UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2005

or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                      .

Commission File Number: 0-25092

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:

Title of each class		Name of each exchange on which registered
None		N/A

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 is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ                 No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o                 No þ

     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.

Yes þ                 No o

     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. þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ                 Accelerated Filer o                 Non-accelerated Filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                 No þ

     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, 2005, the last business day of the Registrant’s most recently completed second fiscal quarter, was $960,534,199.

     The number of outstanding shares of the Registrant’s common stock on February 10, 2006 was 48,013,356.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement relating to its 2006 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, non-operating income and expenses or net earnings; projections of capital expenditures and growth; hiring plans; plans for future operations; the availability of financing and our needs or plans relating thereto; plans relating to our products and services; the effect of new accounting principles; benefits and expenses relating to restructuring activities and employee terminations; the effect of guaranty and indemnification obligations; the actual or expected outcome of legal proceedings against the Company; 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 information technology industry and/or the economic environment;
	•		our reliance on suppliers for product availability, marketing funds, purchasing incentives and competitive products to sell;
	•		actions of our competitors, including manufacturers of products we sell;
	•		disruptions in our information technology and voice and data networks;
	•		our reliance on a limited number of outsourcing clients;
	•		our failure to comply with the terms and conditions of our public sector contracts;
	•		the risks associated with international operations;
	•		our dependence on key personnel;
	•		the decreased effectiveness of equity compensation resulting from changes in accounting for equity compensation;
	•		our integration and operation of future acquired businesses;
	•		rapid changes in product standards;
	•		our ability to renew or replace short-term financing facilities;
	•		intellectual property infringement claims; and
	•		risks that are otherwise described from time to time in the reports that we file with the SEC, including, but not limited to, the items discussed in “Risk Factors” in Item 1A 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, 2005

TABLE OF CONTENTS

				Page
		PART I
ITEM 1.		Business			1
ITEM 1A.		Risk Factors			17
ITEM 1B.		Unresolved Staff Comments			23
ITEM 2.		Properties			23
ITEM 3.		Legal Proceedings			23
ITEM 4.		Submission of Matters to a Vote of Security Holders			23
		PART II
ITEM 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			24
ITEM 6.		Selected Financial Data			25
ITEM 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
ITEM 7A.		Quantitative and Qualitative Disclosures about Market Risk			42
ITEM 8.		Financial Statements and Supplementary Data			43
ITEM 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			71
ITEM 9A.		Controls and Procedures			71
ITEM 9B.		Other Information			73
		PART III
ITEM 10.		Directors and Executive Officers of the Registrant			73
ITEM 11.		Executive Compensation			73
ITEM 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			73
ITEM 13.		Certain Relationships and Related Transactions			73
ITEM 14.		Principal Accountant Fees and Services			73
		PART IV
ITEM 15.		Exhibits and Financial Statement Schedules			74
SIGNATURES					75
CERTIFICATIONS					79
Exhibit 3.1
Exhibit 21
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

to our clients, helping them enhance their business performance through innovative technology solutions. Historically, we have primarily been engaged in our client’s acquisition cycle once they have substantially determined their IT needs. As a trusted advisor, our goal is to move further up in the acquisition cycle, assisting our clients as they make technology decisions. We believe this will create stronger relationships with our clients, allowing us to serve our clients more effectively, to expand the amount of products and services we sell to each of our current clients and to attract new clients. We believe a solution is defined not by what you sell, but how you sell it. The solution to a business need may be IT products, services or a combination of both. The key to creating the solution is to understand the client’s business need and assist in determining the right IT solution to address that need. Although we have initiatives to increase solution selling in our large enterprise client base, we see an even greater opportunity to sell solutions to SMB clients. IT products are currently sold to the SMB market by a variety of national product resellers, but we believe that no national providers of IT products and services are effectively serving this market as a true solutions provider. 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.

     2005 has been a year of transformation for Insight. We hired, in the fourth quarter of 2004, a new President and Chief Executive Officer of Insight Enterprises, Inc. who brought a depth of industry experience to the Company. Under his leadership, many changes have been made to our business model. The organization structure was flattened, particularly in our United States operations, and new leaders reporting directly to the Chief Executive Officer were hired or promoted in key positions, including: President of Insight’s United States operations; President of Direct Alliance; Chief People Officer; Chief Marketing Officer; and Chief Information Officer. Several changes were also made in the senior sales and services leadership team in Insight’s United States operation. We increased our marketing spend in 2005 approximately 25% over 2004 to help drive brand recognition and awareness of our capabilities. We have also focused our efforts this year on enhancing our relationships with our employees (referred to within the Company and this document as “teammates”), clients and partners. As an example, we believe we have improved our teammate relationships by implementing semi-annual teammate satisfaction surveys, improving benefit offerings, investing in comprehensive training programs, and creating performance management and bonus plans that are aligned throughout the organization. We are also investing substantial resources to improve the skills of our sales teams so that they can successfully transition to the new business model and change their conversations with clients from price and availability to IT solutions based on the client’s business need.

     Our financial goals for 2006 are focused on growing net sales faster than the market and improving our operating margin. To grow net sales faster than the market, we are focused on the following areas:

	•		increasing the number of active SMB clients;
	•		leveraging our services capabilities to enhance profitability, especially within our large enterprise clients;
	•		increasing the share of IT spend within each client;
	•		enhancing sales training and development;
	•		aligning sales and marketing strategies;
	•		leveraging e-commerce capabilities;
	•		increasing the number of account executives; and
	•		driving improvements in sales productivity.

We believe that in order to meet our operating margin improvement targets, we need to both increase our gross margin and lower our selling and administrative expenses as a percentage of net sales. We are focused on the following initiatives that we believe will contribute to improving gross margin:

	•		increasing attach rates for warranties, integration, leasing, accessories and services;
	•		improving growth rates in net sales to SMB clients, which are generally conducted at higher gross margins;
	•		actively managing freight margin tools;
	•		leveraging automated pricing tools; and
	•		developing plans to drive growth of higher margin product categories, like software.

We are focused on the following initiatives that we believe will help lower selling and administrative expenses as a percentage of net sales:

	•		continuing to tighten our management system and focus on expense management throughout the organization;
	•		leveraging the new mySAP Business Suite (“mySAP”) functionality in the second half of 2006 to automate manual processes and adopt best practices;
	•		improving sales-to-support ratios;

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

	•		enhancing our alignment with our key partners to fully leverage our partners’ investments in their Insight relationship; and
	•		reducing our product catalog to feature only high demand products and solutions.

As noted above, one of the primary drivers towards reaching both of these goals is increasing our growth rates in net sales to SMB clients. In the United States in 2005, we experienced above market growth in net sales to large enterprise clients but below market growth in net sales to our SMB clients. It is important for us to improve growth rates to the SMB client base not only to improve overall net sales growth, but to also improve profitability, as sales to SMB clients are generally conducted at higher gross margins than sales to large enterprise clients and result in higher levels of funding from our partners. We will also be upgrading our SAP system to mySAP during the second half of 2006, which we believe will provide us with enhanced IT tools that will assist us in achieving our financial and operating goals.

Operating Strategy

     The key elements of our operating strategy are:

	•		Solutions-oriented business model;
	•		Integrated sales and marketing;
	•		Broad selection of branded products; and
	•		Efficient technology based operations.

      Solutions-Oriented Business Model. This model offers business clients the benefits of complete IT solutions that take advantage of our multiple-vendor product choices, competitive pricing and availability, fast delivery and a vast array of customized services. We continue to transition our business model beyond product fulfillment to include capability to advise our clients on business issues and develop technology solutions to address those issues. We believe this transition is essential to respond to changes in the way businesses plan for, purchase, implement and manage technology. In addition to a sophisticated product fulfillment engine, we offer service capabilities designed to augment our solutions offerings and improve our clients’ business processes. We have the ability to serve as the central project manager for many combinations of IT services a client 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 and asset disposal. We believe we deliver strategic business value to our clients by streamlining IT management and costs. 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 client groups. However, currently, the majority of our service offerings are offered and sold to our large enterprise clients. Our service offerings to SMB clients currently focus primarily on integration, third party extended warranties and leasing.

      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 client-dedicated account executives utilizing proactive outbound telephone-based sales;
	•		a client-focused, face-to-face field sales force;
	•		a nationally deployed dedicated service sales organization;
	•		a small group of knowledgeable account executives dedicated to taking inbound calls;
	•		electronic commerce (primarily the Internet and electronic data interchange (“EDI”));
	•		targeted marketing (including print and electronic marketing and communications, advertising and specialty marketing programs);
	•		comprehensive product and services catalogs; and
	•		pre-sales technical sales support teams.

     We align our technical sales support resources, and tailor our marketing model, to each client market. Our marketing programs emphasize our broad product and services offerings, competitive pricing, fast delivery, client support and financing options. A large portion of our marketing will continue to 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 Governmental and Educational Entities . We target businesses as well as governmental and educational entities. Our target client employs over 100 people who regularly use computing products. We believe this is the most valuable portion of the IT products and services market because these entities 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

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

allows us to tailor our offerings to the size and complexity of our client, positions us to serve this portion of the market effectively through our competitive pricing, extensive product availability, advanced service capabilities, well-trained account executives, high level of client service, cost-effective distribution systems and technological innovation. During 2005, virtually all of our net sales were to business, governmental and educational clients, and no single client accounted for more than 2% of our consolidated net sales.

     Insight Public Sector (“IPS”), a wholly-owned subsidiary of Insight North America, services our United States public sector clients, which include federal, state and local governmental entities, educational institutions and non-profit organizations. Net sales from our public sector clients 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. A separate public sector team also operates within Insight UK and focuses on central and local government entities, educational institutions, not for profit organizations and the publicly-owned National Health Service. Net sales from our Insight UK public sector clients are derived from open market sales to individual entities and to consortium buyers and from contracts. For a discussion of risks associated with public sector contracts, see “Risk Factors – 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 1A of this report.

      Recruit, Train and Retain a Quality Sales Force . The majority of our account executives focus on outbound telemarketing by contacting existing clients 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 client base. To support the account executives, we maintain an extensive database of clients and potential clients. We have established dedicated outbound sales divisions focusing on SMB (generally less than 2,500 PC’s), larger enterprise businesses (generally at least 2,500 PC’s) and the public sector entities. Account executives in these sales divisions interact with the sophisticated purchasers and IT systems managers and various other staff of organizations to establish mutually beneficial relationships within these specific client targets. Once established, the one-on-one relationships between our clients 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 and service sales professionals in a number of cities throughout North America, and to a lesser extent, in the United Kingdom. These face-to-face field account executives and service sales professionals typically service larger enterprise accounts, government accounts or accounts that have advanced system and service needs. However, starting in 2006, we plan to geographically align clients assigned to our SMB account executives. We believe this will allow us to utilize our face-to-face field account executives to help strengthen relationships with SMB clients, as well as partner representatives, in their geographical areas. Additionally, we have a small group of knowledgeable account executives dedicated to taking inbound calls generated by our direct marketing activities.

     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 clients’ primary contact with us is through our account executives, we focus on recruiting, training and retaining qualified and knowledgeable sales staff. During 2005, we expanded our training programs for new account executives. New account executives now participate in an extensive twelve-month product, system, sales and procedural training program. The program progresses from spending the majority of the time in a classroom environment to spending more of the training time on the sales floor, gaining supervised sales experience. The overall program focuses on: selling and client service techniques; technical product and services information; systems training; and policies and procedures. Additionally, in conjunction with product manufacturers, we sponsor mandatory periodic product and service training sessions that emphasize the attributes of the products and services and their specific ability to solve clients’ business needs. We also have periodic training programs that introduce new policies and procedures. We are further expanding our sales training programs in 2006 to focus on enhancing existing skills or developing new skills for varying aspects of the sales process.

     With the assistance of our marketing department, each account executive is responsible for building a client base and proactively servicing the needs of established clients. Our IT systems allow on-line retrieval of relevant client information, including the client’s history and product information, such as price, cost and availability, as well as up-selling and cross-selling opportunities. This capability helps deepen client relationships and build our “share-of-wallet” with our client base. Additionally, as part of the mySAP upgrade in 2006 for our United States operations, we are planning to increase our use of customer relationship management (“CRM”) tools and analytics to target the right solution or offer to clients with the greatest propensity to have an interest. 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.

     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 resulted in elimination of less experienced account executives. Average tenure for Insight UK has remained relatively flat over the past year as we have experienced some targeted 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 “Risk Factors – We depend on key personnel,” in Item 1A of this report.

      Focus on Client Service . We strive to create strong, long-term relationships with our clients, which we believe promotes client satisfaction and ultimately increases the percentage of IT spending awarded to us. We believe that a key to building client loyalty is to provide clients with a knowledgeable account executive backed by a strong support staff that can help clients find the right IT solutions to solve business needs. Most business clients are assigned a trained account executive that understands the client’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 clients’ various needs within a total solutions framework. Although additional support personnel may interact with the client, such as our solutions center or third party service providers, the client’s dedicated account executive remains the primary contact across all products and services involved. We believe that solving clients’ unique business and technology challenges through strong one-to-one sales and project management relationships will improve the likelihood that clients will look to us for future product and service purchases.

     We realize that fast delivery and efficient fulfillment are also important to our clients. Client 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 clients. We ship almost all of our orders on the day the orders are released for shipment.

     We believe that effective client service is an important factor in client retention and overall satisfaction. We are planning additional automation of our business processes with the upgrade to mySAP and believe these improvements will increase client satisfaction and retention.

      Promote Use of E-Commerce . We believe that providing the client with a seamless e-commerce system, supported by well-trained account executives results in a highly efficient business model that delivers high client satisfaction. Account executives encourage clients 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 clients and prospects through graphically rich electronic newsletters, electronic postcards and other branded sales messages transmitted via e-mail. Through the promotion of e-commerce, including EDI and our website, we hope to increase sales, facilitate our clients’ ease of doing business with us and decrease administrative costs.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

      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 2005 Insight Bowl, telecast live by ESPN on December 27, 2005, 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 in the United States to call us or visit our website. We also leverage more traditional merchandising catalogs and selectively place targeted advertisements in trade publications in the United States, Canada and the United Kingdom. These catalogs and 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 from time to time in promotions by selected manufacturers.

     In the United Kingdom, we are continuing to provide a comprehensive product and services catalog to select clients. Each catalog provides detailed product descriptions, manufacturers’ specifications, pricing and service and support features. In 2005, we expanded our catalog distribution in the United Kingdom to include catalogs aimed at specific vertical markets or industries, such as healthcare, legal and financial services. These vertically focused catalogs augment our sales force in the United Kingdom which is also starting to focus, at least a portion of their assigned clients, on specific vertical markets. We also send targeted catalogs and direct mail brochures showcasing our product, service and solution offerings to clients in the United States, Canada and the United Kingdom.

      Broad Selection of Branded Products. We provide added convenience by offering our clients a comprehensive selection of over 195,000 brand name IT products in North America, and more than 65,000 products in the United Kingdom. We offer products from hundreds of manufacturers including Hewlett-Packard (“HP”), Lenovo, Cisco, Microsoft, IBM, Toshiba, Lexmark, American Power Conversion, Sony, and Symantec. 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 clients’ needs by providing a variety of product solutions to best address their specific business needs, based on particular client preferences or other criteria, such as real-time best pricing and availability, or compatibility with existing technology. During the year, we worked to reduce our product SKU count, which allows us to reduce costs associated with maintaining a larger number of SKUs and we will continue to evaluate the number and types of SKUs that we offer. 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 clients a complete or best solution across all product categories.

     We select our products based upon existing and proven technology and anticipated client 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 client requests, when appropriate.

     The manufacturer warrants most of the products we market, and it is our policy to request that clients return their defective products directly to the manufacturer for warranty service. On selected products, and for selected client service reasons, we may accept returns directly from the client and then either credit the client 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 2005, we purchased products from approximately 1,260 suppliers. Approximately 43% (based on dollar volume) of these purchases were directly from manufacturers, with the balance from distributors. Through our distribution subsidiary, PC Wholesale, we have also purchased from and sold to other computer resellers in order to offer our clients favorable pricing, to balance our inventory or to minimize inventory risk. Purchases from HP, a manufacturer, Ingram Micro, Inc. (“Ingram”) and Tech Data Corporation (“Tech Data”), both of which are distributors, accounted for approximately 17%, 17% and 14%, respectively, of Insight’s aggregate purchases in 2005. No other supplier accounted for more than 10% of purchases in 2005. Our top five suppliers as a group for 2005 were: HP; Ingram; Tech Data; Synnex Information Technologies, a distributor; and Lenovo, a manufacturer. We purchased approximately 59% of Insight’s total product purchases during 2005 from this group 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 that 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’ products. In other cases, such reimbursements may be in the form of participation in our partner

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

programs, 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 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 and net earnings. During 2005, sales of products manufactured by HP accounted for approximately 30% of Insight’s net sales. No other manufacturer accounted for more than 10% of Insight’s net sales in 2005. Sales of product from our top five manufacturers as a group (HP, Cisco, IBM, Microsoft and Lenovo) accounted for approximately 59% of Insight’s net sales during 2005. We believe that the majority of IT purchases by our clients are made based on the ability of our total product and service offering to meet their IT needs more than on specific brands.

     For a discussion of risks associated with our reliance on suppliers, see “Risk Factors — We rely on our suppliers for product availability, marketing funds, purchasing incentives and competitive products to sell,” in Item 1A 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 clients 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 clients in the United States than in Canada or the United Kingdom and are currently sold primarily to large enterprise clients. We provide our clients 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 clients. 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 ISO 9001:2005 certified national repair center is dedicated to maintaining our clients’ 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 clients’ 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.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

•

Project Management — We provide clients with experienced project managers who coordinate the planning, design, deployment, and support of their IT projects and ongoing service programs. This service is performed via our Project Management Office which provides standard methodology and quality assurance.

•

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 and our ISO 9001:2005 national repair center. On certain service offerings or in certain geographies, Insight North America manages delivery of services by contracting with highly qualified service partners. We believe this combination is a key differentiator from direct competitors in the United States. Insight UK manages delivery of services by contracting with highly qualified service partners. Regardless of delivery methods or geography, the client’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 clients.

     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 technical sales support teams focused on the following product and service categories:

	•		Connectivity;
	•		High Performance Systems;
	•		Networking;
	•		Training;
	•		Third Party Extended Warranties;
	•		Wireless;
	•		Project Management;
	•		Lifecycle Management; and
	•		Security.

     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 nationally to larger enterprise clients. However, we have the ability to provide certain of those services nationally to our SMB clients and view this as an opportunity for growth. Determining which services are best suited to the SMB clients, creating awareness of our capabilities and increasing sales to this client group will be a significant focus in the future. However, for 2006, our service offerings to SMB clients will continue to focus primarily on integration, third party extended warranties and leasing.

     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 client 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 clients to a new, unified IT platform. This system, referred to internally 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 clients to conduct business with Insight and to increase the productivity of our account executives, and a customized back-end for sourcing product to improve purchasing decisions and inventory management.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

     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. In 2006, we are planning to upgrade SAP to mySAP. We believe some of the benefits provided by mySAP will be as follows:

	•		increased sales executive and client support productivity;
	•		automated service tracking and billing;
	•		enhanced CRM capabilities;
	•		improved service contract management and reporting;
	•		further automation of manual and inefficient processes;
	•		reduced custom programming and maintenance; and
	•		adoption of best practices around business processes.

     We believe our implementation of advanced technological systems provides a competitive advantage by increasing the productivity of our account executives, delivering more efficient client service and reducing order processing and inventory costs. We currently plan to deploy our IT system in the United States, including the upgrade to mySAP, 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:

	•		client 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 and services recommendations and pricing, provide superior client service and increase overall profitability. We also 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 440,000 square foot distribution facility in Hanover Park, Illinois. Activities performed in our Illinois distribution center include receipt and shipping of inventory and returned product processing. Additionally, this distribution center houses our national repair center and our advanced integration and custom configuration labs. We also have a small distribution facility in Canada and a 53,000 square foot distribution 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 and increase client satisfaction. We also purchase and hold inventory for our integration labs and upcoming projects with large enterprise and public sector clients. 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 clients. 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 client 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 clients 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.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

     For a discussion of risks associated with our information technology and voice and data networks, see “Risk Factors— Disruptions in our information technology and voice and data networks could affect our ability to service our clients and cause us to incur additional expenses,” in Item 1A of this report.

      Growth Strategy

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

	•		Selling additional products and services to our existing client base;
	•		Expanding our client base;
	•		Capitalizing on our international presence;
	•		Leveraging our existing infrastructure; and
	•		Making opportunistic strategic acquisitions.

      Selling Additional Products and Services to Our Existing Client Base. We seek to become the primary provider of IT solutions for our clients 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 clients in an efficient manner. We believe proactive account management and assignment of specific account executives dedicated to developing closer relationships with active business clients will enable us to increase the volume, frequency, and breadth and depth of sales to these clients. We continue to refine and analyze our client database to better understand and service our clients, which we believe will result in establishing and maintaining deeper long-term client relationships and enhanced client loyalty. 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 clients’ business needs, both current and future, so that we can capitalize on opportunities to be our clients’ primary and trusted advisor regarding IT solutions that address those needs.

     We increased 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 clients, government, educational and non-profit organizations, or by these target clients.

     In 2005, we rolled out an integrated marketing approach among sales, marketing and product management. We went to market with the following five specific solution focuses and started aligning our sales, marketing, technical and service areas to support these focus areas:

	•		Manage IT SM — solutions focused on managing a business’s IT infrastructure (e.g., technology refresh and server consolidation);
	•		Mobilize IT SM — 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 IT SM — solutions focused on the storage needs of business clients (e.g., disaster recovery, storage management and regulatory compliance);
	•		Print IT SM — solutions focused on lowering print costs for businesses (e.g., print assessment, document management and pay per use); and
	•		Secure IT SM — 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 client’s business requirements. We will 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 clients greater return on investment and reduced total cost of ownership.

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

	•		sales training and education;
	•		selling tools;
	•		awareness building;

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

	•		client events;
	•		demand generation;
	•		product management;
	•		purchasing;
	•		services development;
	•		web merchandising; and
	•		sales incentives.

     We are also developing a “Solutions Center” in the United States, primarily to support our SMB account executives. The Solutions Center is aligned with each new solution and allows our SMB account executives to have a single point of contact when engaging assistance from our technical support teams with complex IT solutions involving products, services or a combination of the two. The Solutions Center complements the technical sales support teams that typically assist our account executives and service sales professionals in developing solutions for our large corporate clients.

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

      Expanding Our Client Base. We intend to increase our direct sales and targeted marketing efforts in each of our client segments: SMB; large enterprises; and 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 marketing and increased advertising focused on Insight brand awareness and the differentiating factors of our business model.

      Capitalizing on Our 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 client base, expanded product offerings and the ability to leverage our existing infrastructure and supplier relationships. We eventually intend to continue expanding in existing geographies, and we may expand into Europe or other international locations. For a discussion of risks associated with international operations, see “Risk Factors — There are risks associated with international operations that are different than those inherent in the United States business,” in Item 1A of this report.

      Leveraging Our 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 United States clients to Maximus and expect to complete the upgrade of the SAP portions of Maximus to mySAP during 2006. We currently plan to deploy Maximus in our United Kingdom and Canadian operations in the next few years. We believe the mySAP upgrade will better enable us to meet or exceed our clients’ expectations and further differentiate us from our competitors. The benefits we have already 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 and electronically enable routine transactions by adding functionality to the system through mySAP, reducing custom programming and adopting best practices around business processes. Our goal is to enhance our system capabilities and business processes to a level which would enable us to potentially process any client, supplier and teammate interaction electronically.

     We have also invested in facilities and strengthened 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. For a discussion of risks associated with our IT and telephone systems, see “Risk Factors — Disruptions in our information technology and voice and data networks could affect our ability to service our clients and cause us to incur additional expenses,” in Item 1A 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 client base, expand our geographic reach, scale our existing operating structure and/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.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

     For a discussion of risks associated with future acquisitions, see “Risk Factors — The integration and operation of future acquired businesses may disrupt our business, create additional expenses and utilize cash or debt availability,” in Item 1A 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 and 2005. We remain optimistic that IT spending will continue to increase in 2006, although we believe the motivation and demand 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 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 client 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 clients’ purchasing behaviors and to seek the most cost effective and efficient channels to distribute their products. Clients 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 clients in order to grow sales and lower overall selling costs.
	•		Consolidation has occurred over the past few years among direct marketers, and as larger direct marketers continue to broaden their client 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 client 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 “Risk Factors — Changes in the information technology and/or economic environment may reduce demand for the products and services we sell,” and “The IT products and services industry is intensely competitive and actions of competitors, including manufacturers of products we sell, can negatively affect our business,” in Item 1A 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);
	•		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; and
	•		national and global service providers, such as IBM Global Services, HP and EDS.

     Product manufacturers continue to sell directly to business clients, particularly larger enterprise clients. Manufacturers, however, typically do not offer the breadth of multi-branded product offerings that direct marketers such as us offer, nor do

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

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 clients. 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 client 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 clients 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 client 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
	•		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 client 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 clients and adopt more aggressive pricing policies than we do.

     For a discussion of risks associated with the actions of our competitors, see “Risk Factors — The IT products and services industry is intensely competitive and actions of competitors, including manufacturers of products we sell, can negatively affect our business,” in Item 1A of this report.

Direct Alliance

     Direct Alliance is our business process outsourcing (“BPO”) organization, representing 2% and 11% of consolidated net sales and earnings from operations, respectively, in 2005.

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. Because business process outsourcing is not core to our operations, we will, from time to time, evaluate opportunities to divest Direct Alliance with the ultimate goal of maximizing stockholder value.

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 client lifecycle methodology, including:

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

•

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

o

database marketing;

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

	o		catalog marketing;
	o		extranet marketing; and
	o		marketing consulting.

•

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

	o		outbound telesales;
	o		field sales enablement;
	o		inbound telesales;
	o		customer service;
	o		partner relationship development;
	o		opportunity management; and
	o		web/e-commerce sales.

•

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		invoice payment management;
	o		sales tax collection and management;
	o		accounts receivable;
	o		accounts payable;
	o		vendor returns processing; and
	o		financial reporting.

•

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, including proprietary technology, processes and management expertise for direct and indirect sales channels. 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. Direct Alliance’s proprietary IT systems, which are used by many of our clients in support of the sales programs we operate for them, can be successfully integrated with many of today’s most common applications, such as SAP, Oracle and Siebel. Additionally, in some cases, we 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, proven processes and management expertise allows us to provide our clients with:

	•		profitable sales growth;
	•		cost-effectiveness;
	•		fast deployment of direct and channel-focused solutions;
	•		improved client 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.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

     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 outsourcing arrangements that are in place from time to time will 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 years ended December 31, 2005 and 2004, one outsourcing client accounted for approximately 28% and 60%, respectively, of Direct Alliance’s net sales and our three largest outsourcing clients accounted for approximately 76% and 88%, respectively, of net sales. The declines from prior year in concentration with Direct Alliance’s largest clients reflects the fact that the historical contract with Direct Alliance’s largest client, IBM, was replaced in May 2005 with separate contracts with IBM and Lenovo which expire at the end of 2006. For a discussion of risks associated with reliance on outsourcing clients, see “Risk Factors — We rely on a limited number of outsourcing clients,” in Item 1A 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 computing systems 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;
	•		becoming 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.

      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.

      Expanding into the Industries of Software, Customer Loyalty and Office Automation. While we continue to see opportunities within the IT and consumer electronics industries, we are experiencing an increasing demand for both direct programs and channel programs related to software, warranties, service contracts and office automation. Although competitors already exist in each of these markets, we believe we can successfully differentiate our offerings with unique capabilities in relationship-based sales, business process management and transaction management services.

     We believe we can successfully compete for software clients by focusing on software products that have three- to six-month sales cycles and are sold to SMB clients with complex sales environments where relationship development is a competitive differentiator.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

     We also have developed a dedicated customer loyalty team that sells warranty and service contracts. We believe that our approach to selling warranties and service contracts is unique and represents an attractive solution for many manufacturers of hard goods products. We currently sell such contracts to users of IT products and intend to expand our offerings to consumer electronics manufacturers and other related industries.

     The office automation industry offers an attractive growth opportunity to sell consumable items such as printer cartridges, toner, ink and paper supplies. Where automation and auto-replenishment play an important part in reducing the cost of ownership within an organization, we believe our related strengths in business process management, transaction services and systems integration allow us to offer an attractive solution to manufacturers of printers, copiers and digital imaging products.

      Marketing Activities. Based on 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, consumer electronics, software, customer loyalty and office automation industries. Marketing efforts to target prospective clients include the use of proactive outbound telesales, traditional advertising, and electronic and traditional 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 custom 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, Digital River, 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 in 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 “Risk Factors — The IT products and services industry is intensely competitive and actions of competitors, including manufacturers of products we sell, can negatively affect our business,” in Item 1A of this report.

Teammates

     We believe our teammate relations are good. Our teammates are not represented by any labor union, and we have not experienced any work stoppages. At December 31, 2005, we had 3,967 teammates as follows:

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

     We have invested in our teammates’ 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 teammate and management development programs. We emphasize on-the-job training and provide our teammates 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 clients, particularly large enterprise businesses in the United States, tend to spend more in our fourth quarter as they utilize their remaining capital budget authorizations and less in the first quarter. Due to the increased significance of our large enterprise business in the United States, 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 teammates, clients, vendors and others to protect our intellectual property rights. We have registered a number of domain names and our principal trademark is a registered mark. We have also applied for registration of other marks, both in the United States and in select international jurisdictions, and from time to time, file patent applications. 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 current on the latest developments in technology in order to improve our internal operations and for the benefit of our clients, and we have established an internal center 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 the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, 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.

Item 1A. Risk Factors

      Changes in the information technology industry and/or economic environment may reduce demand for the products and services we sell. Our results of operations are influenced by a variety of factors, including the condition of the IT industry, general economic conditions, shifts in demand for, or availability of, computer products, peripherals and software and IT services and industry introductions of new products, upgrades or methods of distribution. Net sales can be dependent on demand for specific product categories, and any change in demand for or supply of such products could have a material adverse effect on our net sales, and/or cause us to record write-downs of obsolete inventory, if we fail to react in a timely manner to such changes. Our operating results are also highly dependent upon our level of gross profit as a percentage of net sales, which fluctuates due to numerous factors, including changes in prices from suppliers, changes in the amount and timing of supplier reimbursements and marketing funds that are made available, volumes of purchases, changes in client mix, the relative mix of products sold during the period, general competitive conditions, the availability of opportunistic purchases

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

and opportunities to increase market share. In addition, our expense levels, including marketing, the costs of facilities expansion, acquisitions and the costs and salaries incurred in connection with the hiring of account executives, are based, in part, on anticipated net sales and the anticipated amount and timing of supplier reimbursements and marketing funds. Therefore, we may not be able to reduce spending in a timely manner to compensate for any unexpected net sales shortfall and any such inability could have a material adverse effect on our business, results of operations and financial condition.

      We rely on our suppliers for product availability, marketing funds, purchasing incentives and competitive products to sell. We acquire products for resale both directly from manufacturers and indirectly through distributors. The loss of a supplier could cause a disruption in the availability of products. Additionally, there is no assurance that as manufacturers continue to sell directly to end users and through the distribution channel, they will not limit or curtail the availability of their product to resellers like us. Although not as prevalent in recent years, certain of the products offered from time to time by us may become subject to manufacturer allocation, which limits the number of units available to us. Our inability to obtain a sufficient quantity of product, or an allocation of products from a manufacturer in a way that favors one of our competitors relative to us, could cause us to be unable to fill clients’ orders in a timely manner, or at all, which could have a material adverse effect on our business, results of operations and financial condition. In addition, a reduction in the amount of credit granted to us by our suppliers could increase our cost of working capital and have a material adverse effect on our business, results of operations and financial condition.

     Certain manufacturers and distributors provide us with substantial incentives in the form of rebates, supplier reimbursements and marketing funds, early payment discounts, referral fees and price protections. Supplier funds are used to offset, among other things, inventory, cost of goods sold, marketing costs and other operating expenses. Certain of these funds are based on our volume of net sales or purchases, growth rate of net sales or purchases and marketing programs. If we do not grow our net sales over prior periods or if we are not in compliance with the terms of these programs, there could be a material negative effect on the amount of incentives offered or paid to us by our manufacturers. Additionally, suppliers routinely change the requirements for, and the amount of, funds available. No assurance can be given that we will continue to receive such incentives or that we will be able to collect outstanding amounts relating to these incentives in a timely manner, or at all. A reduction in, the discontinuance of, a significant delay in receiving or the inability to collect such incentives could have a material adverse effect on our business, results of operations and financial condition.

     Although product is available from multiple sources via the distribution channel as well as directly from manufacturers, we rely on the manufacturers of products we offer not only for product availability and supplier reimbursements, but also for development and marketing of products that compete effectively with products of manufacturers we do not currently offer, particularly Dell. We do have the ability to sell, and periodically have sold, Dell product if it is specifically requested by our clients and approved by Dell, although we do not proactively advertise or offer Dell products.

     In May 2005, Lenovo, the leading personal computer brand in China, acquired IBM’s Personal Computing Division to form the world’s third-largest PC business. IBM is a significant supplier to Insight and was the largest client of Direct Alliance. Direct Alliance has entered into separate contracts with IBM and Lenovo representing pro-rata portions of the contract that Direct Alliance previously had with IBM. These contracts were effective upon completion of Lenovo’s purchase of IBM’s Personal Computing Division. We do not know specifically how this sale will affect our relationships over the long-term with IBM or Lenovo, and we cannot assure you that changes in these relationships will not have a material adverse effect on our business, results of operations and financial condition.

      The IT products and services industry is intensely competitive and actions of competitors, including manufacturers of products we sell, can negatively affect our business. Competition has been based primarily on price, product availability, speed of delivery, credit availability and quality and breadth of product lines and, increasingly, is also based on the ability to tailor specific solutions to client needs. We compete with manufacturers, including manufacturers of products we sell, as well as a large number and wide variety of marketers and resellers of IT products and services. Product manufacturers, in particular, have programs to sell directly to the business client, particularly larger corporate clients and thus, are a competitive threat to us. In addition, manufacturers are increasing the volume of software products distributed electronically directly to end-users and in the future will likely pay lower referral fees for sales of certain software licensing agreements sold by us. An increase in the volume of products sold through any of these competitive programs or distributed directly electronically to end-users or a decrease in the amount of referral fees paid to us, or increased competition for providing services to these clients, could have a material adverse effect on our business, results of operations and financial condition.

     Additionally, we believe our industry will see further consolidation as product resellers and direct marketers combine operations or acquire or merge with other resellers and direct marketers to increase efficiency and market share. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their product and service offerings. Accordingly, it is possible that new competitors or alliances among competitors may emerge and acquire significant market share. Generally, pricing is very aggressive in the industry, and we

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

expect pricing pressures to continue. There can be no assurance that we will be able to negotiate prices as favorable as those negotiated by our competitors or that we will be able to offset the effects of price reductions with an increase in the number of clients, higher net sales, cost reductions, greater sales of services, which are typically at higher gross margins, or otherwise. Price reductions by our competitors that we either cannot or choose not to match could result in an erosion of our market share and/or reduced sales or, to the extent we match such reductions, could result in reduced operating margins, any of which could have a material adverse effect on our business, results of operations and financial condition.

     Certain of our competitors in each of our operating segments have longer operating histories and greater financial, technical, marketing and other resources than we do. In addition, some of these competitors may be able to respond more quickly to new or changing opportunities, technologies and client requirements. Many current and potential competitors also have greater name recognition and engage in more extensive promotional activities, offer more attractive terms to clients and adopt more aggressive pricing policies than we do. Additionally, some of our competitors have higher margins and/or lower operating cost structures, allowing them to price more aggressively. There can be no assurance that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not have a material adverse effect on our business, results of operations and financial condition.

      Disruptions in our information technology and voice and data networks could affect our ability to service our clients and cause us to incur additional expenses. We believe that our success to date has been, and future results of operations will be, dependent in large part upon our ability to provide prompt and efficient service to clients. Our ability to provide such services is largely dependent on the accuracy, quality and utilization of the information generated by our IT systems, which affect our ability to manage our sales, client service, distribution, inventories and accounting systems and the reliability of our voice and data networks. In January 2004, we completed the IT system conversion across all of Insight’s operations serving United States clients. We have been making and will continue to make enhancements and upgrades to the system including a planned upgrade to mySAP during 2006. Over the next few years, we plan to convert Insight’s United Kingdom and Canadian operations to this software platform. There can be no assurances that these enhancements or conversions will not cause disruptions in our business, and any such disruption could have a material adverse effect on our results of operations and financial condition. Additionally, if we complete conversions that shorten the life of existing technology or render it impaired, we could incur additional depreciation expense and/or impairment charges. Although we have built redundancy into most of our systems, have documented system outage policies and procedures and have comprehensive data backup, we do not have a formal disaster recovery or business continuity plan. Substantial interruption in our IT systems or in our telephone communication systems would have a material adverse effect on our business, results of operations and financial condition.

      We rely on a limited number of outsourcing clients. Through our Direct Alliance operating segment, which represented 2% and 11% of our consolidated net sales and earnings from operations, respectively, for the year ended December 31, 2005, we perform business process outsourcing services for a small number of clients in the IT, consumer electronics, software, warranties, service contracts and office automation industries pursuant to various contracted arrangements. For the year ended December 31, 2005, one outsourcing client accounted for approximately 28% of Direct Alliance’s net sales and our three largest outsourcing clients accounted for approximately 76% of net sales. For the year ended December 31, 2004, one outsourcing client accounted for approximately 60% of Direct Alliance’s net sales and our three largest outsourcing clients accounted for approximately 88% of net sales. The declines from prior year in concentration with Direct Alliance’s largest clients reflects the fact that the historical contract with Direct Alliance’s largest client, IBM, was replaced in May 2005 with separate contracts with IBM and Lenovo which expire at the end of 2006. Although the contracts with these clients are generally multi-year contracts, these clients may cancel their contracts under certain circumstances on relatively short notice, elect to not renew them upon expiration or renew them only on terms that are less favorable to us. There is no assurance that we will be able to replace any outsourcing clients that terminate or fail to renew their relationships with us or that we will be able to renew existing contracts on terms that are as favorable to us as the current terms. Additionally, we seek to expand our offerings both within and outside of the computer industry. The failure to maintain current arrangements or the inability to enter into new ones within or outside the computer industry could have a material adverse effect on our business, results of operations and financial condition. The majority of our current outsourcing business is with clients who are manufacturers in the IT industry and are, therefore, subject to similar industry risks that we face, with respect to our Insight North America operations. These risks may negatively affect the amount of business our clients outsource to us and the performance fees we receive from clients that are based on the volume of client product we sell or process through our systems.

      The failure to comply with the terms and conditions of our public sector contracts could result in, among other things, fines or other liabilities . Net sales to public sector clients are derived from sales to federal, state and local governmental departments and agencies, as well as to educational institutions, through open market sales and various contracts. Government contracting is a highly regulated area. Noncompliance with government procurement regulations or contract provisions could result in civil, criminal, and administrative liability, including substantial monetary fines or damages, termination of government contracts, and suspension, debarment or ineligibility from doing business with the government. In

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

addition, substantially all of our contracts in the public sector are terminable at any time for convenience or upon default. The effect of any of these possible actions by any governmental department or agency or the adoption of new or modified procurement regulations or practices could materially adversely affect our business, financial position and results of operations.

      There are risks associated with international operations that are different than those inherent in the United States business. We currently have operations in the United Kingdom and Canada and may expand operations further globally. In implementing our international strategy, we may face barriers to entry and competition from local companies and other companies that already have established global businesses, as well as the risks generally associated with conducting business internationally. These risks include local labor conditions and regulations, the ability to attract and retain suitable local management, exposure to currency fluctuations, limitations on foreign investment, potential tax exposure in repatriating earnings, and the additional expense and risks inherent in operating in geographically and culturally diverse locations. Because we may continue to develop our international business through acquisitions, we may also be subject to risks associated with such acquisitions, including those relating to combining different corporate cultures and shared decision-making. There can be no assurance that we will succeed in increasing our international business or do so in a profitable manner.

     International operations also expose us to currency fluctuations as we translate the financial statements of our United Kingdom and Canadian operations to U.S. dollars. Although the effect of currency fluctuations on our financial results has not generally been material in the past, there can be no guarantee that the effect of currency fluctuations will not be material in the future. In particular, there has been a trend toward a strengthening U.S. dollar relative to the British pound sterling. If this trend continues, it could have a negative effect on our financial condition and results of operations.

      We depend on certain key personnel. Our future success will be largely dependent on the efforts of key management personnel. Over the past year, we have replaced several key personnel, including the President of Insight Direct USA, Inc. and the President of Direct Alliance with new key personnel. The loss of one or more of these key teammates could have a material adverse effect on our business, results of operations and financial condition. We cannot assure you that we will be able to continue to attract or retain highly qualified executive personnel or that any such executive personnel will be able to lead us in directions that will increase stockholder value. We also believe that our future success will be largely dependent on our continued ability to attract and retain highly qualified management, sales, service and technical personnel. We cannot assure you that we will be able to attract and retain such personnel. Further, we make a significant investment in the training of our sales account executives. Our inability to retain such personnel or to train them either rapidly enough to meet our expanding needs or in an effective manner for quickly changing market conditions could cause a decrease in the overall quality and efficiency of our sales staff, which could have a material adverse effect on our business, results of operations and financial condition.

      Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain teammates, and changes in accounting for equity compensation will adversely affect earnings. We have historically used equity based compensation, primarily in the form of stock options, as a key component of total teammate compensation in order to align teammates’ interests with the interests of our stockholders, encourage teammate retention and provide competitive compensation packages. Volatility or lack of positive performance in our stock price may adversely affect our ability to retain key teammates, all of whom have been granted stock based compensation, or attract additional highly qualified personnel. Many of our outstanding stock options have exercise prices in excess of our current stock price. To the extent these circumstances continue or recur, our ability to retain present teammates may be adversely affected. In addition, changes to GAAP require compensation expense to be recorded for stock option grants and other equity based compensation beginning January 1, 2006. Moreover, applicable stock exchange listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant options to teammates in the future. As a result, in addition to recording additional compensation expense, we may incur increased compensation costs, change our stock compensation strategy or find it difficult to use stock based compensation to attract, retain and motivate teammates, any of which could materially adversely affect our business. Additionally, some of our competitors modified their outstanding stock options in 2005 and, as a result, will decrease the amount of equity compensation expense related to the modified stock options in their future statements of earnings. This could result in our equity compensation expense being greater than our competitors in future periods.

      The integration and operation of future acquired businesses may disrupt our business, create additional expenses and utilize cash or debt availability. Over the past few years, we completed acquisitions in the United States, the United Kingdom and Canada. These acquired operations have been fully integrated and now comprise a material portion of our business. Our strategy includes the possible acquisition of other businesses to expand or complement our operations. An acquisition involves numerous risks, including difficulties in the conversion of IT systems and assimilation of operations of the acquired company, the diversion of management’s attention from other business concerns, risks of entering markets in

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

which we have had no or only limited direct experience, assumption of unknown liabilities and the potential loss of key teammates and/or clients of the acquired company, all of which in turn could have a material adverse effect on our business, results of operations and financial condition. The magnitude, timing and nature of any future acquisitions will depend on a number of factors, including the availability of suitable acquisition candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. There is no assurance that we will identify acquisition candidates that would result in successful combinations or that any acquisitions will be consummated at all or on acceptable terms. Any future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of additional debt, the utilization of cash, amortization of expenses related to identifiable intangible assets and future impairments of acquired goodwill, all of which could adversely affect our profitability.

      Rapid changes in product standards may result in substantial inventory obsolescence. The IT industry is characterized by rapid technological change and the frequent introduction of new products and product enhancements, both of which can decrease demand for current products or render them obsolete. In addition, in order to satisfy client demand, protect ourselves against product shortages, obtain greater purchasing discounts and react to changes in original equipment manufacturers’ terms and conditions, we may decide to carry relatively high inventory levels of certain products that may have limited or no return privileges. There can be no assurance that we will be able to avoid losses related to inventory obsolescence on these products.

      Our principal financing facility expires in December 2006, and if we are unable to renew this facility or replace it on acceptable terms, we may incur higher interest expenses or your equity interests may be diluted. Our financing facilities include a $200.0 million accounts receivable securitization financing facility, a $30.0 million revolving line of credit and a $40.0 million inventories financing facility. The availability under each of these facilities is subject to formulas based on our eligible trade accounts receivable or inventories. As of December 31, 2005, the aggregate outstanding balance under these facilities was $70.6 million, and we had $193.2 million available. The accounts receivable securitization financing facility expires in December 2006, the line of credit expires on December 31, 2008 and the inventories financing facility expires March 31, 2006. We have no reason to believe the accounts receivable securitization financing facility will not be renewed before the end of 2006 and we are currently evaluating whether to renew our inventories financing facility. However, it is possible that we may be unable to renew our existing accounts receivable securitization financing facility or secure alternative financing or, if we are able to renew our existing accounts receivable securitization financing facility or secure alternative financing, it may be on less favorable terms, such as higher interest rates. If we were unable to renew our existing accounts receivable securitization financing facility or secure alternative financing, we may be required to seek other financing alternatives such as selling additional equity securities or convertible debt securities that would dilute the equity interests of current stockholders. We cannot assure you that we will be able to obtain such financing on terms favorable to us or at all.

      We may be subject to intellectual property infringement claims, which are costly to defend and could limit our ability to provide certain content or use certain technologies in the future. Many parties are actively developing search, indexing, e-commerce and other web-related technologies, as well as a variety of online business models and methods, all of which are in addition to traditional research and development efforts for IT products and application software. We believe that these parties will continue to take steps to protect these technologies, including, but not limited to, seeking patent protection. As a result, disputes regarding the ownership of these technologies and rights associated with online business and new hardware and software offerings are likely to arise in the future. In addition to existing patents and intellectual property rights, we anticipate that additional third party patents related to our services will be issued in the future. From time to time, parties assert patent infringement claims against us in the form of cease-and-desist letters, lawsuits and other communications. If there is a determination that we have infringed the proprietary rights of others, we could incur substantial monetary liability, be forced to stop selling infringing products or providing infringing services, be required to enter into costly royalty or licensing agreements, if available, or be prevented from using the rights, which could force us to change our business practices in the future. As a result, these types of claims could have a material adverse effect on our business, results of operations and financial condition.

      We issue options and restricted stock shares and units under our long-term incentive plans, and these issuances dilute the interests of stockholders. We have reserved shares of our common stock for issuance under our 1998 Long Term Incentive Plan (the “1998 LTIP”) and our 1999 Broad—Based Incentive Plan. As approved by our stockholders, our 1998 LTIP provides that additional shares of common stock may be reserved for issuance based on a formula contained in that plan. The formula provides that the total number of shares of common stock remaining for grant under the 1998 LTIP and any of our other option plans, plus the number of shares subject to unexercised options and unvested grants of restricted stock granted under any plan, shall not exceed 20% of the outstanding shares of our common stock at the time of calculation of the additional shares. Therefore, we reserve additional shares on an ongoing basis for issuance under this plan. At December 31, 2005, we had options outstanding to acquire 7,122,391 shares of common stock and there were 122,500 shares of restricted

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

common stock and 7,500 restricted common stock units outstanding. Based on the 1998 LTIP formula, we had 2,294,915 shares of common stock available for grant at December 31, 2005.

     Additionally, we have reserved 15% of the outstanding shares of common stock of our subsidiary, Direct Alliance, under the Direct Alliance 2000 Long-Term Incentive Plan. At December 31, 2005, we had options outstanding to acquire 2,042,500 shares of common stock of Direct Alliance, representing 6.8% of the outstanding common stock of Direct Alliance, at a weighted average exercise price of $1.42. These stock options vested on May 5, 2005 and expire on May 5, 2006. If option holders exercise these options, they will become minority stockholders of Direct Alliance, and the percentage of Direct Alliance’s net earnings attributable to minority stockholders will not be included in our consolidated statement of earnings. As of December 31, 2005, none of the 2,042,500 outstanding options have been exercised.

     When stock options with an exercise price lower than the current market price are exercised, the risk increases that our stockholders will experience dilution of earnings per share due to the increased number of shares outstanding. Also, the terms upon which we will be able to obtain equity capital may be affected, because the holders of outstanding options can be expected to exercise them at a time when we would, in all likelihood, be able to obtain needed capital on terms more favorable to us than those provided in outstanding options.

      Some anti-takeover provisions contained in our certificate of incorporation, bylaws and stockholders rights agreement, as well as provisions of Delaware law and executive employment contracts, could impair a takeover attempt. We have provisions in our certificate of incorporation and bylaws which could have the effect (separately, or in combination) of rendering more difficult or discouraging an acquisition deemed undesirable by our Board of Directors. These include provisions:

	•		authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
	•		limiting the liability of, and providing indemnification to, directors and officers;
	•		limiting the ability of our stockholders to call special meetings;
	•		requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors;
	•		controlling the procedures for conduct of Board and stockholder meetings and election and removal of directors; and
	•		specifying that stockholders may take action only at a duly called annual or special meeting of stockholders.

     These provisions, alone or together, could deter or delay hostile takeovers, proxy contests and changes in control or management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

     On December 14, 1998, each stockholder of record received one Preferred Share Purchase Right (“Right”) for each outstanding share of common stock owned. Each Right entitles stockholders to buy .00148 of a share of our Series A Preferred Stock at an exercise price of $88.88. The Rights will be exercisable if a person or group acquires 15% or more of our common stock or announces a tender offer for 15% or more of the common stock. However, should this occur, the Right will entitle its holder to purchase, at the Right’s exercise price, a number of shares of common stock having a market value at the time of twice the Right’s exercise price. Rights held by the 15% holder will become void and will not be exercisable to purchase shares at the bargain purchase price. If we are acquired in a merger or other business combination transaction after a person acquires 15% or more of the our common stock, each Right will entitle its holder to purchase at the Right’s then current exercise price a number of the acquiring company’s common shares having a market value at the time of twice the Right’s exercise price.

     Additionally, we have employment agreements with certain officers and management teammates under which severance payments would become payable in the event of specified terminations without cause or terminations under certain circumstances after a change in control. If such persons were terminated without cause or under certain circumstances after a change of control, and the severance payments under the current employment agreements were to become payable, the severance payments would generally be equal to either one or two times the persons’ annual salary and bonus.

     Any provision of our certificate of incorporation, bylaws or employment agreements, or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and also could affect the price that some investors are willing to pay for our common stock.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

      Sales of additional common stock and securities convertible into our common stock may dilute the voting power of current holders. We may issue equity securities in the future whose terms and rights are superior to those of our common stock. Our certificate of incorporation authorizes the issuance of up to 3,000,000 shares of preferred stock. These are “blank check” preferred shares, meaning our Board of Directors is authorized, from time to time, to issue the shares and designate their voting, conversion and other rights, all without stockholder consent. No preferred shares are outstanding, and we currently do not intend to issue any shares of preferred stock in the foreseeable future. Any shares of preferred stock that may be issued in the future could be given voting and conversion rights that could dilute the voting power and equity of existing holders of shares of common stock and have preferences over shares of common stock with respect to dividends and liquidation rights.

Item 1B. Unresolved Staff Comments

     None.

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INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

     Overall, we believe we grew net sales in 2005 at rates consistent with market growth rates and improved our overall profitability, when we exclude the items noted above. Overviews of each of our operating segments are noted below and reconciliations of segment results of operations to consolidated results of operations can be found in Note 16 to the Consolidated Financial Statements in Item 8 of this report.

     Insight North America reported year over year growth in net sales and earnings from operations of 6.1% and 22%, respectively. We believe that our sales growth rate was near market growth rates, although we did not reach our internal targets of growing faster than the market. We were encouraged by overall growth in our sales to large corporate enterprises, but demand in this sector began to slow near the end of 2005. We were also pleased to see that the second half of 2005 brought increased growth rates in sales to SMB clients after several quarters of experiencing stalled growth. During 2005, we made changes in our Insight North America executive management team, sales leadership, recruiting and training and have increased our marketing activities, all of which we believe will help position us to increase sales growth in the future. We also recorded $3.7 million ($2.2 million net of tax) of severance charges related the elimination of certain sales, support and management functions, including the former President of Insight Worldwide. These restructuring activities were designed to provide additional resources for our efforts to improve SMB sales and to automate key business processes, flatten the organizational structure and increase the effectiveness of our management team. These activities allow us to devote resources to hire additional account executives and sales managers, as well as to increase the effectiveness of our marketing, skills development, human resources and IT systems, while continuing to focus on reducing selling and administrative expenses as a percentage of net sales. Our financial goals for 2006 are focused on growing net sales faster than the market and improving our operating margin. A discussion of our strategy to accomplish these goals can be found in Item 1 of this report.

     Net sales for Insight UK for the year ended December 31, 2005 increased 4.2% compared to the year ended December 31, 2004. In British pound sterling, we posted an increase in net sales of 5.0% compared to 2004. The overall demand for IT products and services in the United Kingdom has been very slow. However, we believe our sales growth was greater than the overall market growth rate in the United Kingdom. We believe our additions of experienced account executives and management focus on large corporate enterprises, as well as various internal initiatives in areas such as training and automation to drive sales growth across all client groups, contributed to our ability to grow sales amidst a challenging demand environment. We also eliminated certain sales, support and management functions to streamline our operations and, as a result, recorded $414,000 ($281,000, net of tax) of severance charges during 2005. At the end of 2005, we moved our London facility to a new location and recorded restructuring charges of $6.9 million ($4.6 million, net of tax) representing the remaining lease obligations on the old lease and $1.0 million ($692,000 net of tax) for duplicate rent expense for the new facility prior to the date we relocated. We believe this new facility will provide a better layout for our business model with additional room for growth. This facility is also in a more desirable location, which should improve teammate recruitment, retention, productivity and morale.

     Net sales for Direct Alliance for the year ended December 31, 2005 increased 4.5% while earnings from operations decreased 15% for the year ended December 31, 2005. The increase in net sales was due primarily to pass-through product sales that are transacted as an accommodation to our clients at little or no gross margin. The decline in earnings from operations was due primarily to the renegotiated fee structures as part of multi-year contract renewals with some of Direct Alliance’s largest clients. During the year ended December 31, 2005, we also recorded $1.0 million ($621,000 net of tax) of severance charges related to the departure of Direct Alliance’s former president.

     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 estimates affect our consolidated financial statements.

Critical Accounting Estimates

General

     Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Item 8 of this report. 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

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

estimates with the Audit Committee of our Board of Directors. Actual results, however, may differ from estimates we have made. We believe the following critical accounting estimates reflect our significant estimates and assumptions used in preparation of the consolidated financial statements.

Accounting for Stock Based Compensation

     We currently have various stock-based compensation plans under which we have granted stock options, restricted stock and restricted stock units (“RSUs”) to certain teammates and non-employee directors. To account for our fixed plan stock options, we currently apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “ Accounting for Stock Issued to Employees ” (“APB No. 25”) and related interpretations including FASB Interpretation No. 44, “ Accounting for Certain Transactions involving Stock Compensation — an interpretation of APB Opinion No. 25. ” Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, “ Accounting for Stock-Based Compensation ” (“SFAS No. 123”) established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, we applied the intrinsic value-based method of accounting described above and have adopted the disclosure requirements of SFAS No. 123. We determine the estimated fair value of stock options on the date of the grant using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model. The Black-Scholes option-pricing model requires us to apply highly subjective assumptions, including expected stock price volatility, expected life of the option and the risk-free interest rate. A change in one or more of the assumptions used in the Black-Scholes option-pricing model may result in a material change to the estimated fair value of the stock-based compensation.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “ Share-Based Payment ” (“SFAS No. 123R”), which replaces SFAS No. 123 and APB No. 25. Effective January 1, 2006, we have adopted SFAS No.123R, as discussed under Recently Issued Accounting Standards in Note 1 to the Consolidated Financial Statements in Item 8 of this report, and we will be recording compensation expense for stock options in our financial statements. We elected to not make any modifications to existing stock options outstanding prior to this date, such as accelerating the vesting of previously granted options as we did not believe it made business sense to do so. We did, however, take the opportunity to reevaluate our equity compensation plans and we have elected to issue service-based and performance-based RSUs instead of stock options in 2006. The number of RSUs ultimately awarded under the performance-based RSUs will vary based on achievement of certain financial results. We will record compensation expense each period based on our estimate of the most probable number of RSUs that will be issued under the grants of performance-based RSUs. Additionally, the compensation expense will be reduced for our estimate of forfeitures. Our 2006 equity compensation expense, which includes expense attributable to RSU grants, as well as to vesting of stock options and restricted stock issued in prior years, is estimated to be between $13 million and $14 million. The actual amount will likely vary, either higher or lower, based on achievement of 2006 financial results. The expense range given assumes target financial results are reached.

Allowances for Doubtful Accounts

     Our accounts receivable balance was $480.4 million and $447.9 million as of December 31, 2005 and 2004, respectively. The allowance for doubtful accounts was $15.9 million and $15.5 million as of December 31, 2005 and 2004, respectively. The allowance is determined using estimated losses on accounts receivable based on historical write-offs, evaluation of the aging of the receivables and the current economic environment. Should our clients’ circumstances change or actual collections of client 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 recorded. See further information on our allowance for doubtful accounts in Note 15 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 write-downs of 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.

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

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 for years ended December 31, 2005, 2004 or 2003.

     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.

Severance and Restructuring 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. We do not currently 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, 2005 can be found in Note 8 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 $5.5 million. Additional information about the valuation allowance can be found in Note 10 to the Consolidated Financial Statements in Item 8 of this report.

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

Cumulative Effect of a Change in Accounting Principle

     We adopted FASB Interpretation No. 47 “ Accounting for Conditional Asset Retirement Obligations ” (“FIN No. 47”) during the year ended December 31, 2005. FIN No. 47 states that companies must recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event if the amount can be reasonably estimated. This interpretation applies to certain provisions in our facility lease agreements in the United States and the United Kingdom. Some of our leases stipulate that any leasehold improvements performed by us with landlord approval become the landlord’s property upon expiration of the lease. However, some landlords further reserve the right to make the determination as to whether the premises must be returned to their original condition, normal wear and tear excepted, at our expense. As a result, we were required to estimate the fair value of our legal obligation to perform asset-retirement activities upon a future lease termination date. The actual costs to perform these activities may differ from our estimate. Additional information about the cumulative effect of this change in accounting principle can be found in Note 1 to the Consolidated Financial Statements in Item 8 of this report.

Contingencies

     From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various governmental, client and vendor audits. We continually assess whether or not such claims have merit and warrant accrual under the “probable and estimable” criteria of Statement of Financial Accounting Standard No. 5 “ Accounting for Contingencies. ” Where appropriate, we accrue estimates of anticipated liabilities in the financial statements. Such estimates are subject to change and may affect our results of operations and our cash flows.

     Insight North America’s net sales increased for the year ended December 31, 2005 by 6.1% to $2.7 billion compared to the year ended December 31, 2004. The increase in net sales over the prior year periods is due primarily to a stable demand environment and our initiatives to deliver technology solutions to business clients more effectively and efficiently. During the latter half of 2005, we saw increased growth rates in sales to SMB clients while growth rates in sales to our large enterprise clients declined from the first half of the year. We have made changes in our Insight North America executive management team, sales leadership, recruiting and training and have increased marketing activities, all of which we believe will help position us to increase growth rates in our sales to SMB clients in 2006. Insight North America had 1,074 account executives at December 31, 2005 compared with 1,106 at December 31, 2004. The decrease in account executives was due to planned headcount reductions in order to reduce costs and increase the productivity of the remaining account executives. Additionally, we delayed increasing the number of account executives while we restructured the fundamentals of our recruiting processes and our new hire training program. Net sales per average account executive in Insight North America increased 15% from $2.2 million for the year ended December 31, 2004 to $2.5 million for the year ended December 31, 2005, which we believe is attributable to internal initiatives, such as training and automation, all of which are designed to allow our account executives to work more productively. The average tenure of our account executives in Insight North America has also increased from 3.5 years at December 31, 2004 to 3.9 years at December 31, 2005. The increase is due primarily to a decrease in account executive turnover.

     Insight UK’s net sales increased 4.2% to $470.2 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. In British pound sterling, net sales increased 5.0% compared to the year ended December 31, 2004, a rate we believe to be faster than the market. We believe our additions of experienced account executives and management focused on large corporate enterprises, as well as our various internal initiatives to drive sales growth across all client groups, contributed to our ability to increase our market share in the United Kingdom during the year ended December 31, 2005. Insight UK had 266 account executives at December 31, 2005 compared to 298 at December 31, 2004. The decrease is due primarily to aggressive recruiting of our more experienced account executives by some of our competition in early 2005. Net sales per average account executive in Insight UK increased 7% from $1.5 million for the year ended December 31, 2004 to $1.6 million for the year ended December 31, 2005, which we believe is attributable to internal initiatives designed to allow our account executives to work more productively. The average tenure of our account executives in Insight UK increased to 2.3 years compared to 2.2 years at December 31, 2004 due primarily to a decrease in new hires during the current year.

     Net sales by product category for Insight North America and Insight UK were as follows for the years ended December 31, 2005 and 2004:

		Insight North America				Insight UK
		Percentage of Product				Percentage of Product
		Net Sales				Net Sales
Product Categories		2005		2004		2005		2004
Computers:
Notebooks and PDAs		17%		16%		18%		18%
Desktops and Servers		16%		18%		15%		13%
		33%		34%		33%		31%
Software		12%		12%		15%		15%
Network and Connectivity		12%		11%		8%		8%
Printers		8%		9%		8%		10%
Storage Devices		8%		7%		8%		7%
Supplies and Accessories		7%		7%		8%		8%
Memory and Processors		5%		6%		4%		4%
Monitors and Video		7%		7%		10%		11%
Miscellaneous		8%		7%		6%		6%
		100%		100%		100%		100%

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

     In general, we continue to experience declines in average selling prices for most of our product categories, which requires us to sell more units than in previous periods in order to maintain or increase the level of sales. Additionally, average selling prices for printers, monitors, desktops and notebooks have been declining at a greater rate than the other product categories as demand and competition for these products have increased. The largest product category continues to be computers, representing 33% of Insight North America product net sales and 33% of Insight UK product sales for the year ended December 31, 2005. In both Insight North America and Insight UK, client demand for computer refreshes, server consolidations, as well as IT solutions related to connectivity, security and data retention needs appears to be increasing. These business needs are resulting in increased sales of storage, monitors/video and network/connectivity products in Insight North America and in sales of storage, network/connectivity and computers in the United Kingdom.

     Direct Alliance’s net sales of $77.4 million for the year ended December 31, 2005 increased 4.5% compared to the year ended December 31, 2004. The increase in net sales was due primarily to pass-through product sales that are transacted as an accommodation to our clients at little or no gross margin. Direct Alliance’s net sales are mainly concentrated with manufacturers of IT and consumer electronics products. For the year ended December 31, 2005, Direct Alliance’s largest outsourcing client accounted for 28% of Direct Alliance’s net sales compared to 60% for the year ended December 31, 2004. For the year ended December 31, 2005, Direct Alliance’s top three outsourcing clients accounted for approximately 76% of Direct Alliance’s net sales compared to 88% for the year ended December 31, 2004. The declines in concentration with Direct Alliance’s largest clients were primarily due to the fact that the historical contract with Direct Alliance’s largest client, IBM, was replaced in May 2005 with separate contracts with IBM and Lenovo.

      Gross Profit . Gross profit increased 6% to $391.9 million for the year ended December 31, 2005 from $370.4 million for the year ended December 31, 2004. As a percentage of net sales, gross profit remained consistent at 12.0% for the years ended December 31, 2005 and 2004. Our gross profit and gross profit as a percent of net sales by operating segment for the year ended December 31, 2005 and 2004 were as follows (in thousands):

     Insight North America’s gross profit increased for the year ended December 31, 2005 by 7% to $311.1 million from $289.6 million for the year ended December 31, 2004. As a percentage of net sales, gross profit increased to 11.5% for the year ended December 31, 2005 from 11.3% for the year ended December 31, 2004 due primarily to increases in freight margin, increases in referral fees from Microsoft for enterprise agreements, increases in supplier reimbursements as a percentage of net sales and increases in services. These increases were partially offset by decreases in product margin due to the increase in the percentage of sales to large corporate enterprise clients, which are generally transacted at lower product margins and an increase in the write-downs of inventories as a percentage of sales.

     Insight UK’s gross profit increased for the year ended December 31, 2005 by 3% to $63.4 million from $61.6 million for the year ended December 31, 2004. As a percentage of net sales, gross profit decreased to 13.5% for the year ended December 31, 2005 from 13.7% for the year ended December 31, 2004 due primarily to decreases in product margin resulting from an aggressive pricing environment as well as some product mix shift to lower margin products and a decrease in service sales. These downward pressures on gross profit were offset partially by decreases in the write-downs of inventories as a percentage of sales and increases in supplier discounts.

     Direct Alliance’s gross profit decreased 10% for the year ended December 31, 2005 to $17.4 million from $19.2 million for the year ended December 31, 2004. As a percentage of net sales, gross profit decreased to 22.4% for the year ended December 31, 2005 from 25.9% for the year ended December 31, 2004. The overall decrease in the year ended December 31, 2005 compared with the year ended December 31, 2004 is due primarily to renegotiated fee structures as part of multi-year contract renewals with some of Direct Alliance’s largest clients. These decreases were offset partially by increases in gross profit from other client programs.

Operating Expenses.

      Selling and Administrative Expenses. Selling and administrative expenses increased 1% to $289.3 million for the year ended December 31, 2005 from $285.7 million for the year ended December 31, 2004, but decreased as a percent of net sales

     Insight North America’s selling and administrative expenses increased for the year ended December 31, 2005 by 3% to $232.2 million compared to the year ended December 31, 2004. As a percentage of net sales, selling and administrative expenses decreased to 8.6% for the year ended December 31, 2005 from 8.8% for the year ended December 31, 2004. In 2005, Insight North America benefited from increased net sales, savings from restructuring activities and increases in operational efficiencies. These savings were offset by increased expenses in areas we are investing in for growth, most notably marketing, information technology and training. Additionally, selling and administrative expenses for the year ended December 31, 2004 included $1.2 million of expenses associated with the hiring of our chief executive officer.

     Insight UK’s selling and administrative expenses decreased 5% to $50.8 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. As a percentage of net sales, selling and administrative expenses decreased to 10.8% for the year ended December 31, 2005 from 11.8% for the year ended December 31, 2004. The decrease is primarily due to bonus expenses recorded in 2004 of $3.2 million, including employer taxes, related to management incentive plans with the top executives at a discontinued operation. In 2005, Insight UK also benefited from increased net sales, savings from restructuring activities and increases in operational efficiencies. These savings were offset by increased expenses in areas we are investing in for growth, most notably marketing, sales support and sales compensation plans.

     Direct Alliance’s selling and administrative expenses remained consistent at $6.3 million for the years ended December 31, 2005 and 2004. As a percentage of net sales, selling and administrative expenses decreased to 8.2% for the year ended December 31, 2005 from 8.5% for the year ended December 31, 2004. The decrease in selling and administrative expenses as a percentage of sales is due primarily to an increase in net sales. During the year ended December 31, 2005, we also increased our focus on controlling administrative expenses, which was offset primarily by increases in expenses related to information technology.

      Severance and Restructuring Expenses. During the year ended December 31, 2005, Insight UK moved into a new facility and recorded restructuring costs of $6.9 million for the remaining lease obligations on the previous lease and $1.0 million for duplicate rent expense for the new facility for the last half of 2005. Also, during 2005, Insight North America, Insight UK and Direct Alliance recorded severance and restructuring expenses of $3.7 million, $414,000 and $1.0 million, respectively, for severance attributable to the elimination of 90 positions, primarily in support and management. These amounts included the severance for the former President of Insight North America of $2.4 million and the President of Direct Alliance for $1.0 million. During the year ended December 31, 2004, Insight North America, Insight UK and Direct Alliance recorded $2.0 million, $377,000 and $83,000, respectively, of severance and restructuring expenses attributable to the elimination of certain sales, support and management functions. These amounts included $1.6 million recorded for the retirement of our Executive Vice President, Chief Administrative Officer, General Counsel and Secretary and our agreement to terminate his employment agreement without cause. See Note 8 to Consolidated Financial Statements in Item 8 of this report of this report for further discussion of all severance and restructuring activities.

      Reductions in Liabilities Assumed in Previous Acquisition . During the years ended December 31, 2005 and 2004, Insight UK settled certain liabilities assumed in a previous acquisition for $664,000 and $3.6 million, respectively, less than the amounts originally recorded. See Note 9 to the Consolidated Financial Statements in Item 8 of this report of this report for further discussion.

      Interest Income . Interest income of $3.4 million and $1.8 million for the year ended December 31, 2005 and 2004, respectively, was generated through short-term investments. The increase in interest income is due to a generally higher level of cash available to be invested in short-term investments and increases in interest rates earned on those investments during the year ended December 31, 2005.

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

      Interest Expense . Interest expense of $1.9 million and $2.0 million for the year ended December 31, 2005 and 2004, 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 partially by increases in interest rates during the year ended December 31, 2005.

      Other Expense, Net . Other expense, net, decreased to $853,000 for the year ended December 31, 2005 from $893,000 for the year ended December 31, 2004. These amounts consist primarily of bank fees associated with our financing facilities and cash management, miscellaneous investment gains or losses and foreign currency transaction gains or losses. In 2004, we recorded gains from Insight UK’s sale of a building of $328,000 and Direct Alliance’s sale of stock upon exercise of stock options that were received from a client several years ago as compensation for a note payable extension of $516,000. These gains were offset partially by non-operating expenses in 2004 of $400,000 related to the losses and write-off of an equity method investee.

      Income Tax Expense . Our effective tax rates for continuing operations for the years ended December 31, 2005 and 2004 were 39.2% and 29.2%, respectively. Our effective tax rate for the year ended December 31, 2005 was higher than for the year ended December 31, 2004 primarily due to a $5.5 million tax benefit recorded during the year ended December 31, 2004 as a result of a decrease in the deferred tax valuation allowance for our United Kingdom operations. The increase in the rate for 2005 is also due to a higher percentage of earnings that are taxable in the United States at higher rates.

      Earnings from Discontinued Operation. In 2004, we sold our entire investment in PlusNet. Accordingly, the gain on the sale and the results of operations attributable to PlusNet are disclosed as a discontinued operation. See Note 18 to the Consolidated Financial Statements in Item 8 of this report for further discussion.

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 in 2004 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 clients. In 2004, the growth rates were stronger in sales to large enterprise and public sector clients compared to SMB clients. 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. In British pound sterling, 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 clients. 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.

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

consistent with 2003 as internal initiatives to increase gross margin were successful but were offset by the increase in sales to large enterprise clients, which are typically at lower product margins. The overall increase in gross profit as a percentage of net sales in 2004 was the result of a surge in referral fees from Microsoft for enterprise agreements, decreases in the write-downs of inventories due to enhanced inventory management policies and procedures, and increases in supplier reimbursements as a percentage of sales. 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 clients, 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 was due primarily to renegotiated fee structures as part of multi-year contract renewals with two of Direct Alliance’s largest clients in 2004 and the wind-down of one client relationship that ended, as scheduled, in May 2003.

      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 in 2004, reductions in bad debt expense and a continued focus on cost controls, which resulted in some headcount reductions. These decreases were partially offset by $1.2 million of expenses associated with the hiring of our chief executive officer and increased investments in 2004 on marketing and business development.

     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 was due primarily to reduced bad debt expense and increases in supplier reimbursements that are specifically offset against marketing expenditures. These decreases were 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 a discontinued operation. 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 the discontinued operation.

     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 in 2004.

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

      Severance and Restructuring Expenses. During the year ended December 31, 2004, Insight North America, Insight UK and Direct Alliance recorded $2.0 million, $377,000 and $83,000, respectively, of severance and restructuring expenses attributable to the elimination of certain sales, support and management functions. These amounts included $1.6 million recorded in connection with the retirement of our Executive Vice President, Chief Administrative Officer, General Counsel and Secretary. 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 teammates, 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 8 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 a previous acquisition 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 resulting from the reductions in liabilities assumed in previous acquisitions during the year ended December 31, 2003 was not taxable. See Note 9 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 related to borrowings under our financing facilities. The decrease in interest expense was 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 consisted primarily of bank fees associated with our financing facilities and cash management, miscellaneous investment gains or losses and foreign currency transaction 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. In 2004, we recorded gains from Insight UK’s sale of a building of $328,000 and Direct Alliance’s sale of stock upon exercise of stock options that were received from a client several years ago as compensation for a note payable extension of $516,000. For the year ended December 31, 2004, we also recorded non-operating expenses of $400,000 representing the write-down of an equity method investment. See Note 19 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.

      Earnings from Discontinued Operation. During the year ended December 31, 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 18 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, 2005, 2004 and 2003 (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. We intend to hold cash balances in the United Kingdom for future growth and investments and to meet any liquidity requirements in the United States through ongoing cash flows, external borrowings or both. However, we decided to repay intercompany balances owed by our Canadian operation to certain of our United States operations, primarily for charges of management fees, interest and other expenses, to preserve the deductibility of these expenses for Canadian tax purposes and to provide additional cash for uses in the United States such as working capital, debt repayment and repurchases of our common stock. Certain intercompany balances were paid in December 2005 and January 2006, and ongoing charges will be paid on a monthly basis.

     As noted in Note 10 to Consolidated Financial Statements in Item 8 of this report, in October 2004, the Financial Accounting Standards Board (“FASB”) released FASB Staff Position No. 109-2, “ Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ” (“FSP No. 109-2”), which provides guidance under FASB Statement No. 109, “ Accounting for Income Taxes ” (“SFAS No. 109”) with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on an enterprise’s income tax expense and deferred tax liability. FSP No. 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 SFAS No. 109. We have completed our evaluation of the impact of the repatriation provisions of the Jobs Act and have elected not to utilize these provisions to repatriate the undistributed earnings of our foreign subsidiaries to our operations in the United States.

     Our primary uses of cash in the past few years have been to fund our working capital requirements, capital expenditures, repurchases of our common stock and acquisitions.

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

     In 2004, we sold our entire investment in a discontinued operation. Excluding net earnings, amounts related to the discontinued operation have not been removed from the 2004 and 2003 cash flow statements because the effect is immaterial.

      Net cash provided by operating activities. For the year ended December 31, 2005, net cash provided by operating activities was $12.7 million, a 4% decrease from cash flows from operations of $13.2 million for the year ended December 31, 2004 primarily due to higher net earnings before depreciation in 2004. Cash flows from operations for the year ended December 31, 2005 resulted primarily from net earnings before depreciation, offset by increases in accounts receivable and inventories. The increase in accounts receivable was primarily due to increased sales and increases in sales with terms longer than 30 days. The increase in inventories was due primarily to opportunistic purchases and increased inventories for our integration labs and upcoming projects with large enterprise and public sector clients. Additionally, we decreased the outstanding balance on our inventories financing facility. Cash flows from operations for the year ended December 31, 2004 resulted primarily from net earnings before depreciation and the gain on the sale of our investment in a discontinued operation, offset by an increase in accounts receivable and inventories due primarily to increased sales compared to the prior year.

     Our consolidated cash flow operating metrics for the years ended December 31, 2005, 2004 and 2003 are as follows:

     The increase in DSOs is due primarily to an increase in net sales with terms longer than 30 days, primarily related to our large enterprise and public sector clients. The decrease in inventory turns is primarily due to the increase in inventories primarily related to opportunistic purchases and increased inventories for our integration labs and upcoming projects with large enterprise and public sector clients. The $35.5 million of inventories not available for sale at December 31, 2005 represents inventories segregated pursuant to binding client contracts, which will be recorded as net sales when the criteria for sales recognition are met. Client payments in advance of shipment of $24.7 million at December 31, 2005 primarily represent payments received from clients pursuant to these contracts. The decrease in DPOs is due primarily to utilizing early pay discounts from suppliers and to the timing of payments at year end.

     If sales continue to increase in the future, we expect that cash flow from operations will be used, at least partially, to fund working capital as we typically increase balances in our inventories and pay our suppliers on average terms that are shorter than the average terms granted to our clients in order to take advantage of supplier discounts.

      Net cash used in investing activities. In January 2005, we received $27.0 million owed to us by an underwriter related to the sale of a discontinued operation. Capital expenditures of $38.8 million for the year ended December 31, 2005 primarily relate to capitalized costs of software developed for internal use, the purchase of a previously leased office facility, leasehold improvements primarily in our Illinois distribution center and in Insight UK’s London facility and computer equipment. Capital expenditures for the year ended December 31, 2004 of $20.7 million primarily related to software, computer equipment and capitalized costs of software developed for internal use. Capital expenditures in 2004 were offset by proceeds from the sale of a discontinued operation and proceeds from the sale of a building. See Note 18 to Consolidated Financial Statements in Item 8 of this report for further discussion about our discontinued operation. We expect total capital expenditures in 2006 to be between $30.0 million and $35.0 million.

      Net cash provided by (used in) financing activities. During the year ended December 31, 2005, cash was provided by borrowings on our short-term financing facility and our line of credit and by cash received from common stock issuances as a result of stock option exercises. Cash was primarily used to make repayments on our short-term financing facility and to repurchase shares of our common stock. In January 2006, our Board of Directors approved a stock repurchase program that allows us to purchase up to an additional $50.0 million of our common stock.

     We anticipate that cash flow from operations, together with the funds available under our financing facilities, will be adequate to support our presently anticipated cash and working capital requirements for operations through 2006 and longer if we successfully renew our short-term finance facility at or prior to the expiration of its current term on December 30, 2006. We have no reason to believe the facility will not be renewed at the end of its current term.

     As part of our long-term growth strategy, we intend to consider acquisition opportunities from time to time, which may require additional debt or equity financing.

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

     See Note 5 of our Consolidated Financial Statements in Item 8 of this report for a description of our financing facilities, including terms, amounts outstanding, amounts available and weighted average borrowings and interest rates during the year.

Off Balance Sheet Arrangements

     We have entered into off-balance sheet arrangements, which include guaranties and indemnifications, as defined by the SEC’s Final Rule 67, “ Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations .” The guaranties and indemnifications are discussed in Note 14 to the Consolidated Financial Statements in Item 8 of this report. We believe that none of our off-balance sheet arrangements have, or is reasonably likely to have, a material current or future effect on our financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations for Continuing Operations

     At December 31, 2005, our contractual obligations for continuing operations were as follows (in thousands):

(a)		Includes the accounts receivable securitization facility that expires December 30, 2006 and secured inventory financing facility that expires March 31, 2006.
(b)		Includes the line of credit facility which expires December 31, 2008.
(c)		As a result of approved severance and restructuring plans, we expect future cash expenditures related to employee termination benefits and facilities based costs. See further discussion in Notes 8 to the Consolidated Financial Statements in Item 8 of this report.
(d)		Includes:

	I.		Estimated interest payments in 2006 of $1.8 million based on the projected monthly balances under the asset backed securitization facility and using the December 31, 2005 interest rate of 4.8% per annum.
	II.		Amounts totaling $9.6 million over the next 8 years to the Valley of the Sun Bowl Foundation for sponsorship of the Insight Bowl and $11.0 million over the next 10 years for advertising and marketing events at the new stadium where the Arizona Cardinals are scheduled to play their National Football League games beginning in 2006.
	III.		During the three months ended December 31, 2005, we recorded $979,000, $649,000 net of taxes, for the cumulative effect of a change in accounting principle for the adoption of FIN No. 47. FIN No. 47 states that companies must recognize a liability for the fair value of a legal obligation to perform asset-retirement activities that are conditional on a future event if the amount can be reasonably estimated. This interpretation applies to certain provisions in our facility lease agreements in the United States and the United Kingdom. Some of our leases stipulate that any leasehold improvements performed by the tenant with landlord approval become the landlord’s property upon expiration of the lease. However, some landlords further reserve the right to make the determination as to whether the premises must be returned to their original condition, normal wear and tear excepted, at our expense. Because of these provisions, FIN No. 47 now requires us to record a liability for the estimated fair value of this legal obligation to return the premises to the original condition with the offset recorded as an increase to the cost of the leasehold improvements. We estimate that we will owe $3.2 million in future years in connection with returning our leased facilities to original condition.

See further discussion in Note 14 to the Consolidated Financial Statements in Item 8 of this report.

     Although we set purchase targets with our suppliers tied to the amount of supplier reimbursements we receive, we have no material contractual purchase obligations.

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

Acquisitions

     Our strategy includes the possible acquisition of other businesses to expand or complement our operations. The magnitude, timing and nature of any future acquisitions will depend on a number of factors, including the availability of suitable acquisition candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing of future acquisitions would result in the utilization of cash, incurrence of additional debt, issuance of stock or a combination of any of the three.

Inflation

     We have historically not been adversely affected by inflation, as technological advances and competition within the IT industry have generally caused the prices of the products we sell to decline and product life cycles tend to be short. This requires our growth in unit sales to exceed the decline in prices in order to increase our net sales. We believe that most price increases could be passed on to our clients, as prices charged by us are not set by long-term contracts; however, as a result of competitive pressure, there can be no assurance that the full effect of any such price increases could be passed on to our clients.

Recently Issued Accounting Standards

     See Note 1 of our Consolidated Financial Statements in Item 8 of this report of this report for a description of recent accounting pronouncements, including our expected dates of adoption and the estimated effects on our results of operations and financial condition.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

     We have interest rate exposure arising from our financing facilities, which have variable interest rates. These variable interest rates are affected by changes in short-term interest rates. We manage interest rate exposure by maintaining a conservative debt to equity ratio.

     We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows will not be material. Our financing facilities expose net earnings to changes in short-term interest rates since interest rates on the underlying obligations are variable. Borrowings outstanding under the interest-bearing financing facilities totaled $66.3 million at December 31, 2005, and the interest rates attributable to this outstanding balance were 4.8% and 7.25% per annum at December 31, 2005. A change in net earnings resulting from a hypothetical 10% increase or decrease in interest rates would not be material.

Foreign Currency Exchange Risk

     Our revenue, expense, and capital purchasing activities are primarily transacted in U.S. dollars. However, since a portion of our business is operated in the United Kingdom and Canada in their respective functional currencies, we do have foreign currency translation exposure for changes in exchange rates for the Canadian dollar and the British pound sterling. Additionally, our U.S. operation outsources one of its call centers to our Canadian operations for a monthly charge, which creates some foreign currency transaction exposure. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may adversely affect our consolidated financial statements as expressed in U.S. dollars. We monitor our foreign currency exposure and may from time to time enter into hedging transactions to manage this exposure. There were no hedging transactions during the year ended December 31, 2005, and there were no hedging instruments outstanding at December 31, 2005.

INSIGHT ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Item 8. Financial Statements and Supplementary Data

		Page
Reports of Independent Registered Public Accounting Firm			44
Consolidated Balance Sheets – December 31, 2005 and 2004			46
Consolidated Statements of Earnings – For each of the years in the three-year period ended December 31, 2005			47
Consolidated Statements of Stockholders’ Equity and Comprehensive Income – For each of the years in the three-year period ended December 31, 2005			48
Consolidated Statements of Cash Flows – For each of the years in the three-year period ended December 31, 2005			49
Notes to Consolidated Financial Statements			50