As filed with the Securities and Exchange Commission on December 22, 2000

FORM S-1

8123 South Hardy

Branson (“Tony”) M. Smith, Chief Executive Officer and President

Copies to:

      Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.

     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   

     If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  

CALCULATION OF REGISTRATION FEE

(1)	Calculated pursuant to Rule 457(o).

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED DECEMBER             , 2000

                        Shares

Common Stock

         This is our initial public offering of shares of common stock. We are offering      shares. We anticipate that the initial public offering price will be between $          and $          per share. No public market currently exists for our shares. We have applied to list our shares on the Nasdaq National Market under the symbol “DACC.” We are currently a wholly-owned subsidiary of Insight Enterprises, Inc., and Insight’s common stock is listed on the Nasdaq National Market under the symbol “NSIT.” When the offering is completed, Insight will own approximately      % of our outstanding shares of common stock.

Investing in our common stock involves risks.

      We have granted the underwriters the right to purchase up to  additional shares of common stock to cover over-allotments, if any. The underwriters expect to deliver the shares to purchasers on or about             , 2001.

      Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

A.G. Edwards & Sons, Inc.

	Robert W. Baird & Co.

	Morgan Keegan & Company, Inc.

Prospectus dated             , 2001

      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. This prospectus is not an offer to sell or a solicitation of an offer to buy our common stock in any jurisdiction where it is unlawful. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock.

TABLE OF CONTENTS

      In this prospectus, unless the context otherwise requires, the terms “we,” “us,” “our,” “the company” and “Direct Alliance” refer to Direct Alliance Corporation and its subsidiaries. All references to “Insight” refer to Insight Enterprises, Inc., a Delaware corporation, and its subsidiaries.

      Until             , 2001, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

      Direct Alliance™, SuperScan™, UDE™, Universal Data Extract™, and MAX™ are some of our trademarks. Other marks used herein are the property of their respective owners, which includes us in some instances.

PROSPECTUS SUMMARY

      You should read the entire prospectus carefully, including the “Risk Factors” section. This summary highlights selected information contained elsewhere in this prospectus.

Direct Alliance

      We enable manufacturers of brand name products to directly access customers and improve the efficiency of their indirect sales channels. We provide demand generation marketing, direct sales management, Internet enablement, product fulfillment and transaction management services using state-of-the-art proprietary technology, infrastructure and processes. Our unique combination of services, technology and direct channel expertise allows us to provide customized, vertically integrated outsourced solutions for our clients in a cost-effective and timely manner. Our highly scalable solutions include the following features:

	•	end-to-end integration
	•	MAX, our sophisticated and proprietary technology system
	•	program customization
	•	client dedicated personnel
	•	confidentiality
	•	transparency to customers
	•	seasoned management with extensive direct channel expertise

Our solutions provide the following client benefits:

	•	profitable sales growth
	•	cost-effectiveness
	•	speed to market
	•	improved customer satisfaction
	•	system capabilities for international operations

      U.S. direct market sales will exceed $1.7 trillion in 2000 and increase to $2.7 trillion in 2005.* Additionally, the worldwide market for comprehensive supply chain services outsourcing will grow from $325 million in 1999 to $25 billion in 2004, as predicted by the             . We believe we are well positioned to benefit from these trends because we offer a full range of outsourced direct channel services with unique features and significant client benefits.

Our Strategy

      Historically, we have operated numerous programs targeted at various customer segments for our clients who have primarily been manufacturers of computers and computer related equipment and currently include Hewlett-Packard, IBM and Toshiba. We are pursuing further opportunities in this and other industries by leveraging our direct channel expertise. Our goal is to become the leading global provider of outsourced direct channel solutions by enhancing existing client relationships, expanding market share in our current industry, expanding into new industries, broadening our service offerings globally, developing strategic partnerships and continually improving our technology.

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Our MAX System

      We use our proprietary MAX technology as the foundation for the comprehensive suite of services we provide our clients. Our MAX system is a compilation of sophisticated, integrated software applications that, together with our direct channel services, provides our clients with the means to cost-effectively increase their sales. We configure a customized version of MAX for each client by determining which of our many MAX capabilities will best serve the client’s needs and then enabling the appropriate software applications for the client’s solution. We believe that the unique characteristics of our MAX system allow us to rapidly implement highly scalable direct channel solutions for our clients based on state-of-the-art technology.

Our Relationship with Insight

      We are currently a wholly-owned subsidiary of Insight. We were formed in 1993 to capitalize on Insight’s experience as a direct marketer of computer hardware and software products and provide outsourced direct channel solutions for manufacturers. We have been profitable each year since our formation. After the completion of this offering, Insight will own approximately      % of the outstanding shares of our common stock, or approximately      % if the underwriters exercise their over-allotment option in full. Insight has announced that it plans to spin-off Direct Alliance. The spin-off will result in the complete separation of Direct Alliance from Insight through a distribution of our stock held by Insight to Insight’s stockholders. There are various conditions to the completion of the spin-off, and we cannot assure you as to whether or when it will occur.

Corporate Information

      We were incorporated in Arizona on August 30, 1993. On December 22, 2000, we became a Delaware corporation pursuant to a change-of-domicile merger. Our principal executive offices are located at 8123 South Hardy, Tempe, Arizona 85284, and our telephone number is (480) 902-5900. Our website is located at www.direct-alliance.com. Information on the website is not part of this prospectus.

The Offering

      This information excludes 3,410,000 shares issuable upon exercise of options granted under our 2000 Long-Term Incentive Plan and 3,590,000 shares of common stock available for future grants of options under this plan, including shares subject to options which we expect to grant to our employees upon the spin-off in replacement of unvested options to acquire Insight common stock that will expire upon the spin-off. The actual number of our shares issuable under these replacement options will not be determined until the effective date of the spin-off and will be based on the relative market price of Insight and our common stock at that time. See “Management — Treatment of Insight Stock Options” on page 52.

      Unless otherwise noted or clear from the context, the information in this prospectus assumes that the underwriters’ over-allotment option will not be exercised and is based on the number of shares outstanding as of September 30, 2000.

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Summary Consolidated Financial Data

      The audited data presented in this table are derived from our historical consolidated financial statements and accompanying notes thereto that are included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements for the nine-month period ended September 30, 1999 and the years ended December 31, 1995, 1996 and 1997 from which the unaudited financial data below is derived include all adjustments, which consist only of normal recurring accruals, necessary for a fair presentation of the results for such periods. You should read our consolidated financial statements and accompanying notes for a further explanation of the consolidated financial data summarized here. Our historical financial information may not necessarily reflect our results of operations or financial position in the future. The net revenues and gross profit included in the consolidated financial data below may not be reliable indicators of our performance because:

	•	From late 1997 through September 2000, we transitioned our business from product based programs, pursuant to which we earned net revenue by purchasing and reselling our clients’ products, to our service fee based program model, pursuant to which we are compensated by our clients for the provision of services. Under the service fee based programs, we neither recognize the product sales as net revenues nor recognize the cost of products sold in our cost of revenues. As a result, the service fee based programs generate substantially less net revenues for a similar value of products sold. Because our net revenues during this transition period were derived from a changing mix of service fee based and product based programs, the inter-period comparability of our total net revenues during the transition is limited.
	•	Under the service fee based programs, substantially all direct operating costs related to the generation of net revenues are included in our cost of revenues and, therefore, are taken into account in determining gross profit. Under the product based programs, these same costs are accounted for as operating expenses and, therefore, are not taken into account in determining gross profit. Because of this, the inter-period comparability of our gross profit is limited during our transition to service fee based programs.

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RISK FACTORS

      Before you invest in our common stock, you should carefully consider the risks described below. You should also refer to the other information included in this prospectus before you decide to invest in our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be harmed. In that case, the trading price of our common stock could decline, and you might lose part or all of your investment. Additional risks and uncertainties not presently known to us, or that we currently think are immaterial, may also impair our business operations.

Risks Relating to Our Business

      Our reported net revenues and gross profit are not reliable indicators of our performance.

      The reported net revenues and gross profit included in the financial data in this prospectus may not be reliable indicators of our performance because:

	•	From late 1997 through September 2000, we transitioned our business from product based programs, pursuant to which we earned net revenue by purchasing and reselling our clients’ products, to our service fee based program model, pursuant to which we are compensated by our clients for the provision of services. Under the service fee based programs, we neither recognize the product sales as net revenues nor recognize the cost of products sold in our cost of revenues. As a result, the service fee based programs generate substantially less net revenues for a similar value of products sold. Because our net revenues during this transition period were derived from a changing mix of service fee based and product based programs, the inter-period comparability of our total net revenues during the transition is limited.
	•	Under the service fee based programs, substantially all direct operating costs related to the generation of net revenues are included in our cost of revenues and, therefore, are taken into account in determining gross profit. Under the product based programs, these same costs are accounted for as operating expenses and, therefore, are not taken into account in determining gross profit. Because of this, the inter-period comparability of our gross profit is limited during our transition to service fee based programs.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Transition from Product Based Programs to Service Fee Based Programs” for a discussion of the change in our business and its effect on the comparability of our financial data.

      We derive a significant portion of our revenues from a few large clients, and the loss of any of these clients could cause our net revenues to decline significantly.

      Our success depends on our continued ability to develop and manage relationships with significant clients. For the nine months ended September 30, 2000, our three largest clients accounted for 80.0% of our net revenues, as follows: Hewlett-Packard — 14.1% (service fees), IBM — 29.8% (service fees), and Toshiba — 36.1% (service fees, product sales and pass through product sales). We cannot be certain that our current significant clients will continue to do business with us, that business from existing clients will continue at the same levels as in previous periods or that we will be able to develop significant amounts of new business with new or existing clients. If we lose any of our significant clients and are unable to replace their business with business from other current or new clients, our revenues could decrease significantly.

      Substantially all of our clients are manufacturers of computers and computer related equipment. If that industry experiences a significant down turn, our revenues could decline.

      Currently, substantially all of our clients are manufacturers of computers and computer related equipment, and almost all of our net revenues have been derived from clients in that industry. Therefore, we are dependent upon the continued growth and financial stability of clients in that industry. If the computer and computer related equipment industry should experience a significant down turn, our net revenues could decline. If our clients’ products do not gain or sustain market acceptance, if computer and

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      We intend to market our services in new industries, and we cannot assure you that we will do so effectively or profitably.

      Part of our strategy is to provide our services to clients in new industries. While we plan on targeting industries with characteristics that we believe make them amenable to our direct marketing solutions, there can be no assurance that companies in any new industry will benefit from our services or that we will make accurate predictions about the readiness of an industry to begin using the direct marketing channel. Additionally, a general economic down turn in any new industry which we enter, or a slow-down or reversal of outsourcing trends, could have a material adverse effect on our business.

      Our client contracts are terminable on short notice, and the termination of any significant client contract could have an adverse effect on results of operations.

      Many of our agreements with our clients are terminable by the client at will on short notice. Therefore, we cannot assure you that our clients will continue to use our services for any extended period of time. Termination of our services by one or more large clients could materially adversely affect our business.

      An important part of our net revenues is based on the amount of clients’ products sold through our MAX system, and our revenues may be affected by changes in our clients’ sales volumes.

      A portion of our net revenues and a substantial portion of our earnings from operations are based on a percentage of the net revenues from the sale of our clients’ products and on the amount of products sold in transactions processed through our MAX system. Therefore, our net revenues and earnings from operations will fluctuate with the volume of products our clients sell in transactions processed through MAX. If we commit to provide services to a client whose business does not generate adequate sales, our business could be materially adversely affected.

      We may not be able to hire, retain and adequately train qualified personnel, which may harm our business.

