins. Write-downs are recorded so that inventories reflect the approximate net realizable value and take into account our contractual provisions with our suppliers governing price protection, stock rotation and return privileges relating to obsolescence. Because of the large number of transactions and the complexity of managing the process around price protections and stock rotations, estimates are made regarding adjustments to the carrying amount of inventories. Additionally, assumptions about future demand, market conditions and decisions by manufacturers to discontinue certain product lines can affect the decision to write down inventories. If assumptions about future demand change or actual market conditions are less favorable than those projected by management, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated.

     Taxes on Earnings

     Our effective tax rate includes the impact of certain undistributed foreign earnings for which no United States taxes have been provided because such earnings are planned to be reinvested indefinitely outside the United States. Earnings remittance amounts are planned based on the projected cash flow needs as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, working capital and long-term investment requirements could affect our effective tax rate.

     We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in determining the need for a valuation allowance. If we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, the previously provided valuation allowance would be reversed.

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     Restructuring and Acquisition Integration Activities

     In the third quarter of 2002, we initiated and approved plans to restructure the operations of Insight UK. The restructuring replaced top Insight UK management, eliminated certain duplicative activities, prioritized activities to specific customer segments and reduced the cost structure to better align operating expenses with existing general economic conditions. Consequently, we recorded expenses of $1.5 million in our Insight UK operating segment related to employee termination benefits. The costs were accounted for under EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” and have been included as a charge to the results of operations for the year ended December 31, 2002.

     In connection with the integration of Comark, we incurred costs of $1.8 million related to restructure the operations. These costs were accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations” and were based on the restructuring plans that were initiated and committed to by management in 2002. Accordingly, these costs were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Comark. The charge of $1.8 million to restructure the organization consisted of employee termination benefits of $1.6 million and facilities based costs of $205,000. The employee termination benefits relate to severance payments and transition bonuses for 173 employees who were terminated in connection with the elimination of certain duplicative activities resulting from the acquisition. Severance payments of $1.1 million were made in 2002 resulting in an accrual balance of $500,000 at December 31, 2002. The facilities based costs relate to lease termination costs associated with vacating duplicate facilities. Facility costs of $110,000 were paid during 2002 resulting in an accrual of $95,000 at December 31, 2002.

     In connection with our acquisitions of Action and Kortex, we initiated and approved plans in 2001 to restructure our existing operations. These plans included eliminating certain duplicative activities, terminating lease commitments on unused facilities and recording non-cash asset write-downs. In accordance with EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”, we recorded $7.2 million for these charges to the results of operations for the year ended December 31, 2001. Of the $7.2 million accrued at December 31, 2001, $3.6 million of restructuring charges represented non-cash write-offs of fixed assets, leasehold improvements and government grant receivables. Employee termination benefits of $2.6 million, included in the accrual at December 31, 2001, were paid in 2002 to two members of senior management and 25 employees whose positions were eliminated as part of the integration plan. Facilities based charges of $1.0 million accrued at December 31, 2001 primarily consisted of remaining lease commitments on unused facilities and estimated costs to terminate lease commitments. In 2002, the accrual was decreased by $274,000 due to decreases in estimated lease commitments offset partially by increases in exchange rates for the United Kingdom. Facility costs of $440,000 were paid during 2002 resulting in an accrual of $298,000 at December 31, 2002.

     Also, in connection with the 2001 plan for integration of the acquisitions of Action and Kortex, we incurred costs of $18.4 million relating to restructuring the operations of the acquired companies. These costs were accounted for under EITF Issue No. 95-3, “Recognition of Liabilities in Connection with Purchase Business Combinations” and accordingly were recognized as liabilities assumed in the purchase business combination and included in the allocation of the costs to acquire Action and Kortex. The $18.4 million charge to restructure the organization consisted of employee termination benefits and facilities-based charges of $3.5 million and $14.9 million, respectively. The employee termination benefits consist of severance costs for 105 positions eliminated as part of the initial integration plan. Adjustments in 2002 of $1.3 million primarily represent severance cost for 25 additional positions eliminated as part of the final integration and increases in the exchange rates for the United Kingdom. Employee termination benefits of $357,000 and $4.3 million were paid in 2001and 2002, respectively, resulting in an ending accrual balance at December 31, 2002 of $242,000. The facilities based costs primarily consist of remaining lease commitments on unused facilities and estimated costs to terminate lease commitments, reduced by estimated subleases. Adjustments in 2002 for facilities based costs were $3.3 million, representing decreases in estimated lease commitments offset partially be increases in exchange rates for the United Kingdom. Facilities based costs of $85,000 and $2.0 million were paid in 2001 and 2002, respectively, resulting in an ending accrual balance at December 31, 2002 of $9.5 million.

RESULTS OF OPERATIONS

     Overview

     Acquisition of Comark

     On April 25, 2002, we acquired all of the outstanding stock of Comark, a leading provider of IT products and services in the United States. As a result, the fluctuations in the operating results of Insight Enterprises, Inc. and our Insight North America operating segment in the year ended December 31, 2002 as compared to the years ended December 31, 2001 and 2000 results are due generally to the acquisition of Comark. The historical results section below presents a discussion of our consolidated operating results using the historical results of Insight Enterprises Inc. prepared in accordance with generally accepted accounting principles (“GAAP”) for the years ended December 31, 2002, 2001 and 2000, including Comark’s results of operations from April 25, 2002 (the acquisition date). In order to provide additional information relating to our

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operating results, we also present a discussion of our consolidated operating results as if Insight Enterprises Inc. and Comark had been a combined company in the years ended December 31, 2002 and 2001 (“Unaudited Pro Forma Combined Company Results”). We have included this additional information in order to provide further insight into our operating results, prior period trends and current position. This supplemental information is presented in a manner consistent with the disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” which are described in more detail in Note 15 to the Consolidated Financial Statements in Item 8. Pro Forma information is useful in analyzing operating performance, but should be used only in conjunction with results reported in accordance with GAAP.

     The discussion of operating results at the consolidated level is followed by a more detailed discussion of results of operations by operating segment. The discussion of our results of operations by operating segment is presented on a historical basis for the years ended December 31, 2002, 2001 and 2000, including Comark’s results of operations in Insight North America from April 25, 2002 (the acquisition date).

HISTORICAL RESULTS OF OPERATIONS

     The following discussion compares the historical consolidated results of operations on a GAAP basis for the years ended December 31, 2002, 2001 and 2000: