UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

or

Commission File Number: 0-25092

INSIGHT ENTERPRISES, INC.

1305 West Auto Drive, Tempe, Arizona, 85284
(Address of principal executive offices, Zip Code)

Registrant’s telephone number, including area code: (480) 902-1001

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

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

Common stock, par value $0.01
(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. o

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

     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 30, 2004, the last business day of the Registrant’s most recently completed second fiscal quarter, was $842,502,894.

     The number of outstanding shares of the Registrant’s common stock on February 28, 2005 was 49,647,989.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement relating to its 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

     Certain statements in this Annual Report on Form 10-K, including statements in “Business” in Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include: projections of matters that affect net sales, gross profit, operating expenses, earnings from operations or net earnings; projections of capital expenditures; projections for growth; hiring plans; plans for future operations; financing needs or plans; plans relating to our products and services; statements of belief; and 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 statement. 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:

	•	changes in the economic environment and/or information technology industry;
	•	reliance on suppliers for product availability, marketing funds, purchasing incentives and competitive products to sell;
	•	reliance on a limited number of outsourcing clients;
	•	actions of competitors, including manufacturers of products we sell;
	•	disruptions in our information technology and voice and data networks;
	•	failure to comply with the terms and conditions of our public sector contracts;
	•	risks associated with international operations;
	•	integration and operation of future acquired businesses;
	•	dependence on key personnel;
	•	decreased effectiveness of equity compensation and changes in accounting for equity compensation;
	•	rapid changes in product standards;
	•	ability to renew or replace short-term financing facilities;
	•	recently enacted and proposed changes in securities laws and regulations;
	•	intellectual property infringement claims; and
	•	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 to update, and do not intend to update, any forward-looking statements.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

FORM 10-K ANNUAL REPORT
Year Ended December 31, 2004

TABLE OF CONTENTS

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

PART I

Item 1. Business

     Insight Enterprises, Inc. is a holding company organized in the following three operating segments:

     Additional detailed segment and geographic information can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and in Note 17 to the Consolidated Financial Statements in Item 8 of this report.

     Our business focus is on being a leading provider of brand name computing products, IT services and outsourcing of business processes primarily to business customers in the United States, Canada and the United Kingdom.

     We were incorporated in Delaware in 1991 as the successor to an Arizona corporation that commenced operations in 1988. We began operations in the United States, expanded into Canada in 1997 and into the United Kingdom in 1998.

Acquisitions/Dispositions History

     Over the past few years, we have completed acquisitions in the United States, Canada and the United Kingdom.

     In 2004, we sold our 95% ownership interest in PlusNet plc (“PlusNet”), an Internet service provider in the United Kingdom. As a result of the disposition of our ownership interest, PlusNet is disclosed as a discontinued operation.

Operating Segments

     The following discussions of our operating segments should be read in conjunction with the operating segment disclosures and information regarding geographic operations found in Note 17 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 Operations — Factors that Could Affect Future Results” in Item 7 of this report.

Insight North America and Insight UK – The Insight Brand

     Insight North America and Insight UK (collectively, “Insight”) are reported as separate operating segments. However, they both market products and services principally under the global brand name “Insight” and operate with similarly structured business models and strategic positioning as leading providers of IT products and services.

     Insight North America, with operations in the United States and Canada, is our primary operating segment, representing 83% and 72% of consolidated net sales and earnings from operations, respectively, in 2004. Their target customers are small- to medium-sized businesses (“SMB”) and large enterprises, as well as government and educational entities.

     Insight UK represented 15% and 13% of consolidated net sales and earnings from operations, respectively, in 2004, and primarily targets SMB, as well as government and educational entities, in the United Kingdom.

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Business Overview

     Insight is a leading provider of IT products and services that deliver strategic business value through technology to businesses, government and educational institutions in the United States, Canada and the United Kingdom. We are evolving our business model and branding efforts to emphasize Insight’s ability to provide total product and service solutions based on customers’ business-driven needs. We strive to be a valued advisor to our customers by offering technology solutions that can be applied across the full technology procurement life cycle to maximize our customers’ return on investment. We are evolving further into the IT solutions market. However, our service sales represented less than 5% of Insight’s net sales for 2004 and were sold primarily to our larger enterprise customers. Although we have initiatives to increase solution selling in our large enterprise customer base, we see a greater opportunity to sell solutions to the SMB customers. IT products are sold to this market by a variety of national product resellers but we believe there are no national providers of IT products, services and solutions effectively serving this market. We also believe that our expanded business model, knowledgeable sales force, targeted marketing strategies, streamlined distribution, advanced services capabilities and commitment to total IT solutions could further differentiate us from our competitors targeting the SMB market.

     In 2004, we saw the culmination of two years of focus on internal initiatives, which set the foundation for the evolution in our business model. In the first quarter of 2004, we achieved the successful completion of the integration of a large acquisition, a continued strengthening of United Kingdom profitability and the migration of Insight’s United States business operations to one IT system. The completion of these projects in the first quarter of 2004 strengthened our ability to serve business customers and facilitated the marketing of the full breadth of our product and service capabilities across all customer segments. In the second quarter of 2004, we added strength to our Insight North America senior management team in the areas of marketing, product management and services and re-focused our resources externally to enhance the customer experience. We hired, in the fourth quarter of 2004, a new chief executive officer who brings a breadth of industry experience to the Company. These efforts assisted us in achieving year-over-year growth in net sales for each of the last three quarters in 2004 and for the year 2004 overall. We believe the foundation is set to deploy fully the solutions-oriented business model to our target customers, particularly in the United States.

     Our goal in 2005 is to drive our target customers to our solutions-oriented business model and further invest in our account executives to increase productivity and more effectively sell solutions. Our marketing efforts will target specific business-driven customer needs and will be integrated with sales, product management and training. Additionally, we will continue to enhance our business operations through automation in order to increase our customers’ ease of doing business with us, increase sales, enhance gross margins and reduce operating expenses as a percentage of net sales.

Operating Strategy

     The key elements of our operating strategy are as follows:

     Solutions-Oriented Business Model. This model offers business customers the benefits of complete IT solutions that take advantage of our multiple-vendor product choices, competitive pricing and availability, swift delivery and a vast array of customized services. We continue to transition our business model beyond product fulfillment to include extensive service offerings, enabling us to adopt a selling approach focused on providing total solutions for customers’ IT needs. We believe this transition is essential to respond to changes in the way businesses plan for, purchase and implement technology. In addition to a sophisticated product fulfillment engine, we offer service capabilities designed to improve our customers’ business processes. We have the ability to serve as the central project manager for any combination of IT services a customer may require from basic warranties and financing options, to custom configuration, large technology deployments, centralized management of mobile technology, software license planning, network design and implementation, asset tagging or asset disposal. We believe we deliver strategic business value to our customers by streamlining IT management and costs. By combining technology products and services, we create custom-tailored solutions designed to meet customers’ unique requirements. In North America, our largest area of operation, we believe we have a strong competitive advantage in the degree to which we can provide these products and services across all targeted customer groups.

     Integrated Sales and Marketing. We market and sell IT products and services solutions through a variety of integrated direct sales and marketing techniques 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 data interchange (“EDI”));
	•	targeted marketing (including print and electronic marketing and communications, advertising and specialty marketing programs); and
	•	comprehensive product and services catalogs.

     We tailor our marketing model to each customer market and emphasize our broad product and services offerings, competitive pricing, fast delivery, customer support and financing options. A large portion of our marketing efforts in 2005

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and beyond will be focused on increasing awareness of our service capabilities and the value of our solutions-oriented business model, as well as increasing Insight brand awareness.

     Components of our sales and marketing strategy include:

     Focus on Businesses, including Government and Educational Entities. We target businesses as well as government and educational entities. Our target customer employs 100 to greater than 5,000 people who 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 high-performance technology solutions, purchase frequently, are value conscious, appreciate well-trained account executives and are knowledgeable buyers who require less technical support than the average individual consumer. Our operating model, which allows us to tailor our offerings to the size and complexity of our customer, positions us to serve this segment of the market effectively through our competitive pricing, extensive product availability, advanced service capabilities, well-trained account executives, high level of customer service, cost-effective distribution systems and technological innovation. During 2004, virtually all of our net sales were to business, government and educational customers, and no single customer accounted for more than 3% of our consolidated net sales.

     Insight Public Sector (“IPS”), a wholly-owned subsidiary of Insight North America, services our United States public sector customers, which include federal, state and local governmental entities, educational institutions and non-profit organizations. Net sales from our public sector customers are derived from: open market sales to federal, state and local government agencies; sales made to federal agencies and departments under the Multiple Award Schedule contract between IPS and the U. S. General Services Administration and blanket purchase agreements between IPS and various government departments; sales made to various state and local governmental agencies; and sales made to educational institutions and non-profit organizations. For a discussion of risks associated with public sector contracts, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – The failure to comply with the terms and conditions of our public sector contracts could result in, among other things, fines or other liabilities,” in Item 7 of this report.

     Recruit, Train and Retain a Quality Sales Force. The majority of our account executives focus on outbound telemarketing by contacting existing 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 target customer base. To support the account executives, we maintain an extensive database of customers and potential customers. We have established dedicated outbound sales divisions focusing on SMB (generally less than 1,000 PC’s), larger enterprise businesses (generally at least 1,000 PC’s) and the public sector entities. Account executives in these sales divisions interact with the sophisticated purchasers and IT systems management and various other staff of organizations to establish mutually beneficial relationships within these specific customer targets. Once established, the one-on-one relationships between our customers and their account executives are maintained and enhanced primarily through frequent communications by telephone supplemented by marketing communications and programs. We also enhance our telemarketing operations by maintaining a smaller group of face-to-face field account executives in a number of cities throughout the United States, and to a lesser extent, in the United Kingdom. These face-to-face field account executives typically service larger enterprise accounts, government accounts or accounts that have advanced system and service needs. Additionally, we have a small group of knowledgeable account executives dedicated to taking inbound calls.

     We believe our ability to establish and maintain long-term relationships and to encourage repeat purchases is dependent, in part, on the quality of our account executives. Because our customers’ primary contact with us is through our account executives, we focus on recruiting, training and retaining qualified and knowledgeable sales staff. New account executives are required to participate in an extensive multi-week product, system, sales and procedural training program. This program consists of class work focusing on technical product and services information, sales and customer service, and supervised sales experience. Additionally, in conjunction with product manufacturers, we sponsor periodic training sessions introducing new products and emphasizing products that are in high demand. We also have training programs that introduce new policies and procedures. We are currently expanding our training programs to focus on enhancing existing skills or developing new skills for varying aspects of the sales process.

     Each account executive is responsible for building a customer base and proactively servicing the needs of established customers. Our IT systems allow on-line retrieval of relevant customer information, including the customer’s history and product information, such as price, cost and availability, as well as up-selling and cross-selling opportunities. Additionally, in 2005 we are planning to increase our use of data mining tools and analytics to target the right solution or offer to customers with the greatest propensity to have an interest. This capability helps deepen customer relationships and build our “share-of-wallet” with our customer base. Account executives are empowered to negotiate sales prices within established ranges, and a large part of their compensation is based upon gross profit dollars from sales they generate. As the account executive gains experience, we give them greater latitude to make decisions, and with greater experience, the percentage of total compensation based on gross profit dollars generated also increases. Compensation programs are designed to promote and reward top performers in the organization.