      Our business and financial results depend in part on our ability to attract, train and retain highly skilled technical, managerial and other employees. Our industry is labor intensive and experiences high sales account executive turnover. In addition, the market for technical personnel, including software programmers, is highly competitive. We significantly invest in the training of our software programmers with respect to our proprietary source code and in the training of our sales account executives. Our inability to retain such personnel or to train them rapidly enough to meet our expanding needs could cause a decrease in the overall quality and efficiency of our staff. If our employee turnover rate increases significantly, our recruiting and training costs could rise and our operating efficiency and productivity could decline.

      We may not be able to hire or retain the necessary personnel to implement our growth strategies. In addition, new clients or expanded services for existing clients may require us to accelerate the recruiting, hiring and training of qualified employees on short notice. We cannot assure you that we will be able to continue to hire, train and retain sufficient qualified personnel to meet our anticipated growth.

      We may not accurately forecast our future requirements for capacity and management and technical employees, which may harm our business.

      We expect the number of clients, programs, industries and products we work with to grow in the near future. In order to handle such growth, we forecast and anticipate our needs for additional facilities, systems and equipment and our need to hire additional management and technical employees. If we incorrectly forecast our needs for facilities, systems, equipment and management and technical employees, we may commit to spend more resources for these items than needed. This may cause us to incur cost

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      We face competition from many sources that could adversely affect our business.

      The market for some of our services is highly competitive and subject to rapid technological advances. We expect the intensity of competition to continue to increase in the future as existing competitors enhance and expand their service offerings and as new participants enter the market. In particular, we expect competitors who previously focused solely on the e-commerce market to expand their services to compete in the broader direct channel market due to recent declines in the e-commerce market. We also experience competition from our clients or potential clients, who are capable or may become capable of performing for themselves the services we provide. Many of our competitors have more financial, personnel, capacity and other resources than we have. As a result, our competitors may be in a stronger position to respond quickly to new market opportunities. Our failure to maintain and enhance our competitive position could limit our ability to maintain or increase our market share, which could adversely affect our business and prospects. Increased competition also may result in price reductions, reduced profitability and loss of market share.

      Our quarterly financial results are subject to significant fluctuations because of many factors, any of which could adversely affect our stock price.

      Our quarterly financial results will vary from quarter to quarter. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall. Our net revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are not in our control. These factors include:

	•	cancellations or reductions in the scope of our client programs;
	•	variability in market demand for our clients’ products and our services;
	•	lengthy and unpredictable sales cycles associated with obtaining new clients and programs;
	•	our costs associated with upgrading and developing our systems and infrastructure and attracting new personnel in a timely and effective manner;
	•	the introduction of new services and technology;
	•	the efficiency with which we utilize our employees, plan and manage our existing and new projects, and manage future growth;
	•	seasonal buying factors that affect sales of our clients’ products and, consequently, our operating results;
	•	change in the mix of service fees and pass through product sales;
	•	the effect of changes in the components of our service fee revenues; and
	•	general economic conditions.

      We must maintain our reputation and expand our name recognition without our association with Insight to remain competitive.

      We believe that establishing and maintaining a good reputation and name recognition is critical for attracting and expanding our targeted client base. If our reputation is damaged or if potential clients are unfamiliar with us or our services, we may become less competitive or lose our market share. Further, by being a wholly-owned subsidiary of Insight, we have had the benefit of being associated with an identifiable and successful direct marketer of computer hardware and software products. For example, Insight guaranteed our performance of certain obligations under our client contracts and it is anticipated

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      We are dependent on our management team.

      Our future success will be largely dependent on the efforts of key management personnel who have extensive experience in the direct marketing industry. The loss of one or more of these key employees could have a material adverse effect on our business.

      If we fail to meet our clients’ expectations, we could lose revenue, incur increased expenses and our reputation could be damaged.

      Our solutions often are critical to our clients’ businesses. Our clients face significant uncertainties in forecasting the demand for their products. Limitations on the size of our facilities and number of our personnel could make it difficult for us to meet clients’ unforecasted demand. In addition, any disruption in our services could adversely affect our clients’ ability to sell their products. Any defects or errors in our solutions, or failure to meet clients’ specifications or expectations, could result in:

	•	delayed or lost revenue due to adverse client reaction;
	•	requirements to provide additional services to a client at no charge;
	•	negative publicity about us and our services, which could adversely affect our brand name and reputation and our ability to attract or retain clients; and
	•	claims for substantial damages against us, regardless of our responsibility for such failure, which may not be covered by our insurance policies and which may not be limited by the terms of our client contracts.

Technology Risks

      Our business would be materially adversely affected by the loss of our ability to use MAX.

      We use our proprietary MAX technology as the foundation for the comprehensive suite of services we provide our clients. Our MAX system is a compilation of sophisticated software applications, including a third party software program known as IMS/Forte. We have created certain MAX applications using IMS/Forte as the base to which we have made significant modifications. We own all these modifications, and we license IMS/Forte from Information Management Systems, Inc., a privately held company. We have a broad, perpetual license to IMS/Forte and have the right to use and modify the IMS/Forte source code. We also license from IMS certain ancillary programs necessary for the MAX applications to run on our UNIX servers.

      Loss of our license through third party intervention or invalidity to use this system software or other third party software utilized by us to provide our services, or the misappropriation of the proprietary technology and information comprising our MAX system, would materially impair our ability to provide our services to our clients. In either of these events, our relationship with our existing clients would be adversely affected and we would be exposed to liability, negatively impacting our operating results.

      Our systems may not accommodate substantial growth in our business.

      Our success depends on our ability to handle a large number of transactions for different clients in various service categories. We expect that the volume of transactions will increase significantly as we expand our operations. If this occurs, additional stress will be placed upon our MAX system and our network hardware and software that manages our operations. MAX or our hardware and software systems may not be able to efficiently manage a substantial increase in the number of transactions. If we are not

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      Our market is subject to rapid technological change and to compete we must continually enhance our computer and technology systems to comply with evolving standards.

      To remain competitive, we must continue to enhance and improve the responsiveness, reliability and features of our services and underlying computer systems. Our industry is characterized by rapid technological advances, changes in user requirements and preferences, frequent new products and services embodying new technologies and the emergence of new industry standards and practices that could render our technology and systems obsolete. From time to time, we have retained consultants to assist us with developing new technology, including with respect to our MAX system and applications. Our success will depend, in part, on our ability to license or develop new services or improve upon those already offered to our clients. To the extent we continue to retain consultants to help us develop technology, we will be dependent on them and their ability to develop new technology or improve upon what we have. We must continue to address the increasingly sophisticated and varied needs of our clients and respond to technological advances and emerging industry standards on a cost-effective and timely basis. If we are unable to license or develop technology to adapt to changing market conditions, client requirements or emerging industry standards, or if we utilize or acquire technology which proves to be ineffectual, our business could be adversely affected.

      Our business could be adversely affected by a systems or equipment failure.

      Our operations are dependent upon our ability to protect our computer equipment, software and other systems against damage and material failures. Damage or failures could result from fire, power loss, including our back-up power supply, equipment malfunctions, system failures, problems with Internet access or usage, natural disasters and other causes. If natural disasters, accidents or the intentional acts of others interrupt our business or that of our clients, our business could be materially adversely affected. Most of our operations are located at one location, in buildings next to one another, and we do not have duplicate system capabilities at a second location, which increases the risk that damages and failures could materially affect our business operations. In addition, in the event of widespread damage or failures, our disaster recovery and contingency plans and insurance coverage may not be sufficient.

      Any system or equipment failures we experience could also harm our clients’ businesses. In that event, our relationship with these clients may be damaged, we may lose these clients, our ability to attract new clients may be adversely affected and we could be exposed to liability. Interruptions also could result from the intentional acts of others, like so-called hackers. If hackers penetrate our systems, or if computer viruses attack our systems, our computers could fail or our proprietary information could be misappropriated.

      A breach of our internal and other security measures could allow for theft of proprietary information which could reduce demand for our services or subject us to litigation or to liability.

      Our business involves the secure transmission of confidential client information over public networks by our employees. A party who is able to circumvent our security measures could misappropriate proprietary information, such as our clients’ product or pricing information, or interrupt our operations. Any compromise or elimination of our security could jeopardize our client relationships and the confidence of potential clients.

      We may be required to expend significant capital and other resources to protect against security breaches or to address any problems they may cause. Because our activities involve the storage and transmission of proprietary information, such as pricing and product information and credit card numbers, security breaches could occur and could expose us to litigation and possibly liability. Our security measures may not prevent security breaches, and failure to prevent security breaches may disrupt our operations.

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     Should we be unable to protect our intellectual property, its value and our competitive position would be significantly impaired.

      We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing agreements, to establish and protect our proprietary rights. We do not have any federally registered copyrights or trademarks. Significant portions of the applications we use as part of our MAX system are proprietary to us. Certain of these applications are the basis on which we create our customized service programs for our clients and are critical to our business. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain and use all or portions of our MAX system or our other technology. We may be unable to detect the unauthorized use of our intellectual property or to take appropriate steps to enforce our intellectual property rights. Policing unauthorized use of our technology is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Further, enforcing our intellectual property rights could result in the expenditure of significant financial and managerial resources and the success of these efforts cannot be predicted with certainty. Litigation may be necessary in the future to enforce our intellectual property rights. This litigation could be costly and its outcome cannot be predicted with certainty.

      Although we intend to file patent applications where appropriate in the future, we have not filed any United States patent applications with respect to our proprietary technology, nor do we have any patent applications pending. As a result, we currently do not have patented technology that would preclude or inhibit competitors from entering our market. Moreover, we have not patented our technology abroad, nor do we currently have any international patent applications pending. We cannot be certain that future patents, registered trademarks or registered service marks, if any, will be granted or that any future patent, trademark or service mark will not be challenged, invalidated or circumvented. Also, we cannot assure you that rights granted under any future patents, trademarks or service marks will actually provide a competitive advantage to us.

      The technology and intellectual property created for us by our own employees and independent contractors may not be adequately protected pursuant to confidentiality agreements, employment agreements, “work for hire” agreements or access controls. There can be no assurance that a current or former employee or independent contractor will not have grounds to challenge or invalidate our ownership of our intellectual property. Moreover, our competitors may independently develop technologies that are substantially equivalent or superior to ours or may jointly develop these technologies under agreements giving them rights to exploit those technologies.

     Claims that we infringe third party intellectual property rights could result in significant expenses or restrictions on our ability to provide our services.

      In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies used in our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, and divert the efforts of our technical and management personnel. Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements. However, we may be unable to obtain royalty or license agreements on terms acceptable to us or at all. We also may be subject to significant damages or an injunction against use of our proprietary or licensed systems. Moreover, we have not obtained a business method patent concerning our business model or methodology. In recent years there has been a substantial increase in the number of patent applications for business methods, particularly in connection with e-commerce business methodologies. Only a limited number of patents have been issued to date and, therefore, the potential scope of these business method patents is not known. A successful claim of patent or other intellectual property infringement against us, including with respect to our business method, could materially adversely affect our business.

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Risks Relating to Our Spin-Off from Insight

     Our business and the market for our stock may be materially adversely affected if Insight does not complete the spin-off of Direct Alliance.

      There are various conditions which must be satisfied prior to the completion of the spin-off. See “Proposed Spin-off from Insight.” One of the material conditions is the issuance of an IRS ruling that the transaction qualifies as a tax-free distribution for federal income tax purposes. We cannot assure you whether or when any of the conditions will be satisfied. If the conditions are not satisfied and, consequently, the spin-off does not occur, we will continue to be controlled by Insight. If that occurs, the price of our shares of common stock in the public market could be adversely affected because of the uncertainty as to if and how the shares held by Insight would be sold to the public. This would, in turn, adversely affect potential benefits offered by employee equity incentive programs, such as employee stock options. In addition, we believe that control by Insight may limit our ability to market our services to potential clients outside of the computer hardware and software industry and even within the industry to competitors of Insight. Even if the conditions to the spin-off are satisfied, including the issuance of a favorable IRS ruling, we cannot assure you when the spin-off will occur, if at all, or whether we will obtain any of the contemplated benefits.

     If we are unable to obtain third party consents to the spin-off, our ability to conduct our business as currently conducted could be materially adversely affected.

      The spin-off and related transactions could result in a violation of some of our existing contractual or licensing arrangements or require the consent of a third party to transfer these arrangements to us. In certain situations, an amendment, consent or waiver from third parties, such as from clients, will be required. Our failure to obtain any material consent could have a material adverse effect on our business.

     If the spin-off is not a legal dividend, it could be held invalid by a court.

      The dividend which effects the spin-off is subject to Delaware corporate law. We cannot assure you that a court will not later determine that the spin-off was invalid under Delaware law and reverse the spin-off. The resulting complications and cost could have a material adverse effect on our business.

     Insight will control the outcome of stockholder voting as long as it owns a majority of our common stock and, until the spin-off, may exercise its voting power in a manner adverse to you.

      After the completion of this offering, Insight will own approximately      % of our outstanding shares of common stock, or approximately      % if the underwriters exercise their over-allotment option in full. As long as Insight owns a majority of our outstanding common stock, it will continue to be able to elect our entire board of directors, appoint management and generally be able to determine, including by written consent, the outcome of all corporate actions requiring stockholder approval. As a result, Insight will be in a position to continue to control all matters affecting us, including:

	•	a change of control of our company, including a merger;
	•	the acquisition or disposition of our assets;
	•	future issuances of our common stock or other securities;
	•	the incurrence of debt by our company;
	•	the payment of dividends on our common stock; and
	•	some determinations with respect to the treatment of items in our tax returns which are consolidated or combined with Insight’s tax returns.

      All of our assets are subject to a security interest related to Insight’s $100 million credit facility. It is intended that this security interest will be released upon the effectiveness of the spin-off. Should Insight’s

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      Due to the factors discussed above, Insight’s ability to control our company may cause our common stock to trade at a lower price than it would if Insight did not own a controlling interest in our company.

     The terms of the spin-off will be negotiated in the context of a parent-subsidiary relationship.

      Insight will own a majority of our common stock until the spin-off. As long as Insight is a majority stockholder, it will be able to dictate and approve the terms of the spin-off. We cannot assure you that the terms of the spin-off will be negotiated to our benefit.

     Two of our seven directors may have conflicts of interest because they are also directors of Insight or own significant amounts of Insight’s stock.

      Two members of our board of directors are directors and executive officers of Insight and as of September 30, 2000 together own 7.9% of Insight’s common stock. These directors will have obligations to both companies and may have conflicts of interest with respect to matters potentially or actually involving or affecting us, such as acquisitions and other corporate opportunities that may be suitable for both Insight and us. In addition, after this offering and the proposed spin-off, these directors will continue to own significant amounts of Insight’s common stock and options with respect to Insight’s common stock they acquired as employees of Insight. This ownership could create, or appear to create, potential conflicts of interest when these directors are faced with decisions that could have different implications for Insight and us.

     In certain circumstances, Insight is our competitor, and we may have conflicts of interest with Insight.

      We compete on behalf of some of our clients with Insight. Additionally, until the spin-off is complete, Insight will be our controlling stockholder. As a result, conflicts of interests may arise between us and Insight. We cannot assure you that we will be able to resolve any potential conflicts or that, if resolved, they will be resolved in our favor.

      We currently have and, after this offering and the proposed spin-off, will continue to have for a limited time, various interim and ongoing agreements with Insight. As a result, conflicts of interest may arise between Insight and us in a number of areas relating to our past and ongoing relationships, including:

	•	the nature, quality and pricing of the interim services Insight has agreed to provide to us;
	•	litigation, tax, employee benefits and other matters arising from our separation from Insight;
	•	prior to the spin-off, sales or distributions by Insight of all or any portion of its ownership interest in us; and
	•	prior to the spin-off, Insight’s ability to control the management and affairs of our company.

      We cannot assure you that we will be able to resolve any conflicts we may have with Insight or, if we are able to do so, that the resolution will be as favorable as if we were dealing with an unaffiliated party. The agreements we will enter into with Insight may be amended by mutual agreement of the parties. While we are controlled by Insight, it may be able to require us to agree to amendments to these agreements that may be unfavorable to us.

      We have potential liability to Insight for tax indemnification obligations if the spin-off does not qualify as a tax-free distribution.

      Insight announced that it plans to complete the spin-off late in 2001. We will be required to indemnify Insight for any tax liability it suffers arising out of our actions, or certain circumstances that may exist, before or after the spin-off that would cause the spin-off to lose its qualification as a tax-free

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Risks Relating to This Offering

      Our common stock has not traded publicly, and the market price of our common stock may decline after this offering.

      Prior to this offering, there has not been a public market for our common stock. The public offering price of our common stock was determined by negotiations among representatives of the underwriters and us, and may not be indicative of the market price of our common stock after this offering. For a discussion of the factors to be considered in determining the public offering price, see “Underwriting.” We cannot assure you that an active public market will develop or be sustained after this offering or that the market price of our common stock will not decline below the public offering price.

      Our stock price could fluctuate significantly after this offering.

      The market price of our common stock could fluctuate significantly after the offering. Factors that could affect our stock price include:

	•	economic and stock market conditions generally and specifically as they may impact participants or competitors in our industry;
	•	earnings and other announcements by, and changes in market evaluations of, participants in our industry;
	•	changes in financial estimates and recommendations by securities analysts following our stock;
	•	strategic moves by us or our competitors, such as acquisitions; and
	•	actions by Insight prior to the proposed spin-off of our common stock.

      In addition, the securities of many companies have experienced extreme price and volume fluctuations in recent years, often unrelated to their operating performance.

      Sales of substantial amounts of our common stock in the open market could cause our stock price to decline.

      After this offering, we will have                      shares of common stock outstanding. This includes the                      shares of common stock we are selling in this offering, which may be resold in the public market immediately after this offering. The remaining                      shares, representing approximately      % of our total outstanding shares of common stock following this offering, will be owned by Insight. If Insight distributes these shares to its stockholders through the proposed spin-off, all these shares, except those held by our affiliates, would be eligible for immediate resale in the public market. We are unable to predict whether significant amounts of our common stock will be sold in the open market in anticipation of, or following, this spin-off. Insight has the sole discretion to determine the timing, structure and the terms of the spin-off, all of which may affect the trading levels of our common stock. Any sales of substantial amounts of our common stock in the open market, or the perception that these sales might occur, whether as a result of the spin-off or otherwise, could cause the market price for our common stock to decline. See “Shares Eligible for Future Sale.”

      Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company, which could decrease the value of your shares.

      Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions

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      We will have broad discretion over the use of the net proceeds of this offering, and may not use the proceeds in ways that benefit us.

      Other than the repayment of our intercompany payable to Insight and the purchase of real property from Insight, we intend to use all of the net proceeds of this offering for general corporate purposes. Our management will have broad discretion in determining how to use these funds. If our use of these funds does not increase our cash flows from operations, our liquidity and capital resources could be adversely affected. See “Use of Proceeds.”

      Investors in this offering will experience immediate and substantial dilution.

      Investors purchasing common stock in this offering will incur immediate and substantial dilution in net tangible book value per share. Assuming our sale of the                      shares of common stock in this offering at an assumed initial public offering price of $      per share, the deduction of the underwriting discount and estimated offering expenses and the application of the net proceeds, our net tangible book value as of September 30, 2000 would have been $          , or $      per share of common stock. This represents an immediate dilution of $      per share to new investors. To the extent that outstanding options or other rights to acquire our common stock are exercised, further dilution will occur.

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FORWARD-LOOKING STATEMENTS

      This prospectus contains forward-looking statements. The forward-looking statements are principally contained in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements do not guarantee future performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performances or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to:

	•	our business strategy;
	•	the market opportunity for our services, including the willingness of businesses in other industries to implement and outsource direct marketing solutions;
	•	our plans to hire additional personnel with the appropriate qualifications;
	•	our forecasts of our capital requirements, client program needs and needs for additional financing;
	•	competition in our business;
	•	the effects of system failures and rapid changes in technology; and
	•	our spin-off from Insight.

      In some cases, you can identify forward-looking statements by the use of words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and variations of these words or comparable words. In addition, all of the non-historical information herein is forward-looking. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these risks and uncertainties, you should not place undue reliance on the forward-looking statements. We discuss many of these risks and uncertainties in greater detail under the heading “Risk Factors.” Also, forward-looking statements represent our estimates and assumptions only as of the date of this prospectus.

      You should read this prospectus completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information. We qualify all our forward-looking statements by these cautionary statements.

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PROPOSED SPIN-OFF FROM INSIGHT

      We are a wholly-owned subsidiary of Insight, a computer hardware and software direct marketer. After completion of this offering, Insight will own approximately   % of the outstanding shares of our common stock, or approximately   % if the underwriters exercise their over-allotment option in full.

The Proposed Spin-off

      Insight has announced that it intends to complete the spin-off late in 2001, by distributing to its stockholders all of the shares of our common stock it then holds. We refer to this distribution as the “spin-off.”

      Because there are conditions effecting the spin-off, Insight has advised us that it has not yet definitively determined whether and when it expects to complete the spin-off. These conditions include:

	•	Receipt by Insight of a ruling by the Internal Revenue Service that, among other tax consequences of the transaction, the spin-off will qualify as a tax-free distribution for federal income tax purposes and will not result in the recognition of a taxable gain or loss for federal income tax purposes to Insight or its stockholders. Insight expects to submit its ruling request to the IRS in January 2001, and it generally takes four to six months to receive a ruling from the IRS. Whether a favorable ruling will be issued depends upon a number of determinations that are based on the particular facts and circumstances of Insight and our company. Although we believe that these determinations will be made favorably to Insight, there is no guarantee that Insight will receive a favorable ruling.
	•	Receipt of all necessary consents to consummate the spin-off.
	•	Absence of court orders, injunctions, decrees, regulations or other legal restraint prohibiting or restricting the completion of the spin-off.
	•	Absence of events or developments after the closing of this offering that, in the sole judgment of Insight, would result in the spin-off having a materially adverse effect on Insight, us, or stockholders of either company.

      Although Insight has announced that it presently intends to complete the spin-off, it is not obligated to do so and can abandon the spin-off in its sole discretion.

Benefits of the Spin-off

      We believe we will realize certain benefits from our separation from Insight, including the following:

	•	Greater Strategic Focus. As a result of having our own board of directors and separate management team, we expect to have a sharper focus on our business and strategic opportunities. We will also have greater ability to modify business processes to better fit the needs of our clients.
	•	Efficient Access to Capital Markets. We believe that capital can be raised by us more efficiently through an offering of our stock rather than through an offering of Insight stock. This is because we believe that companies, such as Direct Alliance, which provide outsourced integrated direct market solutions to manufacturers will be valued in the public market at a generally higher valuation than direct market computer hardware and software resellers, such as Insight. This advantage in large part depends on the market’s perception that Insight will spin-off our company, and any indication to the contrary may adversely affect the value of our stock in the public market because of the uncertainty as to if, when and how the shares held by Insight would be sold or distributed to the public.
	•	Competition. We believe that our ability to market our services to new industries is hampered by Insight’s ownership of us. Potential clients may view our services as applicable only to the computer hardware and software direct marketing industry. Additionally, because many of our clients compete with Insight and because we believe this competition will increase, we believe that our separation

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		from Insight will eliminate client concerns regarding potential business conflicts and the potential disclosure of proprietary information.
	•	Direct Incentives for Employees. We expect that the motivation of our employees and the focus of our management will be strengthened by incentive compensation programs tied to the market performance of our stock. The separation will allow direct incentives for our employees and management. As a separate, publicly traded company after the spin-off, we will be able to implement stock-based compensation plans for our employees and management, which will be focused entirely on the successful results and achievements of our business. We believe this will enhance our ability to attract and retain qualified personnel.

Separation and Transitional Arrangements

      Upon the completion of this offering, we will enter into a separation and distribution agreement with Insight, which will govern the separation of our business from Insight, and a tax indemnification and allocation agreement, which will govern the allocation of tax liability between us and Insight. The separation and distribution agreement will provide for additional agreements to be entered into at the time of the spin-off, including an employee benefits agreement, an interim administrative services agreement and an insurance matters agreement.

      The agreements relating to our separation from Insight will be made in the context of a parent-subsidiary relationship and will be negotiated in the overall context of our separation from Insight. For more information regarding the separation arrangements, see “Certain Transactions.”

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USE OF PROCEEDS

      We estimate that our net proceeds from this offering will be approximately $     million based on an assumed initial public offering price of $     per share and after deducting the estimated underwriting discount and offering expenses. If the underwriters exercise their over-allotment option in full, our net proceeds are estimated to be $       million.

      We anticipate using approximately $6.0 million of the net proceeds from this offering to repay an intercompany payable to Insight which is payable on demand and accrues interest at the London Interbank Offered Rate (LIBOR) plus 0.80%, which was 7.42% as of September 30, 2000, the proceeds of which were used to purchase our facility located at West Carver Drive, Tempe, Arizona. We also anticipate using approximately $1.5 million of the net proceeds to purchase our facility located at South Hardy Drive, Tempe, Arizona from Insight in connection with which we also will assume or refinance the mortgage related to this property, which had a balance of $4.5 million as of September 30, 2000. The balance of the net proceeds will be used to provide funds for general corporate purposes, including operational, development and working capital. In addition, we may use a portion of the net proceeds of this offering to acquire or invest in complementary technologies or businesses. We are not currently a party to any agreements or understandings with respect to any future acquisitions or investments. Pending the foregoing uses, we intend to invest the net proceeds from this offering in short-term, interest bearing, investment grade marketable securities.

      We cannot currently identify all of the specific uses for a substantial portion of the net proceeds from this offering. Accordingly, our management will have broad discretion in applying the net proceeds from this offering.

DIVIDEND POLICY

      We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings to fund the growth and development of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors deems relevant.

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CAPITALIZATION

      The following table sets forth our capitalization as of September 30, 2000:

	•	on an actual basis; and
	•	as adjusted to reflect:

	—	the sale by us of                shares of common stock in this offering at an assumed initial public offering price of $     per share, after deducting underwriting discounts and estimated offering expenses;
	—	the repayment of our intercompany payable to Insight that as of September 30, 2000 was approximately $6.0 million, with a portion of the estimated proceeds from this offering; and
	—	our purchase from Insight of our South Hardy Drive facility for $6.0 million, which we will pay using $1.5 million of net offering proceeds and assuming or refinancing $4.5 million in mortgage debt.

      This information excludes shares of common stock which may be issued pursuant to the following options granted under our 2000 Long-Term Incentive Plan:

	•	3,410,000 shares issuable upon exercise of outstanding options at a weighted average exercise price of $1.42 per share; and
	•	shares subject to options which we expect to grant to our employees upon the spin-off to replace unvested options to acquire Insight common stock which will expire upon the spin-off. The actual number of shares issuable under these replacement options will not be determined until the effective date of the spin-off and will be based on the relative market prices of the Insight and Direct Alliance common stock at that time. See “Management — Treatment of Insight Stock Options.”

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DILUTION

      Our net tangible book value as of September 30, 2000 was approximately $18.0 million, or $     per share of common stock. Net tangible book value per share represents the amount of our total tangible assets, less total liabilities, divided by the number of shares of common stock outstanding.

      After giving effect to the sale of           shares of our common stock in this offering at an assumed public offering price of $     per share and after deducting the estimated underwriting discount and estimated offering expenses payable by us, our net tangible book value as of September 30, 2000 would have been $       million, or $     per share. This represents an immediate increase in the net tangible book value per share of $          to Insight, our sole pre-offering stockholder, and an immediate dilution of $     per share to new investors in this offering, as illustrated by the following table:

      The following table summarizes as of September 30, 2000, the differences between the total consideration paid and the average price per share paid by Insight and by the new investors with respect to the number of shares of common stock purchased from us based on an assumed public offering price of $ per share, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us:

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SELECTED CONSOLIDATED FINANCIAL DATA

      You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and the accompanying notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected consolidated financial data presented below as of December 31, 1999 and September 30, 2000 and for each of the years in the two-year period ended December 31, 1999 and the nine-month period ended September 30, 2000 are derived from our consolidated financial statements which have been audited by KPMG LLP, independent certified public accountants, and are included as part of this prospectus. In the opinion of management, the unaudited consolidated financial statements for the nine-month period ended September 30, 1999 and the years ended December 31, 1995, 1996 and 1997 from which the unaudited financial data below is derived, include all adjustments, which consist only of normal recurring accruals, necessary for a fair presentation of the results for such periods.

      Our historical financial information may not necessarily reflect our results of operations or financial position in the future. The net revenues and gross profit included in the consolidated financial data below may not be reliable indicators of our performance because:

	•	From late 1997 through September 2000, we transitioned our business from product based programs, pursuant to which we earned net revenue by purchasing and reselling our clients’ products, to our service fee based program model, pursuant to which we are compensated by our clients for the provision of services. Under the service fee based programs, we neither recognize the product sales as net revenues nor recognize the cost of products sold in our cost of revenues. As a result, the service fee based programs generate substantially less net revenues for a similar value of products sold. Because our net revenues during this transition period were derived from a changing mix of service fee based and product based programs, the inter-period comparability of our total net revenues during the transition is limited.
	•	Under the service fee based programs, substantially all direct costs related to the generation of net revenues are included in our cost of revenues and, therefore, are taken into account in determining gross profit. Under the product based programs, these same costs are accounted for as operating expenses and, therefore, are not taken into account in determining gross profit. Because of this, the inter-period comparability of our gross profit is limited during our transition to service fee based programs.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Transition from Product Based Programs to Service Fee Based Programs” for a discussion regarding the change in our business model and its effect on the comparability of our financial data.

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      The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

      We provide marketing, sales and supply chain services using state-of-the-art proprietary technology, infrastructure and processes to enable manufacturers of brand name products to directly access customers and support existing sales channels in a cost-effective, timely and highly scalable manner. We operate as a “virtual division” of our clients, and provide a comprehensive range of services, from customer acquisition to returns management, including demand generation marketing, direct sales management, Internet enablement, product fulfillment and transaction management.

      Our service fee revenues are composed of a combination of the following:

	•	fees based on a percentage of client product sales processed through our MAX transaction management system, whether or not such sales are generated by our services, and which are subject to client guarantees of minimum sales volumes in some instances;
	•	fixed monthly fees;
	•	fees to recover our costs for ongoing services, such as dedicated sales and other personnel, benefits, facility utilization, supplies, telephone service and freight charges;
	•	fees for specific projects, such as marketing programs, Internet infrastructure development and customization of client transaction management systems.

      We price our service fees on the basis of various factors, including the volume, scope and complexity of services provided, the level of client integration required, the degree of customization, the length of the contract and other factors. All direct costs related to the provision of these services are included in our cost of revenues.

      We also generate net revenues from the purchase and immediate resale of various products to our clients for ultimate client resale to their customers. We do this as an accommodation to our clients for their convenience. The sales revenues from these products are included in our net revenues as pass through product sales and our cost of revenues includes our purchase price of the products.

Transition from Product Based Programs to Service Fee Based Programs

      Prior to 1998, substantially all of our client contracts were product based programs pursuant to which our net revenue was earned by purchasing and reselling our clients’ products from inventory. Under these programs, in addition to performing sales and other services for our clients, we took title to the products and assumed the credit risk associated with sales to the end user. Accordingly, the net revenues from product sales were included in our net revenues and the cost of products sold was included in our cost of revenues. In late 1997, we began to transition our business from product based programs to our service fee based program model pursuant to which we are compensated for the provision of services. Because we do not take title to the products or bear the credit risk associated with sales to the end user under these programs, we neither recognize the product sales as net revenues nor recognize the cost of products sold in our cost of revenues. We completed this transition from product based programs to service fee based programs as of September 30, 2000.

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      As a result of this transition, the inter-period comparability of our total net revenues for 1997 through 2000 is limited. This is because net revenues derived from product based programs are substantially higher than net revenues derived from service fee based programs for a similar value of products sold.

      The period-to-period changes in our level of business activity can be measured by the amount of client sales processed through our MAX system. This measure is independent of whether sales are associated with product based programs or service fee based programs and is a relevant measure before, during and after our transition to service fee based programs. Set forth below is a sales index which shows the relative total dollar volume of, and year to year percentage increase in, client product sales processed through MAX for the indicated periods, using 1998 total dollar volume as the base.

Gross Profit Comparisons

      The transition from late 1997 through September 30, 2000 from product based programs to service fee based programs also affects the inter-period comparability of our gross profit, both in dollar terms and as a percentage of net revenues. Total gross profit during the transition is affected because:

	•	under product based programs, we included product sales revenues in our net revenues and included the costs of the products sold in our cost of revenues, and we accounted for operating costs, such as the cost of sales personnel, telephone service and the like, as operating expenses;
	•	under service fee based programs, we included the service fees in revenues and included all direct operating costs of providing the services in our cost of revenues, such as the cost of sales personnel, telephone service and the like.

      Because of this, under service fee based programs a substantial portion of our direct operating costs is included in cost of revenues and, therefore, is taken into account in determining gross profit, while under product based programs those same costs are accounted for as operating expenses and, therefore, are not taken into account in determining gross profit. During the transition, gross profit was derived from a changing mix of product based programs and service fee based programs. Accordingly, it is not useful to compare gross profit in a period during the transition with gross profit in any other period before, during or after the transition.

      For the same reasons, it is not useful to compare gross profit as a percentage of net revenues between a period during the transition and any other period before, during or after the transition. The usefulness of this measure is further limited because gross profit as a percentage of net revenues is substantially lower for product based programs than for service fee based programs.

      We believe that our earnings from operations, rather than gross profit, is a more appropriate measure of our financial performance during the transition from product based programs to service fee based programs. In the future, we believe that gross profit dollars will be a useful measure of our financial performance. Gross profit as a percentage of net revenues, however, will vary from period to period in the future and may not be a useful measure of our financial performance due to the varying level of direct costs associated with each client program, all of which we strive to recover, and all of which are included in both our service fee revenues and our cost of revenues.

Insight Shared Services

      We receive general management allocation and some administrative services from Insight, including financial, tax and legal services and, insurance and employee benefit plan administration. We record specific expenses for these services where the service and the cost are identifiable. For other services, we record expenses for a pro rata share of Insight’s total costs for the services, determined on the basis of our

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Results of Operations

      The following table sets forth for the periods indicated the percentage of net revenues of certain line items included in our consolidated statements of earnings data: