In 2010, our effective tax rate was 33.1%, a decrease of 3.2 percent- age points compared with 2009. The lower tax rate in 2010 reflects the positive impact of certain income tax benefits, including the difference between U.S. federal and foreign tax rates, tax credits related to Morningstar’s research and development activities, and the use of foreign net operating losses that had previously been subject to a valuation allowance. These items favorably impacted our effec- tive tax rate by approximately 3.7 percentage points in 2010. 

Income tax expense in 2010 includes approximately $1.7 million of non-cash expense related to the $4.6 million holding gain we recorded in conjunction with the acquisition of Morningstar Denmark. This income tax expense did not have a significant impact on our effective tax rate in 2010. 

In 2009, our effective tax rate decreased by 1.5 percentage points compared with 2008 despite several items that increased our effec- tive tax rate. State income taxes represented 2.7 percentage points of our effective tax rate compared with 1.5 percentage points in 2008, due to a favorable impact from reducing accruals for state income taxes in 2008 that did not recur in 2009. 

Second, in 2009, we recorded an operating expense of $3.4 million for penalties related to the timing of deposits for taxes withheld on stock-option exercises. This penalty is not deductible for income tax purposes and increased our effective tax rate by 1.1percentage points. 

The $6.1 million of operating expense related to adjusting the tax treatment of stock options originally considered incentive stock options increased the effective tax rate by 0.8 percentage points, as these operating expenses are subject to deduction limitations for income tax purposes. 

The above items, which increased our effective tax rate, were par- tially offset by three main factors. First, research and development and foreign tax credits, some from previous years, reduced the 2009 effective tax rate by 2.5 percentage points. A reversal of reserves for uncertain tax positions, primarily as a result of a lapse in the statute of limitations, also reduced our effective tax rate by 1.4 percentage points in 2009. 

As of December 31, 2010, we had net operating loss (NOL) carryfor- wards of $49.0 million related to our non-U.S. operations and have recorded a valuation allowance against all but $5.6 million of these NOLs. Because of the historical operating losses for certain non-U.S. operations, a valuation allowance is required because we do not believe that we will be able to use all of our non-U.S. NOLs. 

Certain positions we have taken or intend to take on our U.S. and non-U.S. tax returns may be reviewed by tax authorities in the juris- dictions in which we operate. As of December 31, 2010, we had approximately $9.1 million of gross unrecognized tax benefits, of which $8.5 million, if recognized, would reduce our effective income tax rate and decrease our income tax expense by $6.9 million. It is not possible to estimate the impact of current audits on previously recorded unrecognized tax benefits. 

We anticipate that our effective income tax rate may continue to fluctuate related to the creation or reversal of valuation allowances for our non-U.S. operations as well as to changes in unrecognized tax benefits. 

## Liquidity and Capital Resources 

We believe our available cash balances and investments, along with cash generated from operations, will be sufficient to meet our operating and cash needs for the foreseeable future. We invest our cash reserves in cash equivalents and investments, consisting pri- marily of fixed-income securities. We maintain a conservative invest- ment policy for our investments, emphasizing principal preservation, and invest a portion of these assets in municipal securities with high-quality stand-alone credit ratings. Investments in our portfolio have a maximum maturity of two years; the weighted average matu- rity is approximately one year. 

We intend to use our cash, cash equivalents, and investments for general corporate purposes, including working capital and funding future growth. To date we have not needed to access any significant commercial credit and have not attempted to borrow or establish any lines of credit. Over the past three years, we invested $281.9 million for acquisitions, less cash acquired, with internally generated funds. 

We expect to make a recurring quarterly dividend payment. We paid our first dividend in January 2011 to shareholders of record as of December 31, 2010. This dividend was 5 cents per share for a total cash payment of $2.5 million. In September 2010, our board of direc- tors also approved a share repurchase program that authorizes a repurchase of up to $100 million of our outstanding common stock. Through December 31, 2010, we paid $3.8 million to repurchase shares of our common stock under this program. From time to time we may repurchase shares at prevailing market prices on the open market or in private transactions in amounts that we deem appropriate. 