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     Information regarding the number and tenure of account executives at Insight North America and Insight UK at December 31, 2004 and 2003 follows:

     Increase in tenure is important to our business as our statistics show that account executive productivity increases with experience. The increase in average tenure for Insight North America is due primarily to increased retention efforts, including performance based incentives and enhanced training programs, and headcount reductions based on performance which largely results in elimination of less experienced account executives. Average tenure for Insight UK has remained relatively flat over the past year. However, in 2004 we experienced a higher rate of attrition among our Insight UK account executives with two to three years experience than we experienced in 2003, due primarily to turnover in sales management and recruiting of our tenured account executives by our competition.

     For a discussion of risks associated with our dependence on key personnel, including sales personnel, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – We depend on key personnel,” in Item 7 of this report.

     Focus on Customer Service. We strive to create strong, long-term relationships with our customers, which we believe promotes customer satisfaction and ultimately increases the percentage of IT spending awarded to us. We believe that a key to building customer loyalty is to provide customers with a knowledgeable account executive backed by a strong support staff that can help customers find the right IT solutions to solve business needs. Most business customers are assigned a trained account executive that understands the customer’s technology needs and proactively identifies and processes orders for product and service solutions that meet those needs. In addition to our account executives, we also have technical specialists who support our sales force, creating a team approach to addressing customers’ various needs within a total solutions framework. Although additional support personnel may interact with the customer, such as our national practices or third party service providers, the customer’s dedicated account executive remains the primary contact across all products and services involved. We believe that solving customers’ unique business and technology challenges through strong one-to-one sales and project management relationships will improve the likelihood that customers will look to us for future product and service purchases.

     We realize that fast delivery and efficient fulfillment are also important to our customers. Customer orders are sent to one of our distribution centers or to one of our “direct ship” suppliers for processing immediately after the order is released. We have integrated labeling and tracking systems with major freight carriers into our IT system to ensure prompt and traceable delivery. Additionally, we have integrated our IT system with our “direct ship” suppliers making shipments from these suppliers virtually transparent to our customers. We ship almost all of our orders on the day the orders are released for shipment.

     We believe that effective customer service is an important factor in customer retention and overall satisfaction. We are planning additional automation of our business processes and believe these improvements will increase customer satisfaction and retention.

     Promote Use of E-Commerce. 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 that delivers high customer satisfaction. Account executives encourage customers to place online orders via our website, www.insight.com, and we offer selected businesses their own customized landing pages, which are designed by our electronic marketing team. These pages allow businesses to customize views based on their needs and procurement guidelines and to purchase IT products and services from us at pre-negotiated, volume-based pricing. We also create awareness of our products and services to customers and prospects through graphically rich electronic newsletters, electronic postcards and other branded sales messages transmitted

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via e-mail. Through the promotion of e-commerce, including EDI and our website, we hope to increase sales, facilitate our customers’ ease of doing business with us and decrease administrative costs.

     Selectively Employ Specialty Marketing, Catalogs and Advertising. We continue to increase our national exposure, promote local interest and encourage visits to our website through title sponsorship of the “Insight Bowl,” a post-season intercollegiate football game. During the 2004 Insight Bowl, telecast live by ESPN on December 28, 2004, we aired television commercials highlighting our in-house solutions capabilities as well as commercials showcasing manufacturers’ products offered by us. These 30-second spots provided cooperative advertising opportunities for our suppliers and us and encouraged high-technology business buyers to call us or visit our website. We also selectively place targeted advertisements in trade publications in the United States, Canada and the United Kingdom. These advertisements emphasize our solution offerings and may also provide detailed product descriptions, manufacturers’ specifications and pricing information. Additionally, the Insight logo and telephone number are included in promotions by selected manufacturers.

     In the United Kingdom, we are continuing to provide a comprehensive product and services catalog to select customers. Each catalog provides detailed product descriptions, manufacturers’ specifications, pricing and service and support features. We also send targeted catalogs and direct mail brochures showcasing our product, service and solution offerings to customers in the United States, Canada and the United Kingdom. In 2005, we expect to increase our marketing efforts in the area of targeted print advertising focused on specific solution areas.

     Broad Selection of Branded Products. We provide added convenience by offering our customers a comprehensive selection of more than 200,000 brand name IT products in North America, and more than 70,000 products in the United Kingdom. We offer products from more than 1,000 manufacturers including Hewlett-Packard (“HP”), IBM, Microsoft, Toshiba, Cisco, 3COM, Lexmark and Sony. Our breadth of product offerings combined with our efficient, high-volume and cost-effective direct sales and marketing allows us to offer competitive prices. We believe that offering multiple vendor choices enables us to better serve customers’ needs by providing a variety of product solutions based on customer preferences or other criteria, such as real-time best pricing and availability, or compatibility with existing technology. We have developed “direct-ship” programs with many of our suppliers through the use of EDI and extensible markup language (“XML”) links allowing us to expand our product offerings without further increasing inventory, handling costs or inventory risk exposure. Convenience and product options among multiple brands are key competitive advantages against manufacturers’ direct selling programs, which are generally limited to their own brands and may not be able to offer customers a complete or best solution across all product categories.

     We select our products based upon existing and proven technology and anticipated customer needs. Our product managers and buyers evaluate the effectiveness of new and existing products and select those products for inclusion in our offerings based upon the fit in strategic solutions, market demand, product features, quality, reliability, sales trends, price, margins and warranties. We also add products to our selection based on direct customer requests, when appropriate.

     The manufacturer warrants most of the products we market, and it is our policy to request that customers return their defective products directly to the manufacturer for warranty service. On selected products, and for selected customer service reasons, we may 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, for some products we may charge restocking fees. Products returned opened are quickly processed and returned to the manufacturer or supplier for repair, replacement or credit to us. We resell most 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, end users as “previously sold” or “used” products or are sold through other channels, to limit our losses from returned products.

     During 2004, we purchased products from approximately 1,400 suppliers. Approximately 43% (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, to balance our inventory or to minimize inventory risk. Purchases from Ingram Micro, Inc. (“Ingram”) and Tech Data Corporation (“Tech Data”), both of which are distributors, and HP, a manufacturer, accounted for approximately 19%, 14% and 17%, respectively, of Insight’s aggregate purchases in 2004. No other supplier accounted for more than 10% of purchases in 2004. Our top five suppliers as a group for 2004 were Ingram; HP; Tech Data; IBM, a manufacturer; and Synnex Information Technologies, a distributor. We purchased approximately 63% of Insight’s total product purchases during 2004 from this set of suppliers. 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 for sourcing product.

     We obtain supplier reimbursements from certain product manufacturers based typically 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. Manufacturers may also provide mailing lists, contacts or leads to us. We believe that supplier reimbursements allow us to increase our marketing reach and strengthen our relationships with leading

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suppliers. These reimbursements are important to us, and any elimination or substantial reduction would increase our costs of goods sold or marketing expenses and decrease our earnings from operations. During 2004, sales of products manufactured by HP and IBM accounted for approximately 31% and 14%, respectively, of Insight’s net sales in 2004. No other manufacturer accounted for more than 10% of Insight’s net sales in 2004. Sales of product from our top five manufacturers as a group (HP, IBM, Microsoft, Cisco and Toshiba) accounted for approximately 63% of Insight’s net sales during 2004. We believe that the majority of IT purchases by our customers are made based on the ability of our total product and service offering to meet their IT needs more than on specific brands. However, consolidation among manufacturers (e.g., the merger of HP and Compaq) has increased our reliance on some manufacturers, particularly HP.

     For a discussion of risks associated with our reliance on suppliers, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – We rely on our suppliers for product availability, marketing funds, purchasing incentives and competitive products to sell,” in Item 7 of this report.

     Advanced IT Services Offering. Although sales of services are currently a small percentage of our net sales (less than 5%) and gross profit, we believe our service offerings differentiate us from our competitors. We believe these service offerings help to establish strong, deep-rooted relationships with customers as they look to us for more than just product fulfillment and view us as partners in creating integrated product and service solutions for their IT needs. As sales of services increase, services will likely become a greater percentage of gross profit because sales of services are generally at a higher gross margin than product sales. Currently, many of these service capabilities are more widely available to customers in the United States than in Canada or the United Kingdom.

     We provide our customers a wide variety of IT services that focus on the following areas:

•

Custom Configuration – We custom configure servers, desktops, laptops and peripherals, including services such as:

	o	asset tagging;
	o	basic testing;
	o	hardware and software configuration; and
	o	software imaging and installation.

•

Advanced Integration – Our ISO 9001: 2000 certified advanced integration lab in the United States provides technical operations, resources and expertise to manage and implement large-scale network rollouts, including:

	o	workstations, servers and connectivity equipment;
	o	individual user customization of file servers, switches, routers and racks;
	o	pre-built networks, including IP addressing;
	o	live network testing and turnkey deployment; and
	o	wireless activations and configurations.

•

Enterprise Consulting – We evaluate, design, implement and manage business technology projects for our customers. Our enterprise consulting competencies include:

	o	infrastructure assessment and design;
	o	wireless LAN design and implementation;
	o	Citrix deployments;
	o	Microsoft implementation;
	o	IP voice and telephony solutions; and
	o	network security.

•

National Repair Center – Our National Repair Center is dedicated to maintaining our customers’ equipment and ensuring optimal performance levels through a variety of services including:

	o	break fix services;
	o	hot swap/spare program;
	o	asset retrieval, refurbishment or redeployment; and
	o	end-of-lease processing.

•

Resource Management – We offer highly skilled technical staff to augment customers’ existing IT staffs in areas such as:

	o	desk side support;
	o	help desk support;
	o	installs, moves, adds and changes;
	o	LAN administration; and
	o	critical server restoration.

•

Project Management – We provide customers with experienced project managers who coordinate the planning, design, deployment, and support of their IT projects and ongoing service programs.

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•

National Implementation Programs – Together with selected highly qualified service partners, we provide comprehensive, customized implementation services, including:

	o	national implementation and deployment projects;
	o	national service maintenance programs;
	o	wireless LAN implementations; and
	o	service vendor relationship management.

     A significant amount of services provided by Insight North America are delivered through extensive in-house capabilities, including services performed in our ISO 9001:2000 certified advanced integration and custom configuration labs. We believe this is a key differentiator from direct competitors in the United States. Insight UK manages delivery of services by contracting with highly qualified service partners. In all cases, regardless of delivery methods or geography, the customer’s dedicated account executive remains the primary contact throughout the entire sales and service implementation process and we offer to maintain the service level agreement to assure consistent quality of service across the project. This commitment to project management is central to our value proposition for delivering total product and service solutions, and we believe it will enhance the development of strong, long-term relationships with customers.

     Our account executives are supported by teams of qualified experts that specialize in specific emerging and/or complex technologies. In North America, we currently have specialty support teams focused on the following product categories:

	•	Connectivity;
	•	High Performance Systems;
	•	Networking;
	•	Training;
	•	Warranties; and
	•	Wireless.

     In the United Kingdom, we currently have teams of qualified experts focused on:

	•	Connectivity;
	•	Servers;
	•	Networking;
	•	Wireless;
	•	Warranties; and
	•	Software Licensing/Planning.

