An individual i is an DIRECT-INSTANCE-OF class C if i is an instance-of C and there is no other subclass of C defined in the current ontology of which i is also an instance-of. Such a class C is a `minimal' or `most-specific' parent class for the individual i. The direct class is not necessarily unique; an individual can have several most-specific classes. Note that this relation is indexical -- its truth depends the contents of the current knowledge base rather than the world.
The distinction between INSTANCE-OF and DIRECT-INSTANCE-OF is not the same as the relationship between asserting instance-of directly and having the system infer it. The meanings of both instance-of and direct-instance-of, and every other object-level relation in a knowledge base mean, are independent of whether they are asserted explicitly or inferred.
Cyc makes the distinction between #%instanceOf and #%allInstanceOf. #%allInstanceOf means the same thing as INSTANCE-OF in our ontology. However, #%instanceOf is subtlely different from direct-instance-of. When someone asserts (#%instanceOf i C) to Cyc, it means the same thing as (#%allInstanceOf i C), but Cyc creates a pointer between an instance unit and a collection unit. Later, someone may define a subclass C_sub of C and assert (#%instanceOf i C_sub), and this is consistent with the earlier #%instanceOf assertion.
Direct-instance-of is useful for maintaining a class hierarchy in a modular, canonical form. It is defined here because some systems maintain direct-instance-of and some applications depend on this.