In this quarterly report, all references to "we," "our" and "us" refer to Quidel Corporation and its subsidiaries.

Future Uncertainties and Forward-Looking Statements

This Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that involve material risks, assumptions and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially from those currently expected. As such, no forward-looking statement can be guaranteed. Differences in actual results and performance may arise as a result of a number of factors including, without limitation, seasonality, the timing of onset, length and severity of cold and flu seasons, the level of success in executing on our strategic initiatives, uncertainty surrounding the detection of novel influenza viruses involving human specimens, adverse changes in the competitive and economic conditions in domestic and international markets, actions of our major distributors, technological changes and uncertainty with research and technology development, including any future molecular-based technology, the reimbursement system currently in place and future changes to that system, manufacturing and production delays or difficulties, adverse actions or delays in product reviews by the U.S. Food and Drug Administration (the "FDA"), intellectual property, product liability, environmental or other litigation, potential required patent license fee payments not currently reflected in our costs, potential inadequacy of booked reserves and possible impairment of goodwill, and lower than anticipated sales or market penetration of our new products. Forward-looking statements typically are identified by the use of terms such as "may," "will," "should," "might," "expect," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. The risks described under "Risk Factors" in Item 1A of this Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2008, and elsewhere herein and in reports and registration statements that we file with the Securities and Exchange Commission (the "SEC") from time to time, should be carefully considered. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Quarterly Report. The following should be read in conjunction with the Consolidated Financial Statements and notes thereto beginning on page 3 of this Quarterly Report. We undertake no obligation to publicly release the results of any revision or update of these forward-looking statements, except as required by law.

Overview

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 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.

Recent Developments

In January 2009, we announced that Caren L. Mason, our President and Chief Executive Officer ("CEO"), had decided to retire from the Company on June 1, 2009. Ms. Mason continued in her 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 is serving as a special advisor to the new 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 and became a Board Director in February 2009, and his role as President and CEO was effective March 1, 2009.

In March 2009, we announced a restructuring plan which included a workforce reduction in order to gain operational efficiencies and reduce costs. The reduction in force involved approximately 10% of the workforce from all areas of the business. We incurred a restructuring charge of $1.0 million in the first quarter of 2009 for both personnel and non-personnel related costs and expect to incur an additional restructuring charge of approximately $1.1 million in the second quarter of 2009, relating to the impairment of an operating lease for a portion of our Santa Clara facility, which was not completely vacated until early April 2009.

Outlook

For the fiscal year 2009, we anticipate an overall decrease in revenue year-over-year, due primarily to the impact of the weak 2008/2009 cold and flu season during the first quarter of 2009, lower pre-season influenza purchases in the third and fourth quarters of 2009, as well as other macroeconomic conditions. We expect gross margins will also be negatively impacted primarily by an unfavorable product mix of our infectious disease products.
Internationally, we expect continued growth for fiscal year 2009 as we increase the reach of our products to markets around the world. Excluding amortization expense, we expect operating expenses to be slightly lower year-over-year, largely as a result of our restructuring efforts, partially offset by continued investment in research and development.

Results of Operations

Three months ended March 31, 2009 compared to the three months ended March 31, 2008

Total Revenues

    The following table compares total revenues for the three months ended
March 31, 2009 and 2008 (in thousands, except percentages):

                                       For the three months
                                         ended March 31,          Increase (Decrease)
                                        2009          2008            $             %
 Infectious disease net product       $    7,817     $ 32,199    $     (24,382 )     (76 )%
 sales
 Reproductive and women's health           4,941        5,543             (602 )     (11 )%
 net product sales
 Other net product sales                   3,860        2,872              988        34 %
 Royalty income and license fees             272          251               21         8 %

 Total revenues                       $   16,890     $ 40,865    $     (23,975 )     (59 )%

The decrease in total revenues was primarily driven by a significant decrease in sales of our infectious disease products. We believe the decrease in revenue of our influenza and Group A strep products is related to the timing of onset and overall weakness of the 2008/2009 cold and flu season. In this regard, revenues were adversely impacted by both a significant decrease in the number of doctor visits for influenza-like illnesses as well as overall patient visits, compared to the prior year. The decrease in total revenues was partially offset by an increase in our other product sales category, which was a result of an increase in sales of our veterinary products.

We derive a significant portion of our total revenue from a relatively small number of distributors. Approximately 52% and 59% of our total revenue for the three months ended March 31, 2009 and 2008, respectively, were derived from sales through our five largest distributors.

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 decreased 40% to $8.4 million, or 50% of total revenues for the three months ended March 31, 2009, compared to $14.1 million, or 35% of total revenues for the three months ended March 31, 2008. The absolute dollar decrease is primarily related to the variable nature of direct costs (material and labor) associated with the 59% decrease in total revenues. The percentage increase in cost of sales as a percentage of total revenue was largely due to an unfavorable product mix and a decrease in unit volume and the related leverage of fixed costs.

Operating Expenses

    The following table compares operating expenses for the three months ended
March 31, 2009 and 2008 (in thousands, except percentages):

                                                   For the three months
                                                      ended March 31,

                                           2009                             2008
                               Operating       As a % of        Operating       As a % of         Increase (Decrease)
                               expenses      total revenues     expenses      total revenues         $             %
Research and development       $    2,896                 17 %  $    3,067                  8 %  $     (171 )         (6 )%
Sales and marketing                 4,735                 28 %       5,320                 13 %        (585 )        (11 )%
General and administrative          4,120                 24 %       3,639                  9 %         481           13 %
Amortization of intangibles           348                  2 %       1,151                  3 %        (803 )        (70 )%
Restructuring charges                 953                  6 %           -                  -           953          N/A

Research and Development Expense

The decrease in research and development expense is due primarily to certain project-related costs that were incurred during the first quarter of 2008 and lower incentive compensation in the first quarter of 2009 compared to the first quarter of 2008, partially offset by an increase in headcount hired during late 2008 and material costs associated with the development of potential new technologies and processes and with products under development.

Sales and Marketing Expense

The decrease in sales and marketing expense is primarily related to a decrease in sales commissions and product shipment costs associated with lower sales volume, partially offset by an increased investment in our sales force to further support our leadership position. Other key components of this expense relate to continued investment in assessing future product extensions and enhancements, market research and reimbursement-related activities.

General and Administrative Expense

The increase in general and administrative expense is primarily related to transition costs from hiring our new CEO and increased costs incurred in connection with our new credit facility, partially offset by lower incentive compensation in the first quarter of 2009 compared to the first quarter of 2008.

Amortization of Intangibles

The amortization of intangible assets decreased primarily due to the full amortization of a license agreement in December 2008.

Restructuring Charges

We recorded a restructuring charge of $1.0 million, comprised of personnel and non-personnel related costs, during the three months ended March 31, 2009, which is net of a $0.2 million stock-based compensation expense reversal for certain terminated employees.

Other Income (Expense)

The decrease in interest income is related to the decrease in interest rates and a decrease in our average cash balance during the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. Interest expense relates to interest paid on obligations under capital leases, primarily associated with our San Diego facility.

Income Taxes

The effective tax rate for the three months ended March 31, 2009 and 2008 was 39.0% and 38.5%, respectively. We recognized a tax benefit of $1.8 million for the three months ended March 31, 2009 and tax expense of $5.4 million for the three months ended March 31, 2008.

Liquidity and Capital Resources

As of March 31, 2009, our principal sources of liquidity consisted of $56.3 million in cash and cash equivalents, as well as the $60.0 million available to us under our senior secured syndicated credit facility (the "Senior Credit Facility"), which can fluctuate from time to time due to, among other factors, our funded debt to EBITDA ratio. Our working capital as of March 31, 2009 was $73.8 million.

Our cash provided by operating activities was $9.8 million for the three months ended March 31, 2009. We had a net loss of $2.8 million, including non-cash charges of $1.5 million for depreciation and amortization of intangible assets and property and equipment. Other changes in operating assets and liabilities included decreases in accounts receivable of $19.2 million, accounts payable of $2.2 million and accrued royalties of $1.3 million, which are due to the decrease in revenue during the quarter. The decrease in other current liabilities of $1.5 million was primarily due to a decrease in the allowance for volume discounts related to the decrease in total revenues.

Our investing activities used $0.8 million during the three months ended March 31, 2009 primarily for the acquisition of production and scientific equipment and building improvements.

We are planning approximately $5.0 million in capital expenditures for the remainder of 2009. 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 have $0.3 million in firm purchase commitments with respect to such planned capital expenditures as of the date of filing this report.

Our financing activities used $10.5 million of cash during the three months ended March 31, 2009. This was primarily related to the repurchase of approximately 1.1 million shares of our common stock in the open market at a cost of approximately $10.5 million.

Our $120.0 million Senior Credit Facility matures on October 8, 2013. The Senior Credit Facility bears interest at a rate ranging from 0.50% to 1.75% plus the lender's prime rate or, at our option, a rate ranging from 1.50% to 2.75% plus the London InterBank Offering Rate. The agreement governing the Senior Credit Facility is subject to certain customary limitations, including among others: limitation on liens; limitation on mergers, consolidations and sales of assets; limitation on debt; limitation on dividends, stock redemptions and the redemption and/or prepayment of other debt; limitation on investments (including loans and advances) and acquisitions; limitation on transactions with affiliates; and limitation on annual capital expenditures. The terms of the Senior Credit Facility require us to

comply with certain financial covenants which include a funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio, and an interest coverage ratio. The Senior Credit Facility is secured by substantially all present and future assets and properties of the Company. As of March 31, 2009, we had approximately $60.0 million available under the Senior Credit Facility. We had no amounts outstanding under the Senior Credit Facility and we were in compliance with all financial covenants.

We also intend to continue evaluation of acquisition and technology licensing candidates. As such, we may need to incur additional debt, or issue additional equity, to successfully complete these transactions. Cash requirements fluctuate as a result of numerous factors, such as the extent to which we generate cash from operations, progress in research and development projects, competition and technological developments and the time and expenditures required to obtain governmental approval of our products. Based on our current cash position and the current assessment of future operating results, we believe that our existing sources of liquidity will be adequate to meet operating needs during the next 12 months and the foreseeable future.

Off-Balance Sheet Arrangements

At March 31, 2009, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, bad debts, inventories, intangible assets, income taxes, stock-based compensation, restructuring and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes in critical accounting policies or management estimates since the year ended December 31, 2008. A comprehensive discussion of our critical accounting policies and management estimates is included in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.