     Historically in the industry, advanced services were available primarily to larger enterprise customers, but we are now able to provide those services to our SMB customers and view this as an opportunity for growth. Determining which services are best suited to the SMB customers, creating awareness of our capabilities and increasing sales to this customer group will be a significant focus in 2005 and thereafter.

     We believe that there is no other national reseller able to offer the same breadth and depth of IT products and services that we offer across all target customer groups in the United States.

     Efficient Technology Based Operations. In 2003 and early 2004, a significant amount of time and resources were focused on the migration of our operations serving United States customers to a new, unified IT platform. This new system, referred to as “Maximus,” is a hybrid system, combining SAP R/3 version 4.6 (“SAP”) for back-end support functions with a proprietary, customized front-end consisting of a set of enhanced capabilities developed to make it easier for customers to conduct business with Insight and to increase the productivity of our account executives. These unique and customized front-end capabilities are manifested in four key areas:

	•	an enhanced graphical account representative user interface designed initially for account executives previously operating on Insight’s proprietary system integrated with SAP, with enhanced functionality over previous order-entry systems;
	•	a highly efficient Product Master designed to significantly enhance product data, search capability and search speed, allowing customers and account executives to search and view the same product information;
	•	a Virtual Sourcing engine for “direct ship” sourcing; and
	•	an enhanced web environment to support our e-commerce initiatives by supplying customers with more efficient product searching and enhanced customized landing pages.

     We have seen many benefits from the Maximus system including: an integrated sales and support engine; an efficient, reliable and consistent system to support our business needs; more robust reporting and analysis capabilities; and an increase in functionality from a sales perspective. We expect to continue to make enhancements to the Maximus system, including upgrading to newer versions of SAP, in order to increase sales executive productivity, electronically enable routine transactions and further automate cross-selling and up-selling opportunities.

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     We believe our implementation of advanced technological systems provides a competitive advantage by increasing the productivity of our account executives, delivering more efficient customer service and reducing order processing and inventory costs. The migration of our operations serving United States customers to Maximus was completed in January 2004, and we currently plan to deploy Maximus to our United Kingdom and Canadian operations in the next few years.

     Although Maximus has enhanced functionality, our IT systems in all geographies allow our account executives to obtain a wide range of information, including:

	•	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 IT will continue to improve the efficiency of our operations.

     The majority of our United States distribution operations are conducted within a 323,000 square foot distribution facility in Hanover Park, Illinois. We have begun work on expanding this facility to over 400,000 square feet and expect to operate within the expanded space beginning in the second half of 2005. Activities performed in our Illinois distribution center include receipt and shipping of inventory, returned product processing and repair services. Additionally, this distribution center houses our advanced integration and custom configuration labs. We also have a small distribution facility in Canada and a 53,000 square foot facility in the United Kingdom. All of our IT systems have capabilities that integrate our sales, distribution, inventory and accounting functions. Through our IT systems, we send orders electronically to one of our distribution centers or to a “direct ship” supplier for processing immediately upon order release, and the distribution center or supplier automatically prints a packing slip for order fulfillment. Products received in our distribution centers are assigned a unique bar code and placed in designated bin locations. We use systematic checks to ensure accurate fulfillment and to provide real-time reduction in inventories. We have implemented a re-ordering system that calculates lead times and, in some instances, automatically 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 and availability. We have integrated our order processing, labeling and tracking systems with major freight carriers to ensure prompt and traceable delivery. We utilize a combined physical and virtual distribution model, utilizing “just-in-time” inventory management and “direct ship” relationships with suppliers to reduce inventory costs. We promote the use of EDI or XML links with our suppliers, which we believe helps to reduce overhead, simplify the order fulfillment cycle and reduce the use of paper in the ordering process. Our physical distribution capabilities allow us to inventory product as needed to take advantage of product allocations, make opportunistic purchases or meet the service requirements of our customers. Our inventory management techniques, utilizing our system capabilities, allow us to offer a greater range of products without increased inventory requirements, and to reduce inventory exposure and shorten order fulfillment time.

     Additionally, our voice and data networks are an important part of our technology-based operations as the majority of our sales, marketing and customer service efforts are conducted either via the telephone or over the web. Our telephone system is programmed to route inbound calls automatically, depending on their originating data, to specific sales groups, or to specific account executives. Our telephone system also uses menu functions that permit the customers to route themselves to the appropriate sales, service or support area or to their assigned account executives. Our technology infrastructure, generally, and our data connectivity, particularly, are important links in our efforts to increase the ease of transacting business with us.

     For a discussion of risks associated with our IT and telephone systems, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – Disruptions in our IT and telephone communication systems could affect our ability to service our customers and cause us to incur additional expenses,” in Item 7 of this report.

     Growth Strategy

     Insight’s growth strategy is to increase sales and earnings by:

     Selling Additional Products and Services to Our Existing Customer Base. We seek to become the primary provider of IT solutions for our customers by investing in the development and training of our account executives and providing the tools to sell the best IT solution, including products and services, to our customers in an efficient manner. 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 and depth of sales to these customers. We

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continue to refine and analyze our customer database to better understand and service our customers, which we believe will result in establishing and maintaining long-term customer relationships. In addition, we are focused on improving account executive productivity by providing a comprehensive, on-going training program, implementing incentive programs that focus on rewarding and retaining top performers and automating routine processes. We are training account executives on our solutions capabilities and on a sales process that anticipates and evaluates our customers’ technology needs, both current and future, so that we can capitalize on opportunities to be our customers’ primary provider of IT solutions.

     We also plan to increase our marketing initiatives in 2005 relating to demand generation, promotion of our solutions capabilities and general brand awareness. We believe, particularly in the United States, that the full breadth of our solution-focused product and service offerings is an important differentiating factor from our competitors. We also believe that our value proposition of our solution-focused business model is not being fully utilized by our sales executives serving SMB customers, government, educational and non-profit organizations, nor by these target customers. This provides an opportunity in 2005 for sales growth as a result of increased training in and marketing of our capabilities and an increase in gross margin, as sales of services typically generate higher gross margins than product sales.

     Specifically, in 2005, we will be rolling out an integrated marketing approach among sales, marketing and product management. We are going to market with the following five specific solution focuses, and we are aligning our sales, marketing, technical and service areas to support these focus areas:

	•	Manage ITSM – solutions focused on managing a business’s IT infrastructure (e.g. technology refresh and server consolidation);
	•	Mobilize ITSM – solutions focused on product and services that assist businesses in their efforts to enhance the mobility of their workforces (e.g. wireless devices, Wi-Fi infrastructure, wireless WANs and data/voice convergence);
	•	Store ITSM – solutions focused on the storage needs of business customers (e.g. disaster recovery, storage management and regulatory compliance);
	•	Print ITSM – solutions focused on lowering print costs for businesses (e.g. print assessment, document management and pay per use); and
	•	Secure ITSM – solutions focused on securing businesses’ communications, websites and workforces (e.g. e-mail security, firewalls and antivirus systems).

These are managed solutions that our solution experts design based on their detailed assessment of the customer’s business requirements. We “own” the solution, from design and configuration to deployment and life cycle management. We believe our long-term relationships with the world’s leading IT vendors combined with our technical expertise can help us provide effective solutions that bring our customers greater return on investment and reduced total cost of ownership.

     Specific solutions will be brought to market under each of these focus areas and will be supported by:

	•	sales training and education;
	•	sales tools;
	•	awareness building;
	•	customer events;
	•	demand generation;
	•	product management;
	•	web merchandising; and
	•	sales incentives.

     We are also developing “National Practice Groups” built around our consulting and service capabilities and are directly aligned to support each new solution. The five National Practice Groups are Enterprise (Manage IT^SM), Communications (Mobilize IT^SM), Storage (Store IT^SM), Lifecycle (Print IT^SM) and Security (Secure IT^SM). The individuals in the National Practice Groups will guide customers to the right combination of products and/or services to address their business needs. They are charged with accelerating our sales growth as our solutions strategy evolves.

     We believe this integrated, targeted approach will allow us to more effectively communicate our value proposition to our customers, suppliers and account executives.

     Expanding Our Customer Base. We intend to increase our direct sales and targeted marketing efforts in each of our customer segments: SMB; large enterprises; government, educational and non-profit organizations. We seek to acquire new account relationships through proactive outbound telesales, face-to-face field sales, electronic commerce, targeted direct

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marketing and increased advertising focused on Insight brand awareness and the differentiating factors of our business model.

     Capitalizing on International Presence. We seek to capitalize on our international presence in an effort to achieve our long-term goal of becoming a global leader for IT products and services solutions. To that end, we have established operations in Canada and the United Kingdom. Our presence in these countries provides us with an increased customer base, expanded product offerings and the ability to leverage our existing infrastructure and supplier relationships. We intend eventually to continue expanding in Europe through the expansion of our existing infrastructure in the United Kingdom, and we may expand into other international locations. For a discussion of risks associated with international operations, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – There are risks associated with international operations that are different than those inherent in the United States business,” in Item 7 of this report.

     Leveraging Existing Infrastructure. We have expended considerable resources to develop our infrastructure to support planned growth. In early 2004, we completed the conversion of IT systems supporting our operations serving United States customers to Maximus and expect to deploy Maximus in our United Kingdom and Canadian operations in the next few years. The new Maximus system added functionality that we believe will better enable us to meet or exceed our customers’ expectations and further differentiate us from our competitors. The benefits we have seen from the Maximus system are: an integrated sales and support engine; an efficient, reliable and consistent system to support our business needs; more robust reporting and analysis capabilities; and an increase in functionality from a sales perspective. We believe there are opportunities to gain additional efficiencies as we add functionality to the system and electronically enable routine transactions. Our goal is to enhance our system capabilities to a level that enables all customer, supplier and employee interactions to potentially be transacted electronically.

     We have also invested in facilities and enhanced our senior management teams in each of our operating segments over the past few years. We believe our infrastructure allows us to grow for the next few years without additional significant investments in facilities and senior management. We will continue to invest in enhancing our IT systems, increasing the number of account executives (depending on market demand), training, marketing and brand building, and product and service expertise in our solution focus areas. We believe that our investments will allow us to increase sales at a faster rate than operating expenses. We expect to reduce operating expenses as a percent of sales and improve profitability through the enhancements to Maximus, increased productivity of our account executives, cost-effective marketing, utilization of electronic commerce, and economies of scale. In addition, we believe our relationships with our suppliers will continue to offset certain expenses through the receipt of supplier reimbursements. For a discussion of risks associated with our IT and telephone systems, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – Disruptions in our IT and telephone communication systems could affect our ability to service our customers and cause us to incur additional expenses,” in Item 7 of this report.

     Making Opportunistic Strategic Acquisitions. Based on our acquisition experience, capital structure and IT system platform, we believe we are well positioned to take advantage of strategic acquisitions that broaden our customer base, expand our geographic reach, scale our existing operating structure or enhance our product and service offerings. It is part of our growth strategy to evaluate and consider strategic acquisition opportunities if and when they become available.

     For a discussion of risks associated with future acquisitions, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – The integration and operation of future acquired businesses may disrupt our business, create additional expenses and utilize cash or debt availability,” in Item 7 of this report.

