The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of the federal securities laws that involve material risks and uncertainties. This discussion should be read in conjunction with "A Warning About Forward-Looking Statements" on page 2 and "Risk Factors" under Item 1A of this Annual Report. In addition, our discussion of the financial condition and results of operations of Quidel Corporation in this Item 7 should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this Annual Report.

Executive Summary

We have a leadership position in the development, manufacturing and marketing of rapid diagnostic solutions for decentralized applications including point-of-care ("POC") in infectious diseases and reproductive and women's health. We focus on POC testing solutions specifically developed for the physician office lab ("POL") and acute care markets globally. We sell our products to professionals for use in physician offices, hospitals, clinical laboratories, retail clinics and wellness screening centers. We market our products in the U.S. through a network of national and regional distributors, supported by a direct sales force. Internationally, we sell and market primarily in Japan, Europe and the Middle East through exclusive distributor arrangements.

A majority of our total revenues relate to three product families. For the years ended December 31, 2008, 2007 and 2006, we derived approximately 84%, 81% and 82%, respectively, of our total revenues from sales of our influenza, Group A Strep and pregnancy tests. Additionally, a significant portion of our total revenue is from a relatively small number of distributors. Approximately 60%, 61% and 68% of our total revenue for the years ended December 31, 2008, 2007 and 2006, respectively, were related to sales through our five largest distributors in each of those periods.

We also develop research products through our Specialty Products Group (the "SPG") with an emphasis on potential future rapid test applications. The SPG is currently responsible for more than 100 of our clinical and research products used worldwide in reference laboratories and in research applications at leading universities and biotechnology companies. The SPG revenues, income and assets are less than 10% of our overall operations.

Our net revenue increased to $128.1 million for the year ended December 31, 2008 from $118.1 million for the year ended December 31, 2007. This was largely driven by increased domestic sales of our infectious disease products, partially offset by a decrease in our reproductive and women's health, and other products. We are continuing to focus our efforts to strengthen market and brand leadership in infectious disease and reproductive and women's health by delivering economic and clinical proof through our efforts with our Quidel Value Build™ ("QVB™") program. Our POC testing solutions are designed to provide specialized results that meet two important value criteria that we have branded as QVB™:

º •
º Clinical validation: the enabling of rapid patient management decisions leading to improved treatment and outcomes.

º •
º Economic validation: the reduction of overall costs associated with patient testing with emphasis upon critical reimbursement and payer performance criteria.

We focus on ensuring market leadership and providing points of differentiation by specializing in the diagnosis and monitoring of selected disease states. In order to support our value proposition as a company that markets the highest quality products in support of better medical outcomes, we are highlighting our QVB™ through the development of new innovations and the communication of new solutions in the field of rapid diagnostic testing. Our QVB™ includes significant work in understanding the needs of the end-use customer, building products that meet those needs, providing proof studies to

We believe that the trend among healthcare providers to adopt POC testing continues to increase, and demographic changes, reimbursement policies, a shortage of skilled laboratory workers and the availability of clinically valuable tests will increase growth in this diagnostic category. More and more employers, health plans and payers are recognizing that POC testing is a cost-effective means for improving the quality of care and patient satisfaction. Continuous improvements in technologies are resulting in a growing number of new diagnostic tests that combine high levels of accuracy with rapid, easy-to-use product formats. It is our mission to further establish our significant leadership position in POC rapid diagnostics. In order to accomplish this mission, our strategy is to:

º •
º provide clinicians with validated, evidence-based studies which encompass the clinical efficacy and economic efficiency of our rapid POC tests for the professional market. In conjunction with our QVB™ commitment, we expect to present ongoing information that supports the adoption of rapid POC testing;

º •
º continue to focus on strengthening our market and brand leadership in infectious diseases and reproductive and women's health by acquiring, developing and introducing clinically superior diagnostic solutions;

º •
º drive growth by securing dedicated distributor partnerships and strengthening our sales organization to assure physician and laboratorian satisfaction through direct relationships with Integrated Delivery Networks and hospitals;

º •
º support payer evaluation of rapid tests and establishment of favorable reimbursement rates;

º •
º continue creation of strong global alliances to assure leadership in key markets;

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º drive profit through further refinement of our manufacturing efficiencies and productivity improvements, with continued focus on profitable products and markets and our effort to create exceptional competency in new product development;

º •
º continue to focus our research and development efforts on three areas:
1) new proprietary product platform development, 2) the creation of improved products and new products for existing markets and unmet clinical needs, and 3) products developed under collaborations with other companies for new and existing markets; and

º •
º identify and commercialize new markers, products and collaborations in bone health through the SPG.

