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 Quarterly 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 that may be described or implied in the forward-looking statements. 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, our reliance on sales of our influenza diagnostic tests, uncertainty surrounding the detection of novel influenza viruses involving human specimens, our ability to develop new products and technology, adverse changes in the competitive and economic conditions in domestic and international markets, our reliance on and actions of our major distributors, technological changes and uncertainty with research and technology development, including any future molecular-based technology, the medical reimbursement system currently in place and future changes to that system, manufacturing and production delays or difficulties, adverse regulatory actions or delays in product reviews by the U.S. Food and Drug Administration (the "FDA"), compliance with FDA and environmental regulations, our ability to meet unexpected increases in demand for our products, our ability to execute our growth strategy, including the integration of new companies or technologies, disruptions in the global capital and credit markets, our ability to hire key personnel, 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 acceptance, 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. Forward-looking statements in this Quarterly Report include, among others, statements concerning: our outlook for the upcoming fiscal year, including projections about our revenue, gross margins, expenses, and net earnings; projected capital expenditures for the upcoming fiscal year and our source of funds for such expenditures; the sufficiency of our liquidity and capital resources; the future impact of deferred tax assets or liabilities; the expected vesting periods of unrecognized compensation expense; and our intention to maintain our emphasis on research and development and continue to evaluate technology and Company acquisition opportunities and the source of funds for such investments. 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, 2011, 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 audited 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 testing solutions. These diagnostic testing solutions primarily include applications in infectious diseases, women's health and gastrointestinal diseases. We sell our products directly to end users and distributors, in each case, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, leading universities, retail clinics and wellness screening centers. We market our products in the U.S. through a network of national and regional distributors, and a direct sales force. Internationally, we sell and market primarily in Japan and Europe through distributor arrangements.

Outlook

We anticipate revenue growth over the next six months as compared to the same six month period in the prior year and a related positive impact on gross margin and net earnings. We will continue our focus on prudently managing our business and delivering solid financial results, while at the same time striving to continue to introduce new products to the market and maintaining our emphasis on research and development investments for longer term growth. Finally, we will continue to evaluate opportunities to acquire new product lines and technologies, as well as, company acquisitions.

Results of Operations

Three months ended June 30, 2012 compared to the three months ended June 30, 2011

Total Revenues

The following table compares total revenues for the three months ended June 30,
2012 and 2011 (in thousands, except percentages):



                                                     For the three months              Increase
                                                        ended June 30,                (Decrease)
                                                     2012             2011           $            %
Infectious disease net product sales              $    18,758       $ 15,249      $ 3,509          23 %
Women's health net product sales                        8,658          8,426          232           3 %
Gastrointestinal disease net product sales              1,575          1,817         (242 )       (13 )%
Other net product sales                                 1,427          1,427           -           -
Royalty, license fees and grant revenue                   440            590         (150 )       (25 )%

Total revenues                                    $    30,858       $ 27,509      $ 3,349          12 %

While the 2011/2012 cold and flu season was relatively weak, the late onset continued into the second quarter of 2012 driving the revenue growth of our infectious disease products including influenza, Group A Strep, and DFA respiratory. Revenues in other product categories remained relatively constant period over period.

The revenue from our royalty, license fees and grant revenue category for all periods primarily relates to royalty payments earned on our patented technologies utilized by third parties.

Cost of Sales

Cost of sales was $14.0 million, or 45% of total revenues for the three months ended June 30, 2012, compared to $12.5 million, or 46% of total revenues for the three months ended June 30, 2011. The absolute dollar increase in cost of sales is primarily related to the variable nature of direct costs (material and labor) associated with the 12% increase in total revenues.

Operating Expenses

The following table compares operating expenses for the three months ended
June 30, 2012 and 2011 (in thousands, except percentages):



                                                   For the three months ended June 30,
                                                                                                                Increase
                                                 2012                                2011                      (Decrease)
                                                       As a % of                           As a % of
                                     Operating           total             Operating         total
                                      expenses          revenues            expenses        revenues          $           %
Research and development             $    6,844                 22 %      $      6,216             23 %    $   628         10 %
Sales and marketing                       7,677                 25 %             6,254             23 %      1,423         23 %
General and administrative                5,129                 17 %             5,827             21 %       (698 )      (12 )%
Amortization of intangible assets
from acquired businesses and
technology                                1,719                  6 %             1,775              6 %        (56 )       (3 )%

Research and Development Expense

Research and development expense increased primarily due to increased development efforts associated with the creation of additional diagnostic products including clinical trial costs for these products for the three months ended June 30, 2012. Key components contributing to this increase are personnel costs, outside services, clinical trials and laboratory supplies and materials.

Sales and Marketing Expense

Sales and marketing expense increased due to additional investments in our sales organization, including an increase in personnel and corresponding travel and training costs. Other key components of this expense relate to continued investment in existing products and customer marketing programs.

General and Administrative Expense

The decrease in general and administrative expenses is primarily due to a decrease in the incentive compensation accrual for the three months ended June 30, 2012.

Amortization of Intangible Assets from Acquired Businesses and Technology

Amortization of intangible assets from acquired businesses and technology consists primarily of customer relationships, purchased technology and patents and trademarks acquired in connection with our acquisition of Diagnostic Hybrids, Inc. ("DHI").

Other Income (Expense)

The decrease in interest expense is related to a decrease in the average debt outstanding under our Senior Credit Facility for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. Interest expense primarily relates to interest paid on borrowings under the Senior Credit Facility and interest paid on our lease obligation associated with our San Diego facility.

Income Taxes

Our effective tax rate for the three months ended June 30, 2012 and 2011 was 35.0% and 34.0%, respectively. We recognized an income tax benefit of $1.7 million and $1.9 million for the three months ended June 30, 2012 and 2011, respectively. The difference between the June 30, 2012 and June 30, 2011 effective tax rate is primarily due to the exclusion of the federal research and development tax credit due to the expiration of the statute.

Six months ended June 30, 2012 compared to the six months ended June 30, 2011

Total Revenues

The following table compares total revenues for the six months ended June 30, 2012 and 2011 (in thousands, except percentages):

                                                    For the six months               Increase
                                                      ended June 30,                (Decrease)
                                                    2012           2011            $             %
Infectious disease net product sales             $   45,113      $ 62,898      $ (17,785 )       (28 )%
Women's health net product sales                     16,917        16,412            505           3 %
Gastrointestinal disease net product sales            3,186         3,536           (350 )       (10 )%
Other net product sales                               2,726         3,019           (293 )       (10 )%
Royalty, license fees and grant revenue                 876         1,239           (363 )       (29 )%

Total revenues                                   $   68,818      $ 87,104      $ (18,286 )       (21 )%

The decrease in total revenues was largely related to a weak 2011/2012 cold and flu season. This had an adverse impact on our infectious disease products, including influenza, Group A Strep, RSV and DFA respiratory. Revenues in other product categories remained relatively constant period over period.

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

Cost of Sales

Cost of sales decreased 12% to $28.8 million, or 42% of total revenues for the six months ended June 30, 2012, compared to $32.6 million, or 37% of total revenues for the six months ended June 30, 2011. The absolute dollar decrease in cost of sales is primarily related to the variable nature of direct costs (material and labor) associated with the 21% decrease in total revenues. The increase in cost of sales as a percent of total revenue is primarily due to a shift in product mix as flu volume was lower in the six months ended June 30, 2012 compared to the six months ended June 30, 2011 because of a weak 2011/2012 cold and flu season.

Operating Expenses

The following table compares operating expenses for the six months ended
June 30, 2012 and 2011 (in thousands, except percentages):



                                                     For the six months ended June 30,                         Increase
                                                    2012                              2011                    (Decrease)
                                                          As a % of                        As a % of
                                        Operating           total           Operating        total
                                        expenses           revenues         expenses        revenues          $          %
Research and development               $    15,348                 22 %    $    13,676             16 %    $ 1,672        12 %
Sales and marketing                         14,213                 21 %         12,509             14 %      1,704        14 %
General and administrative                  11,053                 16 %         11,940             14 %       (887 )      (7 )%
Amortization of intangible assets
from acquired businesses and
technology                                   3,437                  5 %          3,551              4 %       (114 )      (3 )%

Research and Development Expense

Research and development expense increased primarily due to increased development efforts associated with the creation of additional diagnostic products including clinical trial costs for these products for the six months ended June 30, 2012. Other key components contributing to this increase are personnel costs, outside services, clinical trials and laboratory supplies and materials.

Sales and Marketing Expense

Sales and marketing expense increased due to additional investments in our sales organization, including an increase in personnel and corresponding travel and training costs. Other key components of this expense relate to continued investment in existing products and customer marketing programs.

General and Administrative Expense

The decrease in general and administrative expenses is primarily due to a decrease in the incentive compensation accrual for the six months ended June 30, 2012.

Amortization of Intangible Assets from Acquired Businesses and Technology

Amortization of intangible assets from acquired businesses and technology consists primarily of customer relationships, purchased technology and patents and trademarks acquired in connection with our acquisition of DHI.

Other Income (Expense)

The decrease in interest expense is related to a decrease in the average debt outstanding under our Senior Credit Facility for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. Interest expense primarily relates to interest paid on borrowings under the Senior Credit Facility and interest paid on our lease obligation associated with our San Diego facility.

Income Taxes

The effective tax rate for the six months ended June 30, 2012 and 2011 was 35.0% and 34.0%, respectively. The Company recognized tax benefit of $1.7 million and a tax expense of $4.0 million for the six months ended June 30, 2012 and 2011, respectively. The difference between the June 30, 2012 and June 30, 2011 effective tax rate is primarily due to the exclusion of the federal research and development tax credit due to the expiration of the statue.

Liquidity and Capital Resources

As of June 30, 2012, our principal sources of liquidity consisted of $19.9 million in cash and cash equivalents, and $60.6 million available to us under our Senior Credit Facility, which can fluctuate from time to time due to, among other factors, our funded debt to adjusted earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA") ratio. Our working capital as of June 30, 2012 was $51.5 million.

Cash provided by operating activities was $4.3 million during the six months ended June 30, 2012. We had a net loss of $3.1 million, including non-cash charges of $14.5 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation. Other changes in operating assets and liabilities included an increase in inventory of $2.5 million and a decrease in other accrued liabilities of $2.5 million. The changes are related to the seasonal nature of our business. Cash provided by operating activities was $34.2 million during the six months ended June 30, 2011. We had net earnings of $7.8 million, including non-cash charges of $10.9 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation during the six months ended June 30, 2011. Other changes in operating assets and liabilities included a decrease in accounts receivable, inventory and income tax receivable of $2.6 million, $2.5 million and $7.8 million, respectively. The decrease in accounts receivable and inventory are related to the seasonal nature of our business, while the decrease in income tax receivable is due to a tax refund during the quarter.

Our investing activities used $19.0 million during the six months ended June 30, 2012 primarily related to the acquisition of intangibles associated with our exercise of a buyout clause under the Alere Amendment. During the six months ended June 30, 2012, we exercised the buy-out right under the Alere Amendment, which allowed us to buy-out any remaining future royalty obligation for a fixed cash payment in the amount of $15.7 million less $1.0 million of specified third quarter 2011 royalties. In addition, we used cash for investing activities associated with the acquisition of production and scientific equipment, and building improvements during the six months ended June 30, 2012. Our investing activities used $3.0 million during the six months ended June 30, 2011 primarily related to the acquisition of production and scientific equipment, and building improvements.

We are planning approximately $5.4 million in capital expenditures for the remainder of 2012. The primary purpose for our capital expenditures is to acquire manufacturing and scientific equipment, implement facility improvements, and for the purchase or development of information technology. We plan to fund these capital expenditures with cash flow from operations and other available sources of liquidity. We have $2.3 million in firm purchase commitments with respect to such planned capital expenditures as of the date of filing this report.

Cash used for financing activities of $26.7 million during the six months ended June 30, 2012 was primarily related to repayments under our Senior Credit Facility of $23.0 million, and repurchases of 200,400 shares of our common stock under our share repurchase program at a cost of approximately $2.9 million. Our financing activities generated $27.3 million of cash during the six months ended June 30, 2011. This was primarily related to proceeds from the sale of our common stock, partly offset by repayments made under the Senior Credit Facility, both occurring during the first quarter of 2011.

We currently have a $120.0 million Senior Credit Facility, which matures on October 8, 2013. The Senior Credit Facility bears interest at the lower of either the Eurodollar rate or base rate. The Eurodollar rate is equal to the Eurodollar rate plus the applicable rate, and the base rate is equal to the higher of the federal funds rate plus one-half of one percent plus the applicable rate, or the lenders prime rate. The applicable rate is generally determined in accordance with a performance

pricing grid based on our leverage ratio and ranges from 1.50% to 2.75% for Eurodollar rate loans and from 0.50% to 1.75% for base rate loans (weighted average interest rate of 1.75% at June 30, 2012). 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. We are also subject to financial covenants which include a funded debt to adjusted EBITDA ratio (as defined in the Senior Credit Facility, with adjusted EBITDA generally calculated as earnings before, among other adjustments, interest, taxes, depreciation and amortization) not to exceed 3:1 as of the end of each fiscal quarter, and an interest coverage ratio of not less than 3.5:1 as of the end of each fiscal quarter. The Senior Credit Facility is secured by substantially all of our present and future assets and properties. As of June 30, 2012, we had $60.6 million available under the Senior Credit Facility. Our ability to borrow under the Senior Credit Facility fluctuates from time to time due to, among other factors, our borrowings under the facility and our funded debt to adjusted EBITDA ratio. As of June 30, 2012, we had $19.0 million outstanding under the Senior Credit Facility. As of June 30, 2012, we were in compliance with all financial covenants.

Our 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. In addition, we intend to continue to evaluate candidates for acquisitions or technology licensing. If we determine to proceed with any such transactions, we may need to incur additional debt, or issue additional equity, to successfully complete the transactions. Based on our current cash position and our current assessment of future operating results, we believe that our existing sources of liquidity will be adequate to meet our operating needs during the next 12 months.

Off-Balance Sheet Arrangements

At June 30, 2012, we did not have any relationships or other arrangements 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.

New Accounting Standards

In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income ("ASU 2011-05"). The provisions of this ASU amend FASB Accounting Standards Codification ("ASC") Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. ASU 2011-05 prohibits the presentation of the components of comprehensive income in the statement of stockholders' equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous GAAP, all three presentations were acceptable. Regardless of the presentation selected, the Reporting Entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this ASU are effective for us for fiscal years and interim periods beginning after December 31, 2011 and the required presentation is included in this filing.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08"), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 was effective for us beginning in fiscal year 2012. The adoption did not have an impact on our consolidated financial statements.

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 revenue recognition; stock-based compensation; reserve for uncollectible accounts; inventory valuation; intangible assets; software development costs; and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are 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.

A comprehensive discussion of our critical accounting policies and management . . .