Despite significant reductions to bonus expense, operating expense  as a percentage of revenue increased 1.6 percentage points in 2009,  mainly driven by the $9.5 million of incremental operating expense  described above and other expense increases. The cost reductions we implemented in 2009 were offset by a total  of $9.5 million of operating expense for two separate matters. First,  we recorded a $6.1 million operating expense related to adjusting  the tax treatment of certain stock options that were originally considered incentive stock options (ISOs). In 1998, 1999, and 2000,  we granted ISOs to many employees. Upon exercise, ISOs typically  have a favorable tax treatment for the employee relative to the tax  treatment for non-qualified stock options (NQSOs). In 2009, we  determined that certain ISOs granted to one former and two current executives should have been treated as NQSOs for the  executives’ and our income tax purposes. As a result, Morningstar  paid these individuals a total of $4.9 million to compensate for the  difference in tax treatment. We also recorded $1.2 million, primar- ily for potential penalties related to this matter. This $6.1 million  expense is included in our operating expense as a general and  administrative expense. Cost of goods sold is our largest category of operating expense,  accounting for more than one-third of our total operating expense  over the past three years. Our business relies heavily on human  capital, and cost of goods sold includes the compensation expense  for employees who produce our products and services. Second, we recorded an operating expense of $3.4 million for pen- alties related to the timing of deposits for taxes withheld on stock- option exercises. The expense impacted each of our operating  expense categories, with approximately half recorded as general  and administrative expense. For some companies, including  Morningstar, it is common practice for taxes withheld on stock-based  compensation to be paid with the company’s regularly scheduled  payroll deposit. This approach, however, does not technically com- ply with Internal Revenue Service (IRS) guidelines concerning depos- its of taxes withheld in connection with stock-based compensation,  which generally require that if a company’s cumulative deposit  liability for all compensation exceeds $100,000, the tax withholding  must be deposited by the following business day. Transactions  related to stock-based compensation frequently cause companies  to exceed this threshold outside of their regularly scheduled payroll  cycles, thus triggering the accelerated deposit rules. The subject  of tax deposit penalties was part of an IRS audit that began in 2009  and concluded in early 2010. We have concluded the matter with  the IRS and have increased the frequency of deposits for taxes  withheld on stock-option exercises. Gross margin declined by about 1.4 and 1.0 percentage points in  2010 and 2009, respectively. Cost of goods sold rose $28.5 million in 2010 after declining $1.5  million in 2009. Approximately 60% of the increase in 2010 was  related to recent acquisitions. Higher salaries, bonus expense, and  other compensation-related expense also contributed to the increase.  The majority of the decline in 2009 was driven by lower bonus  expense and lower fulfillment expense, partially offset by incremen- tal costs from acquisitions. Operating expense in 2009 also included additional rent expense  of $3.2 million to increase a liability related to vacant office space,  primarily for the former Ibbotson headquarters. We increased the  liability because we anticipated receiving lower sublease income  and expected it would take more time than previously estimated to  identify a tenant. Development Expense ($000)  2010 2009  2008 Development expense  $ 49,244 $ 38,378  $40,340 % change  28.3%  (4.9)%  14.9% % of revenue  8.9% 8.0%  8.0% Change  0.9pp —   (0.1)pp Cost of Goods Sold ($000)  2010 2009  2008 Cost of goods sold $ 157,068 $ 128,616  $ 130,085 % change  22.1% (1.1)%  14.3% % of revenue  28.3% 26.9%  25.9% Change  1.4pp 1.0pp  (0.2)pp Gross profit  $398,283 $350,380  $372,372 % change  13.7% (5.9)%  15.9% Gross margin  71.7% 73.1%  74.1% Change  (1.4)pp (1.0)pp  0.2pp Morningstar, Inc. 2010 Annual Report 75