Summary of INSIGHT ENTERPRISES INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of our operations, which gives effect to the restatement discussed in Note 2 to the Consolidated Financial Statements, should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Part II, Item 8 of this report. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in "Risk Factors" in Part I, Item 1A and elsewhere in this report.
Restatement of Consolidated Financial Statements Background
On February 9, 2009, following an internal review we issued a press release announcing that our management had identified errors in the Company's accounting for trade credits in prior periods dating back to December 1996. The internal review encompassed aged trade credits, including both aged accounts receivable credits and aged accounts payable credits, arising in the ordinary course of business that were recognized in the Company's statements of operations prior to the legal discharge of the underlying liabilities under applicable domestic and foreign laws. In a Form 8-K filed on February 10, 2009, we reported that the Company's financial statements, assessment of the effectiveness of internal control over financial reporting and related audit reports thereon in our most recently filed Annual Report on Form 10-K, for the year ended December 31, 2007, and the interim financial statements in our Quarterly Reports on Form 10-Q for the first three quarters of 2008, and all earnings press releases and similar communications issued by the Company relating to such financial statements, should no longer be relied upon.
We informed the administrative agents and lenders under our senior revolving credit facility, our accounts receivable securitization financing facility and our inventory financing facility of our intention to restate our financial statements. The errors and restatement constituted a default under each of these facilities. Accordingly, we sought and received the waivers required to resolve this default.
Following management's identification of errors in the Company's accounting for aged trade credits, the Company retained outside legal counsel to conduct a factual investigation into the Company's accounting practices pertaining to aged trade credits. The Board of Directors and its Audit Committee separately retained counsel to oversee and participate in the investigation, reach findings, and propose remedial measures to the Audit Committee. Company counsel and board counsel jointly retained forensic accountants to assist in the investigation and to gather documents and information from Company personnel. As part of this investigation and review process, outside counsel and forensic accountants gathered and evaluated documents and interviewed current and former Company employees. The Audit Committee was advised of the progress of the investigation and the internal review on a regular basis.
Outside counsel has informed the Audit Committee that the internal investigation is complete. Board counsel has presented its findings to the Audit Committee. Interviews, document reviews and forensic analysis conducted during the internal investigation did not indicate an intent to manipulate the Company's accounting or financial results. The Audit Committee has received these findings as well as the recommendations of management, board counsel and other advisors concerning the proposed remedial actions to be taken with respect to the aged trade credit issue. The Audit Committee has adopted these remedial measures and directed management to implement them under the supervision of the Audit Committee. Detailed information about the remedial measures that management plans to implement is included in Part II, Item 9A "Controls and Procedures" of this report.
We determined, based upon the results of our internal review and analysis and the related internal investigation, that the periods in which certain aged trade credits in accounts receivable and accounts payable were previously recorded as a reduction of costs of goods sold preceded the periods in which the Company was legally discharged of the underlying liabilities under applicable domestic and foreign laws. The restated consolidated financial statements included in this Annual Report on Form 10-K reflect the corrections resulting from our determination. The cumulative restatement charge covering the period from December 1, 1996 through September 30, 2008 related to this trade credit issue is $61.2 million, or $37.7 million after taxes. These aged trade credit liabilities totaled $59.4 million as of December 31, 2008. We expect that the final settlement of these liabilities with our clients and our partners and ultimately with state and/or foreign regulatory bodies may take multiple years and may be settled for less than the estimated liability. However, we cannot provide any assurances that the final settlement will be materially lower.

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INSIGHT ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The matters that have caused us to restate our financial statements and data previously reported are further discussed below and in Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data." In addition, in connection with the investigation and restatement process, we identified a material weakness in our internal control over financial reporting. As a result, management has concluded that the Company's internal control over financial reporting was not effective as of December 31, 2008. A description of that material weakness, as well as management's plan to remediate that material weakness, is more fully discussed in Part II, Item 9A, "Controls and Procedures." We have incurred substantial expenses related to our internal review, including the cost of outside legal counsel, forensic accounting consultants and outside consultants engaged to assist management in quantifying the related liabilities under applicable domestic and foreign laws. We have incurred approximately $4.1 million in such costs through March 31, 2009 and anticipate additional fees will be incurred in the completion of the financial statement restatement and related matters.
Restatement Adjustments
We determined that corrections to our consolidated financial statements are required to reverse material prior period reductions of costs of goods sold and the related income tax effects as a result of these incorrect releases of aged trade credits prior to the legal discharge of the underlying liability. These trade credits arose from unclaimed credit memos, duplicate payments, payments for returned product or overpayments made to us by our clients, and, to a lesser extent, from goods received by us from a supplier for which we were never invoiced.
We recorded an aggregate gross charge of approximately $35.2 million to our consolidated retained earnings as of December 31, 2005 and established a related current liability. This amount represented approximately $33.0 million of costs of goods sold and $2.2 million of selling and administrative expenses relating to the period from December 1, 1996 through December 31, 2005. The aggregate tax benefit related to these trade credit restatement adjustments is $13.8 million, which benefit reduced the charge to retained earnings as of December 31, 2005 and established a related deferred tax asset. In addition, our statements of operations for the years ended December 31, 2006 and 2007, and the quarters ended March 31, June 30, and September 30, 2008 contained in this Annual Report have been restated to reflect an aggregate of approximately $9.5 million, $10.2 million, $2.8 million, $2.2 million and $1.3 million, respectively, of increases in costs of goods sold and to establish a related current liability relating to aged trade credits. These reinstated aged trade credit liabilities totaled $59.4 million at December 31, 2008 and are recorded in accrued expenses and other current liabilities.
Other Miscellaneous Accounting Adjustments In addition to the restatements for aged trade credits, we also corrected previously reported financial statements for the following other miscellaneous accounting adjustments as a result of a review of our critical accounting policies:
• An adjustment of $2.7 million to allocate a portion of our North America goodwill not previously allocated to the carrying amount of a division of our North America operating segment that we sold on March 1, 2007 in determining the gain on sale. This adjustment reduced the gain on sale of the discontinued operation recorded in the three months ended March 31, 2007, which gain is included in earnings from discontinued operations. The tax effect of this adjustment was $1.1 million.

• Adjustments to hardware net sales and costs of goods sold recognized in prior periods to recognize sales based on a "de facto" passage of title at the time of delivery. Although our usual sales terms are F.O.B. shipping point or equivalent, at which time title and risk of loss have passed to the client, we have a general practice of covering customer losses while products are in transit despite our stated shipping terms, and as a result delivery is not deemed to have occurred until the product is received by the client. The net increase (decrease) in gross profit resulting from these adjustments was $20,000, $440,000 and ($522,000) for the years ended December 31, 2006 and 2007 and the nine months ended September 30, 2008, respectively. The tax expense (benefit) related to these adjustments was $8,000, $174,000 and ($201,000) for the years ended December 31, 2006 and 2007 and the nine months ended September 30, 2008, respectively. Adjustments related to periods prior to 2006 resulted in an $895,000 reduction of retained earnings as of December 31, 2005.

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INSIGHT ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) • Adjustments to recognize stock based compensation expense related to performance-based RSUs on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards (i.e., a graded vesting basis) instead of on a straight-line basis over the requisite service period for the entire award. The net increase (decrease) in operating expenses was $2.4 million, $2.5 million and ($1.2 million) for the years ended December 31, 2006 and 2007 and the nine months ended September 30, 2008, respectively.

• Adjustments to capitalize interest on internal-use software development projects in prior periods and record the related amortization expense thereon. The net increase (decrease) in pretax earnings resulting from these adjustments was $805,000, $386,000 and ($4,000) for the years ended December 31, 2006 and 2007 and the nine months ended September 30, 2008, respectively. The tax expense (benefit) related to these adjustments was $318,000, $152,000 and ($2,000) for the years ended December 31, 2006 and 2007 and the nine months ended September 30, 2008, respectively. Adjustments related to periods prior to 2006 resulted in a $50,000 reduction of retained earnings as of December 31, 2005.

• Revisions in the classification of consideration that exceeded the specific, incremental identifiable costs of shared marketing expense programs of $5.0 million, $7.3 million and $4.6 million for the years ended December 31, 2006 and 2007 and the nine months ended September 30, 2008, respectively, to reflect such excess consideration as a reduction of costs of goods sold instead of a reduction of the related selling administration expenses. These revisions in classification related to our EMEA operating segment and had no effect on reported net earnings in any period.

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                           INSIGHT ENTERPRISES, INC.
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (continued)
The table below presents the decrease in net earnings resulting from the
individual restatement adjustments for each respective period presented (in
thousands):

                             Nine Months
                                Ended
                              September
                                 30,                          Year Ended December 31,
                                2008             2007           2006           2005           2004
Increase (decrease) in
net sales:
F.O.B. destination
adjustments                 $      (9,288 )    $   5,043      $   6,681      $ (11,074 )    $  18,061

Total adjustments to net
sales                              (9,288 )        5,043          6,681        (11,074 )       18,061


Increase (decrease) in
costs of goods sold:
Trade credit adjustments            6,347         10,161          9,458          9,128          4,847
F.O.B. destination
adjustments                        (8,766 )        4,603          6,661        (10,939 )       17,021
Reclassification of
partner funding                    (4,554 )       (7,259 )       (4,967 )       (2,770 )         (925 )

Total adjustments to
costs of goods sold                (6,973 )        7,505         11,152         (4,581 )       20,943


Net decrease in gross
profit                             (2,315 )       (2,462 )       (4,471 )       (6,493 )       (2,882 )


Increase (decrease) in
operating expenses:
Stock-based compensation           (1,243 )        2,543          2,363              -              -
Reclassification of
partner funding                     4,554          7,259          4,967          2,770            925
Amortization of
capitalized interest                  113            129              3              3              1
Goodwill impairment                  (181 )            -              -              -              -

Total adjustments to
operating expenses                  3,243          9,931          7,333          2,773            926


Net decrease in earnings
(loss) from operations             (5,558 )      (12,393 )      (11,804 )       (9,266 )       (3,808 )


Decrease in
non-operating expenses:
Capitalized interest                 (109 )         (515 )         (808 )          (64 )          (22 )

Total adjustments to
non-operating expenses               (109 )         (515 )         (808 )          (64 )          (22 )


Total adjustments to
earnings (loss) from
continuing operations
before income taxes                (5,449 )      (11,878 )      (10,996 )       (9,202 )       (3,786 )
Income tax benefit                  2,187          4,472          3,719          3,582          1,473

Total adjustments to
earnings (loss) from
continuing operations              (3,262 )       (7,406 )       (7,277 )       (5,620 )       (2,313 )

Decrease in gain on sale
of a discontinued
operation                               -         (2,699 )            -              -              -
Income tax benefit                      -          1,066              -              -              -

Total adjustments to
earnings from
discontinued operations,
net of tax                              -         (1,633 )            -              -              -


Total decrease in net
earnings                    $      (3,262 )    $  (9,039 )    $  (7,277 )    $  (5,620 )    $  (2,313 )

The decrease in net earnings resulting from the trade credit adjustments was $3.1 million, $4.5 million, $3.5 million, $333,000, $762,000, $466,000, $224,000 and $0 for the years ended December 31, 2003, 2002, 2001, 2000, 1999, 1998, 1997 and 1996, respectively. The tax benefit related to these adjustments was $2.0 million, $2.9 million, $2.3 million, $217,000, $498,000, $304,000, $146,000 and $0 for the years ended December 31, 2003, 2002, 2001, 2000, 1999, 1998, 1997 and 1996, respectively. Aggregate F.O.B. destination adjustments related to periods prior to 2004 resulted in a $1.4 million reduction of retained earnings. No other restatement adjustments were made prior to the year ended December 31, 2004.
Related Proceedings
On March 19, 2009, we received an informal inquiry from the Division of Enforcement of the SEC requesting certain documents and information relating to the Company's historical accounting treatment of aged trade credits. We are cooperating with the SEC. We cannot predict the outcome of this investigation.

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INSIGHT ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Beginning in March 2009, three purported class action lawsuits were filed in the U.S. District Court for the District of Arizona against us and certain of our current and former directors and officers on behalf of purchasers of our securities during the period April 22, 2004 to February 6, 2009 (the period specified in the first complaint is January 30, 2007 to February 6, 2009). The complaints, which seek unspecified damages, assert claims under the federal securities laws relating to our February 9, 2009 announcement that we expected to restate our financial statements for the year ended December 31, 2007 and for the first three quarters of 2008 and that the restatement would include a material reduction of retained earnings. The complaints also allege that we issued false and misleading financial statements and issued misleading public statements about our results of operations. None of the defendants have responded to the complaints at this time.
Overview We are a leading provider of information technology ("IT") hardware, software and services to small, medium and large businesses and public sector institutions in North America, Europe, the Middle East, Africa and Asia-Pacific. Currently, our offerings in North America and the United Kingdom include IT hardware, software and services. Our offerings in the remainder of our EMEA segment and in APAC currently only include software and select software-related services.
Our strategic vision is to be the trusted advisor to our clients, helping them enhance their business performance through innovative technology solutions. Our strategy is to grow profitable market share through the continued transformation of Insight into a complete IT solutions company and to establish Insight as a Global Value-Added Reseller ("G-VAR"), differentiating us in the marketplace and giving us a competitive advantage.
Net sales for the year ended December 31, 2008 increased slightly over the year ended December 31, 2007. While net sales for the year ended December 31, 2008 compared to the year ended December 31, 2007 remained flat in North America, net sales in EMEA declined 2% and net sales in APAC grew 42% year over year. We reported a net loss from continuing operations of $239.7 million and a diluted loss per share of $5.15 for the year ended December 31, 2008, primarily as a result of a $276.7 million, net of tax, goodwill impairment charge taken during the year. Net earnings from continuing operations for the year ended December 31, 2007 increased 14% and diluted earnings from continuing operations per share increased 12% compared to the year ended December 31, 2006. The results of operations for the year ended December 31, 2008 include the effect of the following items:
• goodwill impairment charge of $397.2 million, $276.7 million net of tax;

• foreign currency losses of $9.6 million, $6.6 million net of tax;

• severance and restructuring expenses of $8.6 million, $5.7 million net of tax; and

• foreign tax credit impairment of $8.7 million.

The results of operations for the year ended December 31, 2007 include the effect of the following items:
• expenses of $13.0 million, $7.9 million net of tax, for professional fees and costs associated with our stock option review;

• gain on sale of a discontinued operation of $5.6 million, $3.4 million net of tax;

• foreign currency gains of $3.9 million, $2.5 million net of tax; and

• severance and restructuring expenses of $2.6 million, $1.5 million net of tax.

The results of operations for the year ended December 31, 2006 include the following items:
• gain on the sale of a discontinued operation of $14.9 million, $9.0 million net of tax;

• expenses of $1.6 million, $1.0 million net of tax, for professional fees associated with our stock option review;

• foreign currency gains of $1.1 million, $751,000 net of tax; and

• severance and restructuring expenses of $729,000, $454,000 net of tax.

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INSIGHT ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) On July 10, 2008, we acquired MINX Limited ("MINX"), a United Kingdom-based networking services company with annual net sales of approximately $25.0 million, for an initial cash purchase price of approximately $1.5 million and the assumption of approximately $3.9 million of existing debt. Up to an additional $550,000 may be due if MINX achieves certain performance targets over a one-year period. Founded in 2002, MINX is a network integrator with Cisco Gold Partner accreditation in the United Kingdom. We believe this acquisition will significantly enhance our capabilities in the sale, implementation and management of network infrastructure services and solutions in our EMEA operating segment and will complement our April 1, 2008 acquisition of Calence in our North America operating segment.
On April 1, 2008, we completed the acquisition of Calence, LLC ("Calence"), one of the nation's largest independent technology solutions providers specializing in Cisco networking solutions, advanced communications and managed services, for a cash purchase price of $125.0 million plus a preliminary working capital adjustment of approximately $4.0 million, offset by a final post-closing working capital adjustment of $383,000. Up to an additional $35.0 million of purchase price consideration may be due if Calence achieves certain performance targets over the next four years. During the year ended December 31, 2008, we accrued an additional $9.8 million of purchase price consideration and $532,000 of accrued interest thereon as a result of Calence achieving certain performance targets during the year. Such amounts were recorded as additional goodwill. See discussion relating to goodwill in Note 5 to the Consolidated Financial Statements in Part II, Item 8 of this report. We also assumed Calence's existing debt totaling approximately $7.3 million, of which $7.1 million was repaid by us at closing. This acquisition is consistent with our vision and strategy to become a global value added reseller ("G-VAR") through continued investment in certain key technology categories, including networking and advanced communications.
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 and 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 U.S. generally accepted accounting principles ("GAAP"). For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, 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. Actual results, however, may differ from estimates we have made. Members of our senior management have discussed the critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
We consider the following to be our critical accounting estimates used in the preparation of our Consolidated Financial Statements:
Sales Recognition
We adhere to guidelines and principles of sales recognition described in Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB 104"), issued by the staff of the Securities and Exchange Commission (the "SEC"). Under SAB 104, sales are recognized when title and risk of loss are passed to the client, there is persuasive evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the sales price is fixed or determinable and collectibility is reasonably assured. Our usual sales terms are F.O.B. shipping point or equivalent, at which time title and risk of loss have passed to the client. However, because we either (i) have a general practice of covering client losses while products are in transit despite title and risk of loss transferring at the point of shipment or (ii) have specifically stated F.O.B. destination contractual terms with the client, delivery is not deemed to have occurred until the point in time when the product is received by the client.

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INSIGHT ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) We make provisions for estimated product returns that we expect to occur under our return policy based upon historical return rates. Our manufacturers warrant 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 are consistent with manufacturers' terms; however, for some products we may charge restocking fees. Products returned opened are processed and returned to the manufacturer or partner 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 sold to inventory liquidators, to end users as "previously sold" or "used" products, or through other channels to limit our losses from returned products.
We record freight billed to our clients as net sales and the related freight costs as costs of goods sold. We report sales net of any sales-based taxes assessed by governmental authorities that are imposed on and concurrent with sales transactions. . . .