As a business in a highly regulated and competitive industry, we face many risks and challenges and we also have opportunities. There are many economic and industry factors that affect our business; some of the more important factors are outlined below:

º •
º sales of our infectious disease products, which have collectively accounted for approximately 72%, 64% and 65% of total revenue for the years ended December 31, 2008, 2007 and 2006, respectively, are subject to and significantly affected by the seasonal demands of the cold and flu seasons;

º •
º sales of our products can be affected significantly by many competitive factors, including convenience, price and product performance as well as the distribution, advertising, promotion and brand name recognition of the marketer;

º •
º the testing, manufacture and commercialization of our products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies;

º •
º the production processes for POC tests are complex, highly regulated and vary widely from product to product;

º •
º to successfully compete for business in our industry, we believe our POC testing solutions must be designed to provide specific results for clinical and economic validation; and

º •
º there has been a trend toward industry consolidation in our markets over the last several years.

In January 2009, we announced that Caren L. Mason, our President and Chief Executive Officer, has decided to retire from the Company on June 1, 2009. Ms. Mason will continue in her current capacity as President and CEO as well as a Board Director until March 1, 2009, and from March 1, 2009 through her retirement date, Ms. Mason will serve as a special advisor to the CEO. In January 2009, we also announced the appointment of Douglas C. Bryant as the Company's new President, CEO and member of the Board of Directors. Mr. Bryant began his employment in February 2009 and his role as President and CEO is effective March 1, 2009.

Outlook

For fiscal year 2009, we anticipate year-over-year revenue growth. We expect gross margins will be positively affected by a more favorable product mix, partially offset by lower average selling prices. We continue to expect a gradual conversion of the fecal occult blood test market from the current guaiac-based test to an immunochemical-based test. Successful conversion of this market requires changing physician behavior through education, focused in part on clinical and economic validation. Additionally, we expect continued growth from our QuickVue® RSV test for the qualitative detection of respiratory syncytial virus ("RSV") this season so that physicians are well prepared to diagnose and appropriately manage patients with influenza and/or RSV. We received Clinical Laboratory Improvement Amendments of 1988 ("CLIA") waiver on our RSV test in February 2008. Internationally, we expect continued growth as we increase the reach of our products to markets around the world. We expect an overall increase in operating expenses for fiscal 2009, including additional investments in research and development.

You should also refer to the discussion in Item 1A, "Risk Factors" in Part I of this Annual Report for further discussion of risks related to our business.

Comparison of years ended December 31, 2008 and 2007

Total Revenues

The following table compares total revenues for the years ended December 31, 2008 and 2007 (in thousands, except percentages):

                                              For the year ended         Increase
                                                 December 31,           (decrease)
                                               2008        2007         $         %
     Infectious disease net product sales    $  92,426   $  75,896   $ 16,530      22 %
     Reproductive and women's health net        22,989      28,130     (5,141 )   (18 )%
     product sales
     Other net product sales                    11,427      12,864     (1,437 )   (11 )%
     Royalty income and license fees             1,290       1,175        115      10 %

     Total revenues                          $ 128,132   $ 118,065   $ 10,067       9 %

The increase in total revenues was primarily driven by increased sales of our infectious disease products, partially offset by a decrease in our reproductive and women's health and other product categories. We believe the increase in total revenue of our infectious disease products, for both our domestic and international markets, was largely driven by increased market penetration and increased utilization of our influenza test, while the decrease associated with our reproductive and women's health products was primarily driven by the timing of ordering patterns in the domestic market. Purchases by end-users of our non-seasonal products remained fairly constant for the twelve months ended December 31, 2008 as compared to the previous twelve months. Sales of our infectious disease and reproductive and women's health products accounted for 90% and 88% of our total revenue for the years ended December 31, 2008 and 2007, respectively.

The revenue from royalty income and license fees for all periods primarily relate to royalty payments earned on our patented technologies utilized by third parties.

Cost of Sales

Cost of sales increased 3% to $50.2 million, or 39% of total revenue, for the year ended December 31, 2008 compared to $48.6 million, or 41% of total revenues, for the year ended December 31, 2007. The absolute dollar increase is primarily related to the variable nature of direct costs (material and labor) associated with the 9% increase in total revenues. The percentage decrease in cost of sales as a percentage of total revenue was primarily due to a more favorable product mix, partially offset by lower average selling prices.

Operating Expenses

    The following table compares operating expenses for the years ended
December 31, 2008 and 2007 (in thousands, except percentages):

                                                  For the year ended
                                                     December 31,

                                         2008                             2007
                             Operating     As a % of total    Operating     As a % of total     Increase (decrease)
                              expenses        revenues         expenses        revenues             $            %
Research and development      $   11,147                 9 %   $   12,855                11 %  $     (1,708 )     (13 )%
Sales and marketing               20,898                16 %       18,491                16 %         2,407        13 %
General and                       12,786                10 %       13,167                11 %          (381 )      (3 )%
administrative
Amortization of                    4,476                 4 %        5,493                 5 %        (1,017 )     (19 )%
intangible assets

Research and Development Expense

The decrease in research and development expense was due primarily to the discontinuation of our layered thin film immunoassay program in the fourth quarter of 2007 and a decrease in overall incentive-based compensation for 2008, partially offset by increased investment in other strategic research and development efforts. The primary components of research and development expense are personnel and material costs associated with development of potential new technologies and processes and with products under development. In addition, we continue to incur substantial costs related to clinical trials as well as our overall efforts under our QVB programs.

Sales and Marketing Expense

The increase in sales and marketing expense was primarily related to an overall increase in sales personnel and related programs and expenses as well increased expenses associated with distribution events and trade shows, which support our leadership position and strategies to capitalize further on opportunities in POC diagnostics. This was partially offset by a decrease in overall incentive-based compensation for 2008. Other key components of this expense relate to continued investment in assessing future product extensions and enhancements, market research (including voice of customer surveys), reimbursement-related activities and product shipment costs.

General and Administrative Expense

The decrease in general and administrative expense was primarily due to a decrease in overall incentive-based compensation for 2008, partially offset by increased headcount added during late 2007.

Amortization of Intangible Assets

The amortization of intangible assets decreased primarily due to the full amortization of certain purchased technology in fiscal year 2007. In December 2008, amortization of $3.0 million associated with a license agreement became fully amortized. Unless the company acquires new intangible assets, amortization of intangibles will decrease in 2009.

Other Income (Expense)

The slight decrease in interest income to $1.7 million as of December 31, 2008 from $1.9 million as of December 31, 2007 was primarily related to the decrease in interest rates, partially offset by an increase in our average cash balance for the year ended December 31, 2008 as compared to the year ended December 31, 2007. Interest expense was relatively constant at $0.7 million for both of the years

ended December 31, 2008 and 2007 and relates to interest paid on obligations under capital leases, primarily associated with our San Diego facility.

Income Taxes

We recognized income tax expense of $11.0 million for the year ended December 31, 2008 as compared to $6.9 million for the year ended December 31, 2007, which was largely driven by the increase in taxable income from 2007 to 2008. Income tax expense for 2008 includes a net reduction primarily related to deduction associated with investments in foreign subsidiaries and a manufacturing tax deduction. Income tax expense for 2007 includes a reduction of $0.7 million for the completion of a research and development tax credit study for prior years.

Comparison of years ended December 31, 2007 and 2006

Total Revenues

The following table compares total revenues for the years ended December 31, 2007 and 2006 (in thousands, except percentages):

                                              For the year ended        Increase
                                                 December 31,          (decrease)
                                               2007        2006         $        %
     Infectious disease net product sales    $  75,896   $  68,565   $  7,331     11 %
     Reproductive and women's health net        28,130      25,699      2,431      9 %
     product sales
     Other net product sales                    12,864      10,468      2,396     23 %
     Royalty income and license fees             1,175       1,283       (108 )   (8 )%

     Total revenues                          $ 118,065   $ 106,015   $ 12,050     11 %

The increase was largely driven by an increase in sales of our infectious disease and reproductive and women's health products of $7.3 million and $2.4 million, respectively. The overall increase was partially offset by an expected decrease of our influenza product revenues in our Japanese market. We believe the increase in total revenue from these product groups was due to successes related to our QVB™ programs, which have resulted in strengthened customer relationships and preferred partnership programs. We believe that sales of our influenza products continue to increase as a result of increased market awareness, greater utilization and the demonstrated quality of our test. We believe our average selling price in the U.S. has continued to increase largely as a result of our clinical proof claims and product quality, while we have experienced downward pressure in the Japanese market as a result of reimbursement changes and increased competition. Sales of our infectious disease and reproductive and women's health products accounted for 88% and 89% of our total revenue for the years ended December 31, 2007 and 2006, respectively.

The revenue from royalty income and license fees for all periods primarily relate to royalty payments earned on patented technologies of ours utilized by third parties.

Cost of Sales

Cost of sales increased 8% to $48.6 million, or 41% of total revenue, for the year ended December 31, 2007 compared to $44.8 million, or 42% of total revenues, for the year ended December 31, 2006. The absolute dollar increase was primarily related to the increase in direct costs (material and labor) associated with the 11% increase in total revenues. The percentage decrease in cost of sales to revenue was primarily due to a more favorable product and geographic mix and the leveraging of fixed costs associated with higher unit volume and increased average selling prices.

Operating Expenses

    The following table compares operating expenses for the years ended
December 31, 2007 and 2006 (in thousands, except percentages):

                                                   For the year ended
                                                      December 31,
                                          2007                             2006                   Increase
                              Operating     As a % of total    Operating     As a % of total     (decrease)
                               expenses        revenues         expenses        revenues          $       %
Research and development       $   12,855                11 %   $   13,047                12 % $  (192 )   (1 )%
Sales and marketing                18,491                16 %       16,966                16 %   1,525      9 %
General and administrative         13,167                11 %       12,770                12 %     397      3 %
Amortization of intangible          5,493                 5 %        4,580                 4 %     913     20 %
assets

Research and Development Expense

Our research and development expenses were relatively constant. While we may experience some fluctuation in our research and development activities associated with the timing of certain projects, the primary components of research and development expense are personnel and material costs associated with development of potential new technologies and processes and with products under development. In addition, we continue to incur costs related to intellectual property, clinical activity as well as our overall efforts under our QVB™ programs.

Sales and Marketing Expense

The increase in sales and marketing expense was primarily related to an overall increase in sales personnel and related programs and expenses, which support our leadership position and strategies to capitalize further on opportunities in POC diagnostics. Other key components of this expense relate to continued investment in assessing future product extensions and enhancements, market research (including voice of customer surveys), programs aimed at distribution partners and end-user customers and reimbursement-related activities and product shipment costs.

General and Administrative Expense

The increase in general and administrative expenses was primary driven by increased stock compensation expense and costs associated with the departure of our former Chief Financial Officer and hiring a new Chief Financial Officer.

Amortization of Intangible Assets

The increase in the amortization of intangible assets was primarily due to a license agreement entered into during late 2006 and an additional license agreement entered into during 2007.

Other Income (Expense)

Interest income was $1.9 million and $1.4 million for the years ended December 31, 2007 and 2006, respectively. The increase in interest income was largely related to the increase in our average cash balance as well as more favorable interest rates for the year ended December 31, 2007 as compared to the prior year. Interest expense was relatively constant at $0.7 million for both of the years ended December 31, 2007 and 2006. Interest expense relates to interest paid on obligations under capital leases, primarily associated with our San Diego facility.

We recognized income tax expense of $6.9 million for the year ended December 31, 2007 versus a tax benefit of $5.9 million for the year ended December 31, 2006. Income tax expense for 2007 includes a reduction of $0.7 million for the completion of a research and development tax credit study for prior years. For 2006, we recorded a tax benefit which was primarily related to a decrease in the deferred tax valuation allowance during the fourth quarter ended December 31, 2006 and recognizes the deferred tax asset amount considered by management, more likely than not, to be realized.

Liquidity and Capital Resources

As of December 31, 2008, our principal sources of liquidity consisted of $57.9 million in cash and cash equivalents, as well as $120.0 million available to us under our senior secured syndicated credit facility (the "Senior Credit Facility"). Our working capital as of December 31, 2008 was $85.6 million.

Cash provided by our operating activities was $28.9 million for the year ended December 31, 2008. We had net income of $18.8 million, including non-cash charges of $8.7 million of depreciation and amortization of intangible assets and property and equipment. Other changes in operating assets and liabilities included increases in accounts receivable and inventory of $2.2 million and $0.7 million, respectively, and is due to the timing of sales during the fourth quarter of 2008, and a decrease of $0.5 million and $1.6 million for accounts payable and accrued payroll and related expenses, respectively. The decrease in accounts payable was largely due to seasonal demand fluctuations of our influenza product and amounts included in accounts payable for capital expenditures at the end of fiscal 2007, while the decrease in payroll and related expenses was largely related to payments made during 2008 under our 2007 employee compensation programs as well as a reduction of incentive-based compensation in 2008. The increase in other accrued liabilities of $2.2 million was primarily due to an increase in the allowance for volume discounts related to the increase in total revenues.

Our investing activities used $4.4 million during the year ended December 31, 2008, which was primarily for the acquisition of production and scientific equipment and building improvements. We had investments in property, plant and equipment of $0.3 million which had not been paid as of December 31, 2008.

We are currently planning approximately $6.0 million in capital expenditures over the next 12 months. The primary purpose for our capital expenditures is to acquire manufacturing equipment, implement facility improvements, and for information technology. We plan to fund these capital expenditures with cash flow from operations. We do not have any material firm purchase commitments with respect to such planned capital expenditures as of the date of filing this report.

Our financing activities used $12.1 million of cash during the year ended December 31, 2008 which was primarily related to the repurchase of approximately 1.3 million shares of our common stock in the open market at a cost of $19.8 million, partially offset by the benefit of $6.5 million from excess taxes from shared-based compensation, and proceeds of $3.3 million received from the issuance of common stock under our equity incentive and our employee stock purchase plans.

On October 8, 2008, we entered into our new $120.0 million Senior Credit Facility, which matures on October 8, 2013. The new credit facility replaced the Company's $30.0 million credit facility. The Senior Credit Facility bears interest at a rate ranging from 0.50% to 1.75% plus the lender's prime rate or, at the Company's option, a rate ranging from 1.50% to 2.75% plus the London . . .