Industry

     Prior to late 2000, the industry experienced strong growth rates amidst a healthy economic environment. Sales of IT products in the following years decreased worldwide due to sluggish economic growth and a lengthening of IT replacement cycles. This slowdown in spending was evident beginning in the fourth quarter of 2000 and signs of an anticipated recovery were only first seen through slightly increased activity in the latter half of 2003, which continued in 2004. We remain optimistic that IT spending will increase in 2005, although we believe the motivation for purchases has changed from that of the pre-2000 era, and we have repositioned ourselves to respond to these changes accordingly so that we may increase our market share. Technology purchases are being made to address business-driven needs, and financial officers are increasingly playing greater roles in the final purchasing decisions. We believe that demand is no longer driven, for example, only by increased speed and functionality of basic desktop computers, but by the total cost of ownership and return on investment of IT expenditures. Therefore, direct marketers are increasing efforts to include IT services among their offerings, and outbound telesales organizations are being complemented by face-to-face field sales. Insight North America has been at the forefront of this trend since acquiring extensive advanced service capabilities in early 2002, and other direct marketers have since

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made efforts to include varying levels of services among their offerings. We believe that we are uniquely positioned to take advantage of this shift in customer purchasing, as we began migrating from pure product fulfillment-driven direct marketing strategies to our solutions-oriented model of providing IT products and services much earlier than other direct marketers. We believe that in addition to the changing motivation for purchases, the industry is evolving in other ways, too. The market for IT products and services is served through a variety of distribution channels, and intense competition for market share has forced manufacturers to reexamine the psychology behind customers’ purchasing behaviors and to seek the most cost effective and efficient channels to distribute their products. Customers are changing the way they plan for, purchase and implement technology purchases, and participants in the supply chain, including us, are changing in an effort to keep pace with or get ahead of these changes. We believe the following trends have emerged:

	•	Manufacturers are continuing their use of the direct channel, through direct marketers like us and through their own internal resources, to market and sell products directly to customers in order to grow sales and lower overall selling costs.
	•	Consolidation is increasing among direct marketers, and as larger direct marketers broaden their customer reach and increase the depth and breadth of product and service offerings, we believe that larger direct marketers will continue to take market share away from smaller resellers.

     Additionally, with increased competition and an overall improved industry-wide supply chain, IT products experience continual declines in average selling prices. Therefore, in order to increase net sales, unit sales must grow at a rate faster than the decline in average selling prices.

     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. While purchasing decisions will continue to be influenced by product selection and availability, price and convenience, we believe that solution offerings, knowledge of account executives and customer service will become the differentiators businesses will look for when procuring total solutions that minimize their total cost of ownership. For a discussion of risks associated with uncertain economic conditions and actions of competitors, see “Management’s Discussion and Analysis of Financial Condition – Factors That May Affect Future Results and Financial Condition – Changes in the economic environment and/or IT industry may reduce demand for the products and services we sell; Actions of competitors, including manufacturers of products we sell, can negatively affect our business,” in Item 7 of this report.

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, HP and IBM;
	•	other direct marketers, such as CDW Corporation (North America), PC World Business (United Kingdom); and
	•	national and regional resellers, including value-added resellers and specialty retailers, aggregators, distributors, 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 enterprise customers. Manufacturers, however, typically do not offer the breadth of multi-branded product offerings that direct marketers such as us offer, nor do they have sufficient scale to penetrate the SMB space cost effectively. Additionally, most manufacturers, as well as other direct marketers, do not provide the advanced level of services that we offer our customers. We believe that we offer enhanced solution capability, broader product selection and availability, competitive prices, and greater purchasing convenience than traditional retail stores or value-added resellers, and that our dedicated account executives offer the necessary support functions (e.g., purchases on credit terms and efficient return processes) which Internet-only sellers do not usually provide. We are not aware of any competitors with both the breadth and depth of solution offerings 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, and a selling approach that permits us to grow with customers and solidify those relationships.

     Although the barriers to entry into the industry for an Internet-only reseller are relatively low, 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 IT 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 supplier reimbursements and establish electronic transactional relationships with additional participants; and

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•

the difficulty of identifying and recruiting qualified management personnel and a sufficient number of account executives to sell technically advanced products.

     Some 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 marketing and advertising activities, offer more attractive terms to customers and adopt more aggressive pricing policies than we do.

     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, including manufacturers of products we sell, can negatively affect our business,” in Item 7 of this report.

Direct Alliance

     Direct Alliance is our Business Process Outsourcing (“BPO”) organization, representing 2% and 15% of consolidated net sales and earnings from operations, respectively, in 2004.

Business Overview

     In 1993, we sought to leverage core competencies in direct marketing by providing outsourced direct marketing services to third parties through the creation of Direct Alliance. The range of outsourced services has expanded over the years beyond direct marketing to also include solutions designed to enhance manufacturers’ relationships with their channel partners, such as direct marketers. We currently offer solutions designed to rapidly enable and drive cost-efficient sales through proprietary systems, processes, personnel and expertise that are tailored to each client.

Operating Strategy

     Our BPO services are focused on customized solutions in the following key areas:

•

Customer Behavior Analytics — statistical modeling and analysis using data generated from a variety of sources, within a structured customer lifecycle methodology, including:

	o	customer performance metrics;
	o	sales reporting analytics;
	o	campaign management; and
	o	web analytics.

•

Direct Marketing — traditional direct mail and electronic direct marketing services, including:

	o	transactive e-mail solutions;
	o	client extranet marketing;
	o	interactive marketing;
	o	direct mail; and
	o	catalog design and production.

•

Direct and Indirect Sales Channels — service and technologies that can simultaneously connect clients with multiple sales channels, including:

	o	outbound telesales;
	o	inbound telesales;
	o	reseller management;
	o	pre-sales customer support;
	o	internet sales support; and
	o	field sales enablement.

•

Financial Services — accurate financial information and secure transaction management services, including:

	o	trade credit management;
	o	credit card processing;
	o	leasing solutions;
	o	fraud detection and prevention;
	o	collections;
	o	sales tax collection and management;
	o	accounts receivable;
	o	accounts payable; and
	o	vendor returns processing.

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•

Logistics and Supply Chain Management – information and support services to improve logistics and supply chain management, including:

	o	order management;
	o	fulfillment;
	o	virtual supply chain management; and
	o	reverse logistics management.

     We offer a unique selection of BPO services, technology and direct, as well as channel, expertise. We can operate as a “virtual division” for our clients or as a “dedicated reseller.” These customized services enable our clients to sell directly to customers and/or support existing indirect sales channels in a cost-effective and timely manner. The services are offered through Direct Alliance’s proprietary IT systems, which can be successfully integrated with many of today’s most common applications, such as SAP, Oracle and Siebel. Additionally, we may license our multi-lingual, multi-currency proprietary systems to assist our clients in deploying telesales operations in foreign countries.

     We believe that our combination of services, proprietary technology and direct, as well as channel, expertise allows us to provide our clients with:

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

     Any combination of our service offerings can be employed to provide customized, vertically integrated programs for clients. BPO programs can vary in duration, type and quantity and can run in succession or concurrently, depending on each client’s needs. Some programs may be seasonal in nature, particularly if our clients’ customers have cyclical buying patterns.

     Presently, the majority of our outsourcing arrangements are service fee based, meaning that we derive net sales based primarily upon a cost plus arrangement in addition to 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 may 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, we 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 mix of type of outsourcing arrangements that are in place from time to time will likely affect the rate of our future growth in net sales and earnings from operations.

     We currently provide BPO services to a limited number of major brand-name manufacturers, primarily in the IT and consumer electronics industries. For the year ended December 31, 2004, one outsourcing client, IBM, accounted for approximately 60% of Direct Alliance’s net sales and our three largest outsourcing clients accounted for approximately 88% of net sales. For a discussion of risks associated with 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 a limited number of outsourcing clients,” in Item 7 of this report.

Growth Strategy

     Our goal is to be a leading provider of BPO services by:

     Enhancing Existing Client Relationships and Increasing Industry Penetration. We currently provide BPO services to a limited number of large manufacturers, primarily in the IT and consumer electronics industries, and seek to become the system of record for all direct channel sales with each of our existing clients by:

	•	expanding the breadth of services offered under current programs;
	•	seeking to become the most effective sales team in our clients’ organization, further supporting the benefit of outsourcing sales processes to us;
	•	increasing business development efforts to obtain additional clients within the industry, and
	•	promoting our outsourced services, including our multi-lingual, multi-currency system capabilities, to other divisions and product lines within our clients’ organizations.

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     Conducting Channel-centric Business within the IT and Consumer Electronic Industries. While we continue to see opportunity in providing direct program solutions, we are experiencing an increase in demand for channel programs designed to enhance manufacturers’ relationships with their channel partners, such as direct marketers. Opportunities exist to provide lead and demand generation activities, channel partner support and more cost efficient supply chain solutions to manufacturers. We are responding to these opportunities by:

	•	providing our clients with channel partner support through BPO programs that will generate incremental channel opportunities; motivating and supporting existing channel partners to sell our clients’ product lines; and providing a system that measures the programs’ return on investment to our client;
	•	utilizing our demand generation capabilities and data analytics to produce a more cost effective channel solution;
	•	offering physical distribution and virtual supply chain solutions to deliver a more cost effective and responsive supply model for our clients;
	•	utilizing our sales organization to identify business opportunities and drive sales through our clients’ channel partners; and
	•	providing both service and dedicated reseller programs for our clients based on their specific needs.

     Marketing Activities. Based on recent indicators supporting potential increased demand in IT spending and our strong performance history with our current clients, we believe there will continue to be growth opportunities within our current client programs as well as opportunities to obtain new clients in the IT, software and consumer electronics industries. Marketing efforts to target prospective clients include the use of proactive outbound telesales, traditional advertising, electronic and direct mail programs. We also maintain a website featuring our outsourced business process services at www.directalliance.com.

Industry

     In response to competitive pressure and market demands for increased productivity and reduced costs, the BPO market is rapidly growing and represents an attractive niche within the broad “Services” sector. BPO is heavily affected by offshore and near-shore influences including Canada, India, China, the Philippines and other developing countries with lower wage costs. Although international wages and tax preferences are a factor when clients consider BPO for reducing costs, we believe that our ability to provide customized, integrated solutions competes well on both a cost-only basis and on total client service value. We do not currently have offshore BPO operations.

     As more manufacturers desire swift access to the direct market and channel solutions to drive partner sales, we believe they may elect to partner with BPO providers to achieve cost-effective solutions. We believe that we will benefit from industry trends toward outsourcing and that our total cost of operation compares favorably with other industry-leading companies. Additionally, we believe that as businesses increase their familiarity with outsourcing front-office sales and marketing operations, additional opportunities to outsource back-office operations such as distribution, finance and returns management will become more compelling. As a result, we believe companies will look to consolidate their outsourced processes to eliminate redundant costs. Because we have service capabilities that span the full supply chain, we believe we are well positioned to provide cost-effective fully integrated solutions and establish broad and deeply rooted relationships with our clients.

Competition

     The growing BPO market is an industry characterized by intense competition, and we compete with many companies within specific categories (e.g., outbound telesales, fulfillment or direct marketing services). We have seen an increase in competitors in the market, including such companies as PFSweb, Modus Media and Convergys. In many instances, our competition is the in-house operations of our potential clients who have not yet made the decision to outsource a particular business process. We believe that our experience establishing best practices for sales and process management, as well as the technology developed to support our services, differentiates us from competitors, including in-house operations. 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, including manufacturers of products we sell, can negatively affect our business,” in Item 7 of this report.

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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, 2004, we had 3,914 employees as follows:

     We have invested in our employees’ future and our future through an ongoing program of internal and external training. Training programs include new hire orientation, sales training, general industry and computer education, technical training, specific product training and ongoing employee and management development programs. We emphasize on-the-job training and provide our employees and managers with development opportunities through online and classroom training relevant to their needs.

Seasonality

     General economic conditions have an effect on our business and results of operations. We also experience some seasonal trends in the sale of our products and services. For example, sales to the federal government in the United States are often stronger in our third quarter, sales in the United Kingdom to large enterprise and government entities are often stronger in our first quarter, and business customers, particularly large enterprise businesses in the United States, tend to spend more in our fourth quarter as they utilize their remaining capital budget authorizations. Due to the increased significance of our large enterprise business in the United States because of stronger growth rates in sales to this customer group, we expect that consolidated net sales and net earnings may be lower in the first quarter of any year compared to the fourth quarter of the previous year.

Backlog

     Virtually all of our backlog historically has been and continues to be open cancelable purchase orders, and we do not believe that backlog as of any particular date is indicative of future results.

Intellectual Property

     We do not maintain a traditional research and development group, but we do develop and seek to protect a range of intellectual property, including trademarks, service marks, copyrights, domain name rights, trade dress, trade secrets and similar intellectual property. We rely on applicable statutes and common law rights, trade-secret protection and confidentiality and license agreements, as applicable, with employees, clients, vendors and other suppliers and others to protect our intellectual property rights. We have registered a number of domain names and have been issued registrations for our principal trademark. We have also applied for registration of other marks, both in the United States and in select international jurisdictions, and have filed patent applications for certain of our proprietary technology. We may, in the future, license certain of our proprietary intellectual property rights to third parties. It is important for us to work closely with computer product manufacturers and other technology developers to stay abreast of the latest developments in technology in order to improve our internal operations and for the benefit of our clients, and we have established a number of internal centers of excellence to do this. We believe our trademarks and service marks, in particular, have significant value, and we continue to invest in the promotion of our trademarks and service marks and in our protection of them.

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 (the “Exchange Act”), and the reports of beneficial ownership filed pursuant to Section 16(a) of the Exchange Act 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

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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. There were no amendments to our periodic reports in 2004, 2003 and 2002.

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, and some of our face-to-face field account executives conduct business from home offices. We have renewal rights in most of our property leases, and 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 that our facilities in North America will be suitable and adequate for our present purposes, and that the capacity in the majority of our facilities is not fully utilized. We are currently in the process of expanding our 323,000 square foot distribution facility in Hanover Park, Illinois to over 400,000 square feet to accommodate future growth. In the future, we may need to purchase, build or lease additional facilities to meet the requirements projected in our long-term business plan. We are evaluating our facilities in the United Kingdom, specifically in Alperton, to determine if alternative locations would be better suited to our long-term growth plans in the United Kingdom. If we decide to exit the current leases, we may have to continue to make payments under the current leases or pay penalties to cancel the leases.

     Information about sales, distribution, services and administration facilities in use as of December 31, 2004 is summarized in the following table:

     * We have entered into a firm commitment to purchase a building in Bloomingdale, IL for $7,750,000 as disclosed in Note 15 to our Consolidated Financial Statements in Item 8 of this report. This building is owned by the previous owners of an acquired company and has been leased by us since the acquisition date. We expect the sale to be completed in the first half of 2005.

     In addition to those listed above, Insight North America has leased sales offices in various cities across the United States and Canada. For additional information on operating leases, see Note 7 to the Consolidated Financial Statements in Item 8 of this report. We also have several leased facilities in the United Kingdom that are no longer in use due to the integration of previous acquisitions. These properties are not included in the table above.

Item 3. Legal Proceedings

     In July 2002, the Company and certain of our board members and executive officers were named as defendants in four lawsuits in the United States District Court, District of Arizona. The plaintiffs sought class action status to represent all buyers of our common stock from September 3, 2001 through July 17, 2002, and the Court consolidated the lawsuits. On May 11, 2004, the Court granted our motion to dismiss the second amended complaint with prejudice and without leave to amend. Plaintiffs appealed the dismissal to the Ninth Circuit Court of Appeals but withdrew the appeal on August 30, 2004. The case has concluded with no payments to the plaintiffs or their counsel by us or our insurance carriers.

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

     No matters were submitted to a vote of our security holders during our 2004 fourth quarter.

PART II

     Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

     Our common stock trades under the symbol “NSIT” on the Nasdaq National Market. 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, 2005, we had 49,647,989 shares of common stock outstanding held by approximately 134 stockholders of record. This figure does not include an estimate of the number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies.

     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.

Issuer Purchases of Equity Securities

     Although we did not repurchase shares of our common stock during the three-year period ended December 31, 2004, we have repurchased shares of our common stock in the past and may consider doing so again in the future.

Item 6. Selected Financial Data

     The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and the Notes thereto in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report. 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, 2004 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, 2004 and 2003, and for each of the years in the three-year period ended December 31, 2004 and the independent auditors’ report thereon, are included in Item 8 of this report.

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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

18

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Item 8 of this report.

Overview

     We are a leading provider of 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. As of December 31, 2004, we were organized in the following operating segments:

	•	Provider of IT products and services – North America (“Insight North America”);
	•	Provider of IT products and services – United Kingdom (“Insight UK”); and
	•	Business process outsourcing provider (“Direct Alliance”).

     For a business overview, as well as discussions about the operating strategy, growth strategy, industry and competition related to each of our operating segments, see “Business – Operating Segments,” in Item 1 of this report. We evaluate the performance of our operating segments based on results of operations before certain unusual items such as the gain and expenses associated with the sale of PlusNet shares owned by the Company, the tax benefit associated with the reduction in the deferred tax asset valuation allowance, severance and restructuring expenses, income resulting from reductions in liabilities assumed in a previous acquisition, expenses relating to the hiring of our new chief executive officer, the tax effects of these items and other tax adjustments. Reconciliations of segment results of operations to consolidated results of operations can be found in Note 17 to the Consolidated Financial Statements in Item 8 of this report.

     Net sales for the year ended December 31, 2004 increased 7% to $3.1 billion from $2.9 billion for the year ended December 31, 2003. Net earnings for the year ended December 31, 2004 increased 113% to $80.5 million from $37.8 million for the year ended December 31, 2003. For the year ended December 31, 2004, diluted earnings per share increased 102% to $1.64 from $0.81 for the year ended December 31, 2003. Net earnings and diluted earnings per share for the year ended December 31, 2004 included certain special items, including:

	•	gain on the sale of PlusNet shares of $23.7 million, $18.3 million net of taxes;
	•	non-tax deductible bonus expenses of approximately $3.2 million, including employer taxes, related to a management incentive plan with the top executives at PlusNet;
	•	severance and restructuring expenses of $2.4 million, $1.5 million net of taxes, related to the severance associated with the elimination of certain sales, support and management functions;
	•	expenses of $1.3 million, $0.8 million net of taxes, associated with hiring a new Chief Executive Officer (“CEO”), Richard Fennessy, including fees paid to the search firm, a signing bonus and relocation expenses pursuant to Mr. Fennessy’s employment agreement;
	•	reversal of $3.6 million, $2.4 million net of taxes, of net liabilities assumed in previous acquisitions;
	•	tax benefit of $5.5 million recorded for the reduction in the deferred tax valuation allowance due to consistent profitability of our operations in the UK and the expected future profitability of these operations; and
	•	tax benefit of $1.3 million for valuation allowance reversals on depreciation allowance carry forwards and bad debt provisions.

     Insight North America reported year over year growth in net sales of 5% for the year ended December 31, 2004. The sales growth was due primarily to the completion of the IT system conversion in the first quarter of 2004, which allowed a renewed focus on our customers, and to businesses increasing their IT spending in a generally improving economy. The growth rates were stronger in sales to large enterprise and public sector customers compared to SMB customers, although the focus in 2005 will be to accelerate sales growth to the SMB customer group. Internal initiatives continue to focus on ways to deliver technology solutions to business customers more effectively and efficiently. We are designing and implementing enhancements to our systems and website to increase our customers’ ease of doing business with us and to further enhance the productivity of our account executives and support personnel.

     Insight UK continued to focus on increasing awareness of our business model with SMB and public sector customers. Net sales for the year ended December 31, 2004 increased 19% over the prior year and the fourth quarter of 2004 represented Insight UK’s eighth consecutive quarter of operating profitability.

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     Direct Alliance net sales and earnings from operations for the year ended December 31, 2004 declined 3% and 19%, respectively. The decline was due primarily to the wind-down of a client relationship that ended, as scheduled, in May 2003. Additionally, we renegotiated fee structures as part of multi-year contract renewals with two of Direct Alliance’s largest clients. Although new programs typically take several months to contribute to profitability, we were pleased that Direct Alliance successfully added three new clients during 2004.

     Our discussion and analysis of financial condition and results of operations is intended to assist in the understanding of our consolidated financial statements, the changes in certain key items in those consolidated financial statements from year to year, the primary factors that contributed to those changes, as well as how certain critical accounting policies and estimates affect our consolidated financial statements.

Critical Accounting Policies and Estimates

General

     Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales 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. Members of our senior management have discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results, however, may differ from estimates we have made.

     An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and either different estimates reasonably could have been used, or changes in the accounting estimates are reasonably likely to occur periodically, that could materially affect the consolidated financial statements. We believe the following critical accounting policies reflect our significant estimates and assumptions used in the preparation of our consolidated financial statements.

Sales Recognition

     The majority of our sales are product sales, which are covered by our sales agreements containing our standard terms and conditions. Sales are recognized when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the sales price is fixed and determinable and collectibility is reasonably assured. Usual sales terms are free-on-board (“FOB”) shipping point, meaning title and risk of loss are passed to the customer and delivery has occurred when the product is shipped. Persuasive evidence of the arrangement and fixed and determinable sales prices are documented via written sales contracts, purchase orders or both. Based on these criteria, the majority of our sales represent product sales recognized upon shipment. From time to time, in connection with the sale of products and services, we enter into contracts that contain multiple elements, sales terms of FOB destination, or other 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 the delivered item(s) has stand-alone value to the customer and when to recognize the sale. We recognize sales for delivered items only when all of the following criteria are satisfied:

	•	the delivered item(s) has value to the customer on a stand-alone basis;
	•	there is objective and reliable evidence of the fair value of the undelivered item(s); and
	•	if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

     When a sale involves multiple elements, such as sales or products that include services, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when revenue recognition criteria for each element are met. The amount of product and service revenue recognized is impacted by our judgments as to whether an arrangement includes multiple elements and, if so, whether vendor-specific objective evidence of fair value exists for those elements. Changes to the elements in an arrangement and our ability to establish vendor-specific objective evidence for those elements could affect the timing of the revenue recognition. For 2004, sales of services represented less than 5% of our net sales. Portions of our services that accompany product are performed in our facilities prior to shipment of the product. In these circumstances, net sales for both the product and services are recognized upon shipment. In other cases, net sales of

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

services are typically negotiated separately and recorded as the services are performed. Net sales attributable to arrangements that include warehousing product for our customers are deferred until the product is shipped.

     We also sell certain third-party service contracts and certain software licenses for which we are not the primary obligor. These sales do not meet the criteria for gross sales recognition because we do not assume the risks and rewards of ownership in the transaction 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 sales of such services should be recorded as gross sales or net sales. Under gross sales recognition, we are the primary obligor and the entire selling price is recorded in sales with our cost to the third party service provider or vendor 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 with no costs of goods sold.

     Presently, the majority of our outsourcing arrangements are service fee based, meaning that we derive net sales based primarily upon a cost plus arrangement in addition to 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 may 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, we 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.

     We make provisions for estimated product returns that we expect to occur under our return policy based upon historical return rates. The reserve for sales returns as of December 31, 2004 and 2003 included $434,000 and $543,000, respectively, for estimated future returns that were recorded as a reduction of our accounts receivable. Should customers return a different amount of product than originally estimated, future net sales are adjusted to reflect historical return rates.

Severance, Restructuring and Acquisition Integration Activities

     We have engaged, and may continue to engage, in severance and restructuring activities which require us to utilize significant estimates related primarily to employee termination benefits, estimated costs to terminate leases or remaining lease commitments on unused facilities, net of estimated subleases. Should the actual amounts differ from our estimates, adjustments to severance and restructuring expense in subsequent periods would be necessary. Facilities based costs recorded in 2002 represent contractual payments under long-term leases for which we are actively pursuing opportunities to negotiate a termination of these leases and have recorded the obligations as current accrued liabilities. We expect these restructuring activities to have a positive effect on future operating results and liquidity. We do not expect the remaining estimates to increase in the future; however, if we are successful in negotiating early terminations of these leases, the remaining estimates may decrease. A detailed description of our severance, restructuring and acquisition integration activities and remaining accruals for these activities at December 31, 2004 can be found in Note 9 to the Consolidated Financial Statements in Item 8 of this report.

Taxes on Earnings

     Our effective tax rate includes the effect 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 consider past operating results, future market growth, forecasted earnings, historical and projected taxable income, the mix of earnings in the jurisdictions in which we operate, prudent and feasible tax planning strategies and statutory tax law changes 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. In 2004, due to the historical and expected profitability of our UK operations, we reduced the valuation allowance and recorded a tax benefit of

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

$5.5 million. Additional information about the reduction in the valuation allowance can be found in Note 11 to the Consolidated Financial Statements in Item 8 of this report.

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 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) and compares the fair value to the carrying value. If the carrying value exceeds the fair value, an impairment loss is recognized for the difference. This approach uses our estimates of future market growth, forecasted net sales and costs, expected periods the assets will be utilized and appropriate discount rates.

     Annually, during the fourth quarter of each year, we assess whether goodwill is impaired. 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. Determining the fair value of reporting units, as well as identifiable assets and liabilities, uses our estimates of market capitalization allocation, future market growth, forecasted sales and costs and appropriate discount rates. 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. Based on impairment tests performed, there was no impairment of goodwill in fiscal 2004 or 2003. In 2002, we recorded a goodwill impairment charge of $91.6 million, $88.4 million net of taxes, which represented the entire goodwill balance recorded at Insight UK. This impairment resulted from a decline in Insight UK’s operating performance, which caused its book value to exceed its fair value at the time of the assessment. Additional information about our goodwill and goodwill impairment assessments can be found in Note 4 to the Consolidated Financial Statements in Item 8 of this report.

     We identify potential impairment of goodwill through our strategic reviews of our reporting units and operations performed in conjunction with restructuring actions. Deterioration of our business in a geographic region or within a reporting unit in the future could lead to impairment adjustments as such issues are identified. When impairment is identified, the carrying amount of the asset is reduced to its estimated fair value.

Allowances for Doubtful Accounts

     Our accounts receivable balance was $444.8 million and $382.0 million as of December 31, 2004 and 2003, respectively. The allowance for doubtful accounts was $15.5 million and $20.2 million as of December 31, 2004 and 2003, respectively. The allowance is determined using estimated losses on customer receivables based on historical write-offs, evaluation of the aging of the receivables and the current economic environment. Should our customers’ circumstances change or 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. See further information on our allowance for doubtful accounts in Note 16 to the Consolidated Financial Statements in Item 8 of this report.

Write-downs of 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 products or product lines can affect our decision to write down inventories. If our assumptions about future demand change or actual market conditions are less favorable than those projected, additional write-downs of inventories may be required. In any case, actual values could be different from those estimated.

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

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

estimates and assumptions, especially with respect to acquired intangible assets. 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 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.

Consideration Received From Vendors

     We receive payments and credits from vendors, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor,” which we adopted January 1, 2003, vendor consideration received pursuant to volume sales incentive programs is recognized as a reduction to costs of goods sold. Vendor consideration received pursuant to volume purchase incentive programs is allocated to inventories based on the applicable incentives from each vendor and is recorded in cost of goods sold as the inventory is sold. Vendor consideration received pursuant to shared marketing expense programs is recorded as a reduction of the related selling and administrative expenses in the period the program takes place only if the consideration represents a reimbursement of specific, incremental, identifiable costs. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of costs of goods sold.

RESULTS OF OPERATIONS

     The following table sets forth for the period presented certain financial data as a percentage of net sales for the years ended December 31, 2004, 2003 and 2002:

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

2004 Compared to 2003

     Net Sales. Net sales for the year ended December 31, 2004 increased 7% to $3.1 billion from $2.9 billion for the year ended December 31, 2003. Net sales by operating segment for the years ended December 31, 2004 and 2003 were as follows (in thousands):

     Insight North America’s sales increased for the year ended December 31, 2004 by 5% to $2.6 billion from $2.4 billion for the year ended December 31, 2003. The sales growth was due primarily to the businesses increasing their IT spending in a generally improving economy and the completion of the IT system conversion in the first quarter of 2004 which allowed a renewed focus on customers. The growth rates were stronger in sales to large enterprise and public sector customers compared to SMB customers, although the focus in 2005 will be to accelerate sales growth to the SMB customer group. Insight North America had 1,106 account executives at December 31, 2004 compared with 1,194 at December 31, 2003. The decrease in account executives was due to planned headcount reductions, based on performance, in order to reduce costs and increase the productivity of the remaining account executives.

     Insight UK’s net sales increased 19% to $451.2 million for the year ended December 31, 2004 from $379.8 million for the year ended December 31, 2003. Increases in the British pound sterling exchange rates accounted for $50.2 million of this increase. Excluding the effect of fluctuations in the British pound sterling exchange rates, net sales increased 6% compared to 2003. The increase in net sales for 2004 compared to 2003 was due primarily to increasing productivity of account executives and increases in sales and demand from SMB and public sector customers. Insight UK had 298 account executives at December 31, 2004 compared to 232 at December 31, 2003. The increase is due to the addition of account executives during the year ended December 31, 2004, offset by planned headcount reductions, based on performance.

     Net sales by product category for Insight North America and Insight UK were as follows for the years ended December 31, 2004 and 2003:

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     The largest product category continues to be computers, representing 34% of product net sales in 2004 for Insight North America and 31% of product net sales in 2004 for Insight UK. Overall, our product mix is relatively consistent with the prior year’s sales. Growth in desktops, servers and monitors has been fueled by businesses initiating refresh cycles of their IT products. Growth in notebooks and PDAs and network and connectivity in 2004 was strong as businesses continue to focus on increasing the mobility of their workforces. We also continue to see increased demand for products that provide solutions to customers’ security and data retention needs. Printers as a percentage of net sales in Insight North America declined due primarily to decreases in average selling prices and new competitors in the market place. All other product categories, as a percentage of product net sales, were fairly consistent with the prior year.

     Direct Alliance’s net sales of $74.1 million for the year ended December 31, 2004 were down 3% compared to $76.3 million for the year ended December 31, 2003. Net sales declined in 2004 due primarily to the wind-down of one client relationship that ended, as scheduled, in May 2003. This client represented approximately 3% of Direct Alliance’s net sales for the year ended December 31, 2003, offset partially by an increase in pass-through product sales. Direct Alliance’s net sales are concentrated with a few manufacturers of IT products. For the year ended December 31, 2004, Direct Alliance’s largest outsourcing client, IBM, accounted for 60% of Direct Alliance’s net sales compared to 65%, respectively, for the year ended December 31, 2003. For the year ended December 31, 2004, Direct Alliance’s top three outsourcing clients accounted for approximately 88% of Direct Alliance’s net sales compared to 90% for the year ended December 31, 2003. In certain of Direct Alliance customer contracts, there are provisions that provide for payments to Direct Alliance by its clients of the higher of the fees as calculated or a specified guaranteed service fee amount. For the year ended December 31, 2004, this fee was $162,000 compared with $461,000 for the year ended December 31, 2003. The decrease in this fee is related to decreased performance fees related to a renegotiated fee structure as part of multi-year contract renewal with Direct Alliance’s largest client.

     Gross Profit. Gross profit increased 9% to $370.4 million in 2004 from $339.5 million in 2003. As a percentage of net sales, gross profit increased from 11.8% for the year ended December 31, 2003 to 12.0% for the year ended December 31, 2004. Our gross profit and gross profit as a percent of net sales by operating segment for the years ended December 31, 2004 and 2003 were as follows (in thousands):

     Insight North America’s gross profit increased for the year ended December 31, 2004 by 8% to $289.6 million from $267.3 million for the year ended December 31, 2003. As a percentage of net sales, gross profit increased from 11.0% for the year ended December 31, 2003 to 11.3% for the year ended December 31, 2004. Product gross margin was consistent with prior year as internal initiatives to increase gross margin have been successful but offset by the increase in sales to large enterprise customers, which are typically at lower product margins. The overall increase in gross profit as a percentage of net sales was the result of a surge in referral fees from Microsoft for enterprise agreement renewals, decreases in the write-downs of inventories due to enhanced inventory management policies and procedures; and increases in supplier reimbursements. These increases were offset partially by decreases in the gross margin from sales of services.

     Insight UK’s gross profit increased for the year ended December 31, 2004 by 21% to $61.6 million from $50.8 million for the year ended December 31, 2003. As a percentage of net sales, gross profit increased from 13.4% for the year ended December 31, 2003 to 13.7% for the year ended December 31, 2004. The overall increase was the result of increases in gross margin from sales of services, supplier discounts and freight margin and decreases in the write-downs of inventories due to enhanced inventory management policies and procedures. These increases were offset partially by a decrease in supplier reimbursements and an increase in the percentage of sales to public sector customers, which are typically at lower gross margins.

     Direct Alliance’s gross profit decreased for the year ended December 31, 2004 to $19.2 million from $21.3 million for the year ended December 31, 2003. As a percentage of net sales, gross profit decreased from 28.0% for the year ended December 31, 2003 to 25.9% for the year ended December 31, 2004. The overall decrease is due primarily to renegotiated fee structures as part of multi-year contract renewals with two of Direct Alliance’s largest clients and the wind-down of one client relationship that ended, as scheduled, in May 2003.

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     Operating Expenses.

     Selling and administrative expenses. Selling and administrative expenses increased 2%, to $285.7 million in 2004 from $279.5 million in 2003, but decreased as a percent of net sales to 9.3% in 2004 from 9.7% in 2003. Selling and administrative expenses as a percent of net sales by operating segment for the years ended December 31, 2004 and 2003 were as follows (in thousands):

     Insight North America’s selling and administrative expenses decreased for the year ended December 31, 2004 by 1% to $226.0 million from $228.1 million for the year ended December 31, 2003. As a percentage of net sales, selling and administrative expenses decreased from 9.4% for the year ended December 31, 2003 to 8.8% for the year ended December 31, 2004. The overall decrease was primarily due to cost savings from completing the system conversion which eliminated accelerated depreciation of $6.8 million on the old IT system, stay bonuses and redundant personnel. Also contributing to the decrease was an increase in net sales, reductions in bad debt expense and a continued focus on cost controls, which resulted in some headcount reductions. These decreases were partially offset by increased investments in 2004 on marketing, business development and hiring of senior management personnel.

     Insight UK’s selling and administrative expenses increased for the year ended December 31, 2004 by 17% to $53.5 million from $45.9 million for the year ended December 31, 2003. As a percentage of net sales, selling and administrative expenses decreased from 12.1% for the year ended December 31, 2003 to 11.8% for the year ended December 31, 2004. The decrease as a percentage of sales is due primarily to reduced bad debt expense and increases in supplier reimbursements that are specifically offset against marketing expenditures offset partially by increases in personnel costs related to recruitment and headcount increases. Additionally, in the year ended December 31, 2004, Insight UK recorded bonus expenses of $3.2 million, including employer taxes, related to a management incentive plan with the top executives at PlusNet. The management incentive plan compensated them, as a group, with an equivalent to approximately 12.5% of the gain, after certain adjustments, related to our sales of PlusNet shares.

     Direct Alliance’s selling and administrative expenses increased for the year ended December 31, 2004 by 14% to $6.3 million from $5.6 million for the year ended December 31, 2003. As a percentage of net sales, selling and administrative expenses increased from 7.3% for the year ended December 31, 2003 to 8.5% for the year ended December 31, 2004. The overall increase was due primarily to the loss of reimbursement of operating expenses from the client whose program ended in May 2003 as well as increased expenses related to new business development efforts.

     Severance and Restructuring Expenses. During the year ended December 31, 2004, Insight North America, Insight UK and Direct Alliance recorded $1,975,000, $377,000 and $83,000, respectively, of severance and restructuring expenses attributable to the elimination of certain sales, support and management functions. These amounts include $1.6 million recorded in connection with the retirement of P. Robert Moya, Executive Vice President, Chief Administrative Officer, General Counsel and Secretary and our related agreement to terminate his employment agreement without cause. During the year ended December 31, 2003, Insight North America recorded $2.9 million in restructuring expenses associated with costs incurred to close Insight North America’s distribution facility in Indiana and severance associated with the elimination of certain support and management positions. We closed the Indiana facility in order to consolidate warehouse and distribution facilities in Illinois, in accordance with an acquisition integration plan. These restructuring expenses primarily represented costs associated with terminated employees, abandoned assets and remaining lease obligations. Also, during the year ended December 31, 2003, Insight UK recorded $543,000 of restructuring expenses relating to severance associated with the elimination of service technicians and certain support and management functions. See further discussion in Note 9 to the Consolidated Financial Statements in Item 8 of this report.

     Reductions in Liabilities Assumed in Previous Acquisitions. During the years ended December 31, 2004 and 2003, Insight UK settled certain liabilities assumed in previous acquisitions for $3.6 million and $2.5 million, respectively, less than the amounts originally recorded. The tax expense recorded during the year ended December 31, 2004 related to this income was only $272,000 due to the release of the valuation allowance on the related deferred tax asset. The income

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

resulting from the reductions in liabilities assumed in previous acquisitions during the year ended December 31, 2003 was not taxable. See Note 8 to the Consolidated Financial Statements in Item 8 of this report for further discussion.

     Interest Income. Interest income of $1.8 million and $833,000 for the years ended December 31, 2004 and 2003, respectively, was generated through short-term investments. The increase in interest income is due to increases in the amount of cash invested in short-term investments and increases in interest rates earned on those investments during the year ended December 31, 2004.

     Interest Expense. Interest expense of $2.0 million and $2.6 million for the years ended December 31, 2004 and 2003, respectively, primarily relates to borrowings under our financing facilities. The decrease in interest expense is due to a reduction in the amounts outstanding under our interest-bearing financing facilities offset by increases in interest rates during the year ended December 31, 2004.

     Other Expenses, Net. Other expenses, net, decreased to $893,000 for the year ended December 31, 2004 from $2.5 million for the year ended December 31, 2003 and consist primarily of bank fees associated with our financing facilities and cash management and miscellaneous investment gains or losses. The decrease was due primarily to income from two separate gains on investments that occurred during the year ended December 31, 2004. Insight UK sold a building for a gain of $328,000 and Direct Alliance realized a gain of $516,000 from selling stock upon the exercise of stock options that were received from a client several years ago as compensation for a note payable extension. For the year ended December 31, 2004, we also recorded non-operating expenses of $400,000 representing our percentage ownership of the losses of our equity method investee, Executive Technology, Inc., fka ExecTechDirect Technology, Inc. (“ET”), and the write-down of our investment to $0, which represents our estimate of fair value of the investment at December 31, 2004. See Note 5 to the Consolidated Financial Statements in Item 8 of this report for further discussion.

     Income Tax Expense. Our effective tax rates applicable to continuing operations for the year ended December 31, 2004 and 2003 were 29.2% and 34.6%, respectively. Tax expense for the year ended December 31, 2004 was reduced due primarily to a $5.5 million tax benefit recorded as a result of a decrease in the deferred tax valuation allowance for our United Kingdom operations and income resulting from the reduction of certain Insight UK liabilities assumed in connection with a previous acquisition not being taxable. These decreases were partially offset by increases in the percentage of taxable income in the United States, which is taxed at higher rates, and increases in non-deductible expenses.

     Discontinued operation.

     Earnings from discontinued operation. In 2004, we sold our entire investment in PlusNet. Accordingly, the results of operations attributable to PlusNet are disclosed as a discontinued operation. The following amounts for the years ended December 31, 2004 and 2003 represent PlusNet’s results of operations that we consolidated through July 14, 2004 (the date we reduced our ownership in PlusNet from 95% to 45%), amounts we reported as income from equity method investee, included in other income, from July 15, 2004 through December 14, 2004 (the date we sold our remaining investment), and the gain on the sales of our shares of PlusNet. The following amounts have been segregated from continuing operations and reflected as discontinued operation (in thousands):

     See Note 10 to the Consolidated Financial Statements in Item 8 of this report for further discussion.

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

2003 Compared to 2002

     Net Sales. Net sales for the year ended December 31, 2003 increased 1% to $2.89 billion from $2.88 billion for the year ended December 31, 2002. Net sales by segment for the years ended December 31, 2003 and 2002 were as follows (in thousands):

     Insight North America’s sales increased for the year ended December 31, 2003 by 1% to $2.43 billion from $2.40 billion for the year ended December 31, 2002. This increase was attributable to net sales from a company that was acquired on April 25, 2002, and, therefore, included in only eight months of operations in 2002 compared to twelve months of 2003. This increase was partially offset by a decline in overall IT spending in an uncertain economic and international environment. Additionally, net sales of Microsoft software products were stronger in 2002 due primarily to the July 31, 2002 deadline for Microsoft’s upgrade programs, which created an increased demand for Microsoft products. There was no similar catalyst for software sales in 2003. Insight North America had 1,194 account executives at December 31, 2003 and 1,268 at December 31, 2002. The decrease in account executives was due to planned headcount reductions, based on performance, in order to reduce costs and increase productivity of remaining account executives.

     Insight UK’s net sales decreased by 1%, to $379.8 million for the year ended December 31, 2003 from $382.3 million in 2002. The decrease is due primarily to a weakened IT spending environment over the past year, particularly in the larger corporate enterprises, partially offset by increases in the British pound sterling exchange rates. These increases in exchange rates offset $30.7 million of the decrease in net sales from 2002 to 2003. Additionally, net sales of Microsoft software products were stronger in 2002 due primarily to the July 31, 2002 deadline for Microsoft’s upgrade programs, which created an increased demand for Microsoft products. There was no similar catalyst for software sales in 2003. Insight UK had 232 account executives at December 31, 2003 compared to 262 at December 31, 2002. The decrease in account executives was due to planned headcount reductions, based on performance, in order to reduce costs and increase productivity of remaining account executives.

     Net sales by product category for Insight North America and Insight UK were as follows for the years ended December 31, 2003 and 2002:

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     The largest product category continues to be computers, representing 33% of product net sales in 2003 for Insight North America and 31% of product net sales in 2003 for Insight UK. Growth in notebooks and PDAs in 2003 was strong as businesses focused on increasing the mobility of their workforces. The increase in desktop and server sales in 2003 is due primarily to refresh cycles initiated by businesses. Additionally, net sales of Microsoft software products were strong in 2002 due primarily to the July 31, 2002 deadline for Microsoft’s upgrade programs. There was no similar catalyst for software sales in 2003 and that contributed to a decline in software sales from 2002 levels. All other product categories, as a percentage of product net sales, were fairly consistent with the prior years, and we continue to see increased demand for products that provide solutions to customers’ security and data retention needs.

     Direct Alliance’s net sales decreased by 21% to $76.3 million for the year ended December 31, 2003, compared to $95.9 million for the year ended December 31, 2002 due primarily to the wind-down of one client relationship that ended, as scheduled, during the second quarter of 2003. This client represented approximately 3% of Direct Alliance’s net sales for the year ended December 31, 2003 and 14% of Direct Alliance’s net sales for the year ended December 31, 2002. Additionally, in the year ended December 31, 2003, net sales decreased as a result of a reduction in freight services that Direct Alliance provides to its clients and a lower level of pass-through product sales compared to the same periods in 2002. Direct Alliance’s net sales are concentrated with a select few manufacturers of IT products. For the year ended December 31, 2003, Direct Alliance’s largest outsourcing client accounted for approximately 65% of Direct Alliance’s net sales compared to 59% for year ended December 31, 2002. For the year ended December 31, 2003, Direct Alliance’s top three outsourcing clients accounted for approximately 90% of Direct Alliance’s net sales compared to 93% for the year ended December 31, 2002.

     Gross Profit. Gross profit increased 3%, to $339.5 million in 2003 from $328.4 million in 2002. As a percentage of sales, gross margin increased to 11.8% for the year ended December 31, 2003 from 11.4% for the year ended December 31, 2002. Our gross profit and gross profit as a percent of net sales by segment for the years ended December 31, 2003 and 2002 were as follows (in thousands):

     Insight North America’s gross profit increased for the year ended December 31, 2003 by 3% to $267.3 million from $260.0 million for the year ended December 31, 2002. As a percentage of net sales, gross profit increased from 10.8% for the year ended December 31, 2002 to 11.0% for the year ended December 31, 2003. The overall increase was the result of increases in product margins on sales to SMB customers, a change in accounting classification for certain funds received from vendors, increases in service sales, which generally have a higher gross margin than product sales and decreases in the write-downs of inventories.

     Insight UK’s gross profit increased for the year ended December 31, 2003 by 8% to $50.8 million from $47.2 million for the year ended December 31, 2002. As a percentage of net sales, gross profit increased from 12.3% for the year ended December 31, 2002 to 13.4% for the year ended December 31, 2003. The overall increase was the result of a change in accounting classification for certain funds received from vendors, increases in product and freight margin and decreases in the write-downs of inventories.

     The increases in Insight North America and Insight UK were offset partially by lower gross margins on sales to large corporate customers added with the acquisition of Comark, decreases in supplier reimbursements for Insight North America and Insight UK and decreases in service sales, which generally have a higher gross margin than product sales, for Insight UK.

     Effective January 1, 2003, the Company adopted EITF Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor.” As a result of the adoption of this pronouncement, we recorded approximately $9.6 million of vendor consideration as a reduction to costs of goods sold during the year ended December 31, 2003 that, prior to the adoption, would have been classified as a reduction of selling and administrative expenses. For the year ended December 31, 2003, the change in classification resulted in a 0.34% increase in gross margin and a corresponding increase in selling and administrative expenses as a percentage of net sales compared to the prior classification

     Direct Alliance’s gross profit increased marginally for the year ended December 31, 2003 to $21.3 million from $21.2 million for the year ended December 31, 2002. As a percentage of net sales, gross profit increased from 22.1% for the year ended December 31, 2002 to 28.0% for the year ended December 31, 2003. The overall increase is due to higher fixed

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

performance fees and guarantees from the Direct Alliance client whose program ended in the second quarter of 2003 and an existing client program yearly performance guarantee that did not occur in 2002.

     Operating Expenses.

     Selling and administrative expenses. Selling and administrative expenses increased 12% to $279.5 million in 2003 from $249.0 million in 2002, and increased as a percent of net sales to 9.7% in 2003 from 8.7% in 2002. Selling and administrative expenses as a percent of net sales by segment for the years ended December 31, 2003 and 2002 were as follows (in thousands):

     Insight North America’s selling and administrative expenses increased for the year ended December 31, 2003 by 16% to $228.1 million from $196.9 million for the year ended December 31, 2002. As a percentage of net sales, selling and administrative expenses increased to 9.4% for the year ended December 31, 2003 from 8.2% for the year ended December 31, 2002. The overall increase in selling and administrative expenses as a percentage of net sales was due primarily to additional costs, including stay bonuses, associated with maintaining duplicate support departments until the IT system conversion and final integration of an acquired company in North America and a change in accounting classification of certain funds received from vendors. In addition, in 2003, we accelerated the depreciation of certain software assets due to our decision to implement a new IT system as part of the integration of an acquired company. We determined that the old IT system would no longer be used after December 31, 2003, which shortened its estimated useful life and, in accordance with SFAS No. 144, increased the depreciation that was recorded in 2003 by approximately $6,800,000.

     These increases in expenses were offset partially by expense reductions resulting from the continuing integration of Comark’s operations into the operations of Insight North America, cost cutting initiatives and decreases in bad debt expense and increased capitalization of salaries and consultant fees in connection with the IT systems conversion.

     Insight UK’s selling and administrative expenses decreased for the year ended December 31, 2003 by 3% to $45.9 million from $47.3 million for the year ended December 31, 2002. As a percentage of net sales, selling and administrative expenses decreased to 12.1% for the year ended December 31, 2003 from 12.4% for the year ended December 31, 2002. The overall decrease in selling and administrative expenses as a percentage of net sales was due primarily to a change in accounting classification of certain funds received from vendors, cost cutting initiatives and decreases in bad debt expense.

     Direct Alliance’s selling and administrative expenses increased for the year ended December 31, 2003 by 15% to $5.6 million from $4.8 million for the year ended December 31, 2002. As a percentage of net sales, selling and administrative expenses increased to 7.3% for the year ended December 31, 2003 from 5.0% for the year ended December 31, 2002. The overall increase in selling and administrative expenses as a percentage of net sales was due primarily to the loss of reimbursement of operating expenses from the client whose program ended in the second quarter of 2003.

     Severance and Restructuring Expenses. During the year ended December 31, 2003, Insight North America recorded $2.9 million in restructuring expenses associated with costs incurred to close Insight North America’s distribution facility in Indiana and severance associated with the elimination of certain support and management positions. We closed the Indiana facility in order to consolidate warehouse and distribution facilities in Illinois, in accordance with the plan to integrate the acquired company. These restructuring expenses primarily represented costs associated with terminated employees, abandoned assets and remaining lease obligations. Also, during the year ended December 31, 2003, Insight UK recorded $543,000 of restructuring expenses relating to severance associated with the elimination of service technicians and certain support and management functions. During the year ended December 31, 2002, we approved and initiated plans to restructure the operations of Insight UK. The restructuring replaced top Insight UK management, prioritized activities to specific customer segments, eliminated certain duplicative activities and reduced the cost structure to better align operating expenses with existing general economic conditions. Consequently, we recorded approximately $1.5 million of related costs. See further discussion in Note 9 to the Consolidated Financial Statements in Item 8 of this report.

     Reductions in Liabilities Assumed in Previous Acquisition. During the year ended December 31, 2003, Insight UK settled certain liabilities assumed in the acquisition of Action in late 2001 for $2.5 million less than the amounts originally recorded. Normally, these items would be recorded as a reduction to goodwill. However, Insight UK recorded a goodwill

31

INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

impairment charge during the fourth quarter of 2002 which eliminated its entire goodwill balance; therefore, the $2.5 million reduction in assumed liabilities is recorded in the statement of operations. The income resulting from the reduction in assumed liabilities was not taxable.

     Goodwill Impairment. Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” under which goodwill is no longer amortized but instead is assessed for impairment at least annually. Goodwill was tested for impairment upon adoption of SFAS No. 142 as of January 1, 2002 with no resulting impairment of goodwill. We completed our annual assessment of the impairment of goodwill during the fourth quarter of 2002. As a result of the decline in Insight UK’s operating performance, Insight UK’s book value exceeded its market value resulting in an impairment of goodwill. Based on results of the annual assessment, we recorded a non-cash goodwill impairment charge of $91.6 million, $88.4 million net of taxes, which represented the entire goodwill balance recorded at Insight UK. See further discussion in Note 4 to the Consolidated Financial Statements in Item 8 of this report.

     Interest Income. Interest income of $833,000 and $381,000 for the years ended December 31, 2003 and 2002, respectively, was generated through short-term investments. The increase in interest income in 2003 is due to the increase in cash invested in the United Kingdom at higher interest rates than the United States, offset partially by declining interest rates on short-term investments in the United States.

     Interest Expense. Interest expense of $2.6 million and $3.6 million for the years ended December 31, 2003 and 2002, respectively, primarily relates to borrowings under our financing facilities, which were used to finance an acquisition during 2002. Interest expense has decreased due to decreases in interest-bearing debt incurred and assumed in connection with the acquisition and decreases in interest rates.

     Other Expenses, Net. Other expenses, net, increased to $2.5 million from $1.4 million for the years ended December 31, 2003 and 2002, respectively, and consists primarily of bank fees associated with financing arrangements and cash management. The increase is due primarily to prepayment penalties of $628,000 and written off capitalized loan origination fees of $173,000 associated with the prepayment of building mortgages in 2003.

     Income Tax Expense. Our effective tax rate from continuing operations for the year ended December 31, 2003 and 2002 was 34.6% and (124.3%), respectively. The negative tax rate for 2002 was due to the inability to recognize a tax benefit on the majority of the goodwill impairment charge. Excluding the impairment of goodwill, net of taxes, the adjusted effective tax rate for 2002 was 38.2%. The effective tax rate in 2003 periods was reduced because:

	•	income resulting from the reduction of certain Insight UK liabilities assumed in connection with a previous acquisition was not taxable;
	•	a tax benefit relating to a UK foreign currency exchange loss in conjunction with an intercompany debt-to-equity conversion was realized;
	•	net earnings for our United Kingdom operations, which are taxed at lower rates than the United States, increased; and
	•	Canadian statutory tax rates were reduced.

These reductions were offset partially by higher effective state income tax rates due to the acquisition of Comark in April 2002, corporate reorganization changes in September 2003 and increases in partially non-deductible expenses, such as meals and entertainment.

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INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     Discontinued operation.

     Earnings from discontinued operation. In 2004, we sold our entire investment in PlusNet. Accordingly, the results of operations attributable to PlusNet are disclosed as a discontinued operation. The following amounts for the years ended December 31, 2003 and 2002 represent PlusNet’s results of operations that we historically consolidated. The following amounts have been segregated from continuing operations and reflected as discontinued operation (in thousands):

     See Note 10 to the Consolidated Financial Statements in Item 8 of this report for further discussion.

Liquidity and Capital Resources

     The following table sets forth for the period presented certain consolidated cash flow information for the years ended December 31, 2004, 2003 and 2002 (in thousands):

Cash and Cash Flow

     Our cash balances are held in the United States, Canada and the United Kingdom, with the majority in the United Kingdom. The cash held in Canada and the United Kingdom could be repatriated to the United States, but would be subject to United States federal income taxes, less applicable foreign tax credits. Our present intent is that the cash balances will remain in these countries for future growth and investments, and we will meet any liquidity requirements in the United States through ongoing cash flows, external borrowings or both.

     In 2004, the Financial Accounting Standards Board (“FASB”) released FASB Staff Position No. 109-2 (“FSP 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” which provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. We have not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

33

INSIGHT ENTERPRISES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     Our primary use of cash in the past few years has been to fund our working capital requirements, capital expenditures and acquisitions.

     Net cash provided by operating activities. Cash flows from operations for the years ended December 31, 2004 and 2003 were $13.2 million and $60.0 million, respectively. In 2004, cash flows from operations resulted primarily from net earnings before depreciation and the gain on the sale of investment in PlusNet, offset by an increase in accounts receivable and inventories due to increased sales compared to the prior year. Cash flows from operations for the year ended December 31, 2003 resulted primarily from net earnings before depreciation, a decrease in accounts receivable and an increase in customer payments in advance of shipment, offset by an increase in inventories and a decrease in accounts payable. The decrease in accounts receivable at December 31, 2003 was primarily due to lower sales in the fourth quarter of 2003 compared to the fourth quarter of 2002. The increase in customer payments in advance of shipment was due to payments received from customers for inventory segregated pursuant to binding customer contracts for which net sales will be recognized when the sales recognition criteria are met. The increase in inventories at December 31, 2003 was due to increases in opportunistic purchases, increases in inventories of certain categories due to anticipated product shortages, changes in a manufacturer’s buying programs, and an increase in inventories to service larger corporate customers. The decrease in accounts payable is due to timing of payments at year-end.

     The $3.1 million increase in receivables from equity method investee primarily represented receivables from ET, an equity method investee, for amounts due to Insight North America for products purchased. This balance is secured by certain ET accounts receivable.

     Our consolidated cash flow operating metrics for the years ended December 31, 2004, 2003 and 2002 are as follows: