##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM  TO
 Commission File Number
1-33350
 
 SOURCEFIRE, INC.
 (Exact name of Registrant as Specified in its Charter)
 Delaware(State or Other Jurisdiction of 
Incorporation or Organization)
    
    52-2289365(I.R.S. Employer
Identification No.)9770 Patuxent Woods Drive 
Columbia, Maryland(Address of Principal Executive Offices)
    
    21046(Zip Code)
 (410) 290-1616
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated
filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



SOURCEFIRE, INC.
 Form 10-Q
 TABLE OF CONTENTS
 Part IItem 1.
    
    Financial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2008 and
2007
    
    
    4Consolidated Statement of Changes in Stockholders Equity for the three months ended
March 31, 2008
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and
2007
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29Part IIItem 1
    
    Legal Proceedings
    
    
    31Item 1A
    
    Risk Factors
    
    
    31Item 2
    
    Unregistered Sales of Equity Security and Use of Proceeds
    
    
    45Item 3
    
    Defaults Upon Senior Securities
    
    
    45Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    45Item 5
    
    Other Information
    
    
    45Item 6
    
    Exhibits
    
    
    45Signatures
    
    
    46




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##### 



Part I. FINANCIAL INFORMATION
 Item 1. Financial Statements
 SOURCEFIRE, INC.
 CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
 March 31,
    
    
    December 31,2008
    
    
    2007(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    44,961
    
    
    $
    33,071Short-term investments
    
    
    58,995
    
    
    
    69,816Accounts receivable, net of allowance for
doubtful accounts of $110 in 2008 and $160 in
2007
    
    
    13,979
    
    
    
    20,689Inventory
    
    
    6,105
    
    
    
    4,863Prepaid expenses and other current assets
    
    
    2,317
    
    
    
    2,651Total current assets
    
    
    126,357
    
    
    
    131,090Property and equipment, net
    
    
    5,211
    
    
    
    4,041Intangible assets, net of accumulated amortization
    
    
    560
    
    
    
    592Investments
    
    
    4,065
    
    
    
    4,140Restricted cash
    
    
    1,017
    
    
    
    1,000Other assets
    
    
    986
    
    
    
    815Total assets
    
    $
    138,196
    
    
    $
    141,678Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    4,037
    
    
    $
    5,930Accrued compensation and related expenses
    
    
    3,423
    
    
    
    3,151Other accrued expenses
    
    
    1,965
    
    
    
    1,458Current portion of deferred revenue
    
    
    18,283
    
    
    
    18,417Other current liabilities
    
    
    582
    
    
    
    832Total current liabilities
    
    
    28,290
    
    
    
    29,788Deferred revenue, less current portion
    
    
    2,707
    
    
    
    2,610Other long-term liabilities
    
    
    89
    
    
    
    86Total liabilities
    
    
    31,086
    
    
    
    32,484Commitments and contingenciesStockholders equity:Common stock, $0.001 par value; 240,000,000
shares authorized; 24,984,928 and 24,642,433
shares issued and outstanding as of March 31, 2008
and December 31, 2007, respectively
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    154,802
    
    
    
    153,693Accumulated deficit
    
    
    (48,019
    )
    
    
    (44,523
    )Accumulated other comprehensive income
    
    
    303
    
    
    
    Total stockholders equity
    
    
    107,110
    
    
    
    109,194Total liabilities and stockholders equity
    
    $
    138,196
    
    
    $
    141,678
  3




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##### 



SOURCEFIRE, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 Three Months EndedMarch 31,2008
    
    
    2007Revenue:Products
    
    $
    6,851
    
    
    $
    5,650Technical support and professional services
    
    
    6,800
    
    
    
    4,805Total revenue
    
    
    13,651
    
    
    
    10,455Cost of revenue:Products
    
    
    1,997
    
    
    
    1,556Technical support and professional services
    
    
    1,041
    
    
    
    728Total cost of revenue
    
    
    3,038
    
    
    
    2,284Gross profit
    
    
    10,613
    
    
    
    8,171Operating expenses:Research and development
    
    
    3,111
    
    
    
    2,501Sales and marketing
    
    
    7,234
    
    
    
    5,947General and administrative
    
    
    4,414
    
    
    
    2,328Depreciation and amortization
    
    
    492
    
    
    
    362Total operating expenses
    
    
    15,251
    
    
    
    11,138Loss from operations
    
    
    (4,638
    )
    
    
    (2,967
    )Other income, net
    
    
    1,204
    
    
    
    491Loss before income taxes
    
    
    (3,434
    )
    
    
    (2,476
    )Income tax expense
    
    
    (62
    )
    
    
    (12
    )Net loss
    
    
    (3,496
    )
    
    
    (2,488
    )Accretion of preferred stock
    
    
    
    
    
    
    (870
    )Net loss attributable to common stockholders
    
    $
    (3,496
    )
    
    $
    (3,358
    )Net loss attributable to common stockholders per share:Basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.39
    )Weighted average shares outstanding used in computing per share amounts:Basic and diluted
    
    
    24,766,375
    
    
    
    8,623,982
  4




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##### 



SOURCEFIRE, INC.
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
(in thousands, except share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance as of  January 1, 2008
    
    
    24,642,433
    
    
    $
    24
    
    
    $
    153,693
    
    
    $
    (44,523
    )
    
    $
    
    
    
    $
    109,194Exercise of common stock options
    
    
    65,386
    
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    88Issuance of common stock under
employee stock purchase plan
    
    
    17,024
    
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    89Issuance of restricted common stock
    
    
    264,335
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of restricted common stock
    
    
    (4,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    922
    
    
    
    
    
    
    
    
    
    
    
    922Excess tax benefit relating to
share-based payments
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Other comprehensive income:Net loss for the three months ended
March 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,496
    )
    
    
    
    
    
    
    (3,496
    )Net unrealized gain on
investments, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    303Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,193
    )Balance as of March 31, 2008
    
    
    24,984,928
    
    
    $
    24
    
    
    $
    154,802
    
    
    $
    (48,019
    )
    
    $
    303
    
    
    $
    107,110
  5




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##### 



SOURCEFIRE, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 Three Months Ended March 31,2008
    
    
    2007Operating activitiesNet loss
    
    $
    (3,496
    )
    
    $
    (2,488
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    499
    
    
    
    370Provision for doubtful accounts
    
    
    (1
    )
    
    
    (16
    )Non-cash stock-based compensation
    
    
    922
    
    
    
    524Amortization of premium on investments
    
    
    (345
    )
    
    
    (123
    )Realized gain from sales of investments
    
    
    (23
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    6,710
    
    
    
    5,547Inventory
    
    
    (1,187
    )
    
    
    (1,284
    )Prepaid expenses and other assets
    
    
    163
    
    
    
    (1,350
    )Accounts payable
    
    
    (1,893
    )
    
    
    (537
    )Accrued expenses
    
    
    779
    
    
    
    82Deferred revenue
    
    
    (37
    )
    
    
    1,216Other liabilities
    
    
    (247
    )
    
    
    235Net cash provided by operating activities
    
    
    1,844
    
    
    
    2,176Investing activitiesPurchase of property and equipment
    
    
    (1,692
    )
    
    
    (1,263
    )Purchase of investments
    
    
    (19,162
    )
    
    
    (5,950
    )Proceeds from maturities of investments
    
    
    27,500
    
    
    
    7,150Proceeds from sales of investments
    
    
    3,230
    
    
    
    Increase in restricted cash
    
    
    (17
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    9,859
    
    
    
    (63
    )Financing activitiesBorrowings of long-term debt
    
    
    
    
    
    
    113Repayments of long-term debt
    
    
    
    
    
    
    (1,424
    )Proceeds from issuance of common stock, net of underwriters discount of $6,495
    
    
    
    
    
    
    86,288Proceeds from exercise of stock options
    
    
    177
    
    
    
    12Excess tax benefits related to share-based payments
    
    
    10
    
    
    
    Payment of equity offering costs
    
    
    
    
    
    
    (878
    )Net cash provided by financing activities
    
    
    187
    
    
    
    84,111Net increase in cash and cash equivalents
    
    
    11,890
    
    
    
    86,224Cash and cash equivalents at beginning of period
    
    
    33,071
    
    
    
    13,029Cash and cash equivalents at end of period
    
    $
    44,961
    
    
    $
    99,253
  6




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##### 



SOURCEFIRE, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Description of Business
  TM
  2. Summary of Significant Accounting Policies
 Basis of Presentation
  Use of Estimates
   7




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##### 



Investments
 Accounting for Certain Investments in Debt and Equity Securities.
 Allowance for Doubtful Accounts
  Inventories
  Revenue Recognition
   Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions.
 8




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##### 



Warranty
  Income Taxes
 Accounting for Income Taxes
 9




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##### 



Accounting for Uncertainty
in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes
 Stock-Based Compensation
 Share-Based Payment Accounting for Stock Based Compensation, Accounting for Stock Issued to Employees.
 Recent Accounting Pronouncements
 Fair Value Measurements Effective Date of FASB Statement No. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations
 10




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##### 



Non-Controlling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 3. Investments
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMoney market funds
    
    $
    28,251
    
    
    $
    
    
    
    $
    
    
    
    $
    28,251Corporate debt investments
    
    
    22,505
    
    
    
    92
    
    
    
    (9
    )
    
    
    22,588Asset-backed securities
    
    
    8,271
    
    
    
    58
    
    
    
    
    
    
    
    8,329Commercial paper
    
    
    35,168
    
    
    
    162
    
    
    
    
    
    
    
    35,330Total investments
    
    
    94,195
    
    
    $
    312
    
    
    $
    (9
    )
    
    
    94,498Amounts classified as cash equivalents
    
    
    (31,438
    )
    
    
    
    
    
    
    
    
    
    
    (31,438
    )Total available-for-sale investments
    
    $
    62,757
    
    
    
    
    
    
    
    
    
    
    $
    63,060
   Amortized Cost
    
    
    Estimated Fair ValueDue in one year or less
    
    $
    58,721
    
    
    $
    58,995Due after one year through five years
    
    
    4,036
    
    
    
    4,065Total
    
    $
    62,757
    
    
    $
    63,060
 4. Share-Based Compensation
  11




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##### 



Valuation of Stock-Based Compensation
   12




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##### 



Three Months EndedMarch 31,2008
    
    2007Stock options:Average risk-free interest rate
    
    
    2.97
    %
    
    
    4.69
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected useful life (years)
    
    
    6.25
    
    
    
    6.25Expected volatility
    
    
    66.6
    %
    
    
    78.1
    %Weighted-average fair value per grant
    
    $
    4.29
    
    
    $
    9.86Employee stock purchase plan:Average risk-free interest rate
    
    
    2.50
    %
    
    
    Expected dividend yield
    
    
    0.0
    %
    
    
    Expected useful life (years)
    
    
    0.37
    
    
    
    Expected volatility
    
    
    57.5
    %
    
    
    Weighted-average
fair value per purchase
    
    $
    1.64
    
    
    
    
 Average risk-free interest rate
 Expected dividend yield
 Expected
useful life
 Share-Based Payment
  Expected volatility
    13




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##### 



Three Months Ended March 31,2008
    
    
    2007Product cost of revenue
    
    $
    7
    
    
    $
    2Services cost of revenue
    
    
    21
    
    
    
    6Stock based compensation expense included in cost of revenue
    
    
    28
    
    
    
    8Research and development
    
    
    174
    
    
    
    81Sales and marketing
    
    
    343
    
    
    
    209General and administrative
    
    
    377
    
    
    
    226Stock-based compensation included in operating expenses
    
    
    894
    
    
    
    516Total stock-based compensation
    
    $
    922
    
    
    $
    524Effect on net loss per share:Basic and diluted
    
    $
    0.04
    
    
    $
    0.06
 Stock Options
  Range of
    
    
    Weighted-
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Average
    
    
    IntrinsicShares
    
    
    Prices
    
    
    Exercise Price
    
    
    ValueOutstanding at December 31, 2007
    
    
    3,063,588
    
    
    $
    0.24 to $15.49
    
    
    $
    4.05
    
    
    $
    15,266Granted
    
    
    254,869
    
    
    
    5.97 to 7.45
    
    
    
    6.79Exercised
    
    
    (65,386
    )
    
    
    0.24 to 5.26
    
    
    
    1.35Forfeited
    
    
    (146,873
    )
    
    
    1.14 to 13.10
    
    
    
    7.38Outstanding at March 31, 2008
    
    
    3,106,198
    
    
    $
    0.24 to $15.49
    
    
    $
    4.17
    
    
    $
    9,470Vested and exercisable at March 31, 2008
    
    
    2,040,243
    
    
    $
    0.24 to $15.49
    
    
    $
    2.16
    
    
    $
    8,669Vested and expected to vest at March 31, 2008
    
    
    2,762,070
    
    
    
    
    
    
    $
    3.71
    
    
    $
    9,176
  Options Outstanding
    
    
    Options ExercisableWeighted-
    
    
    Weighted-Average
    
    
    
    
    
    
    Weighted-Range of
    
    
    
    
    
    Average
    
    
    Contractual
    
    
    
    
    
    
    AverageExercise Prices
    
    Number of Shares
    
    
    Exercise Prices
    
    
    Life (Years)
    
    
    Number of Shares
    
    
    Exercise Prices$0.24  $0.32
    
    
    822,270
    
    
    $
    0.29
    
    
    
    4.99
    
    
    
    822,270
    
    
    $
    0.29$1.14  $2.03
    
    
    1,069,641
    
    
    
    1.63
    
    
    
    6.62
    
    
    
    886,593
    
    
    
    1.56$3.69  $9.48
    
    
    806,096
    
    
    
    7.47
    
    
    
    8.67
    
    
    
    265,475
    
    
    
    7.39$9.55  $15.49
    
    
    408,191
    
    
    
    12.16
    
    
    
    9.06
    
    
    
    65,905
    
    
    
    12.603,106,198
    
    
    $
    4.17
    
    
    
    7.04
    
    
    
    2,040,243
    
    
    $
    2.16
   14




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##### 



Restricted Stock Awards
  Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueUnvested at December 31, 2007
    
    
    295,680
    
    
    $
    10.56Granted
    
    
    264,335
    
    
    
    6.31Restrictions Lapsed
    
    
    (23,970
    )
    
    
    14.61Forfeited
    
    
    (4,250
    )
    
    
    9.59Unvested at March 31, 2008
    
    
    531,795
    
    
    $
    8.27
    Employee Stock Purchase Plan
  15




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##### 



5. Net Loss per Share
  Three Months EndedMarch 31,2008
    
    
    2007Numerator:Net loss attributable to common stockholders
    
    $
    (3,496
    )
    
    $
    (3,358
    )Denominator:Weighted-average shares of common stock outstanding
    
    
    24,766,375
    
    
    
    8,623,982Net loss attributable to common stockholders per share:Basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.39
    )
  Three Months EndedMarch 31,2008
    
    2007Options to purchase common stock
    
    
    3,106,198
    
    
    
    3,260,274Shares of common stock into which outstanding warrants are convertible
    
    
    
    
    
    
    36,944Unvested shares of restricted common stock
    
    
    
    
    
    
    87,835Total
    
    
    3,106,198
    
    
    
    3,385,053
 6. Fair Value Measurement
 Fair Value
Measurements
  
    
    Level 1 Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical unrestricted assets or liabilities.
    
    Level 2  Quoted prices in markets that are not active or financial instruments for
which all significant inputs are observable, either directly or indirectly.
    
    Level 3  Prices or valuations that require inputs that are both significant to the
fair value measurement and unobservable.
  16




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##### 



Assets at
    
    
    Fair Value Measurement
UsingFair Value
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Money market funds
    
    
    $
    28,251
    
    
    $
    28,251
    
    
    $
    
    
    
    $
    Corporate debt investments
    
    
    
    22,588
    
    
    
    
    
    
    
    22,588
    
    
    
    Asset-backed securities
    
    
    
    8,329
    
    
    
    
    
    
    
    8,329
    
    
    
    Commercial paper
    
    
    
    35,330
    
    
    
    
    
    
    
    35,330
    
    
    
    Total cash equivalents and investments
    
    
    
    94,498
    
    
    $
    28,251
    
    
    $
    66,247
    
    
    $
    Cash
    
    
    
    13,523Total cash, cash equivalents and investments
    
    
    $
    108,021
 7. Business and Geographic Segment Information
  Three Months EndedMarch 31,2008
    
    
    2007United States
    
    $
    9,534
    
    
    $
    7,670All foreign countries
    
    
    4,117
    
    
    
    2,785Consolidated total
    
    $
    13,651
    
    
    $
    10,455
 8. Legal Proceedings
 Howard Katz v. Sourcefire, Inc., et al. Mark Reaves v. Sourcefire, Inc. et al. Raveill v. Sourcefire, Inc. et al., Barry Pincus v. Sourcefire, Inc., et al., Pincus
    17




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##### 



9. Commitments and Contingencies
    10. Subsequent Event
  18




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##### 



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Certain statements contained in this Quarterly Report on Form 10-Q may constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases
would be, will allow, intends to, will likely result, are expected to, will continue,
is anticipated, estimate, project, or similar expressions, or the negative of such words or
phrases, are intended to identify forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about future events. Because such statements
include risks and uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q ,
particularly in Risk Factors, and our other filings with the Securities and Exchange Commission.
Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and
Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise
required by applicable law, we do not undertake, and we specifically disclaim, any obligation to
update any forward-looking statements to reflect occurrences, developments, unanticipated events or
circumstances after the date of such statement.
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes that
appear elsewhere in this Quarterly Report on Form 10-Q and in Risk Factors in Part II, Item 1A in this
Quarterly Report on Form 10-Q. Our actual results could
differ materially from those discussed in or implied by the forward-looking statements.
 Introduction
  
    
    Overview. This section provides a general description of our business, the
performance indicators that we use in assessing our financial condition and results of
operations, and anticipated trends that we expect to affect our financial condition and
results of operations.
    
    Results of Operations. This section provides an analysis of our results of
operations for the three months ended March 31, 2008 as compared to the three months
ended March 31, 2007.
    
    Liquidity and Capital Resources. This section provides an analysis of our cash
flows for the three months ended March 31, 2008 and a discussion of our capital
requirements and the resources available to us to meet those requirements.
    
    Critical Accounting Policies and Estimates. This section discusses accounting
policies that are considered important to our financial condition and results of
operations, require significant judgment or require estimates on our part in applying
them. Our significant accounting policies, including those considered to be critical
accounting policies, are summarized in Note 2 to the accompanying consolidated financial
statements.
 Overview
 
 19




---



##### 



Key Financial Metrics and Trends
 Pricing and Discounts
  Revenue
     20




---



##### 



Cost of Revenue
   Gross Profit
  Operating Expenses
 Research and Development
  21




---



##### 



Sales and Marketing.
  General and Administrative.
  Stock-Based Compensation Share-Based Payment
  Results of Operations
 Revenue
 Three Months EndedMarch 31,
    
    Variance2008
    
    2007
    
    $
    
    %Products
    
    $
    6,851
    
    
    $
    5,650
    
    
    $
    1,201
    
    
    
    21
    %Percentage of total revenue
    
    
    50
    %
    
    
    54
    %Technical support and professional services
    
    
    6,800
    
    
    
    4,805
    
    
    
    1,995
    
    
    
    42
    %Percentage of total revenue
    
    
    50
    %
    
    
    46
    %Total revenue
    
    $
    13,651
    
    
    $
    10,455
    
    
    $
    3,196
    
    
    
    31
    %
  22




---



##### 



Cost of revenue
 Three Months EndedMarch 31,
    
    Variance2008
    
    2007
    
    $
    
    %Products
    
    $
    1,997
    
    
    $
    1,556
    
    
    $
    441
    
    
    
    28
    %Percentage of total revenue
    
    
    15
    %
    
    
    15
    %Technical support and professional services
    
    
    1,041
    
    
    
    728
    
    
    
    313
    
    
    
    43
    %Percentage of total revenue
    
    
    8
    %
    
    
    7
    %Total cost of revenue
    
    $
    3,038
    
    
    $
    2,284
    
    
    $
    754
    
    
    
    33
    %Percentage of total revenue
    
    
    22
    %
    
    
    22
    %
  Gross profit
 Three Months EndedMarch 31,
    
    Variance2008
    
    2007
    
    $
    
    %Products
    
    $
    4,854
    
    
    $
    4,094
    
    
    $
    760
    
    
    
    19
    %Percentage of total revenue
    
    
    36
    %
    
    
    39
    %Technical support and professional services
    
    
    5,759
    
    
    
    4,077
    
    
    
    1,682
    
    
    
    41
    %Percentage of total revenue
    
    
    42
    %
    
    
    39
    %Total
    
    $
    10,613
    
    
    $
    8,171
    
    
    $
    2,442
    
    
    
    30
    %Percentage of total revenue
    
    
    78
    %
    
    
    78
    %
  Operating expense
 Three Months EndedMarch 31,
    
    Variance2008
    
    2007
    
    $
    
    %Research and development
    
    $
    3,111
    
    
    $
    2,501
    
    
    $
    610
    
    
    
    24
    %Percentage of total revenue
    
    
    23
    %
    
    
    24
    %Sales and marketing
    
    
    7,234
    
    
    
    5,947
    
    
    
    1,287
    
    
    
    22
    %Percentage of total revenue
    
    
    53
    %
    
    
    57
    %General and administrative
    
    
    4,414
    
    
    
    2,328
    
    
    
    2,086
    
    
    
    90
    %Percentage of total revenue
    
    
    32
    %
    
    
    22
    %Depreciation and amortization
    
    
    492
    
    
    
    362
    
    
    
    130
    
    
    
    36
    %Percentage of total revenue
    
    
    4
    %
    
    
    3
    %Total operating expenses
    
    $
    15,251
    
    
    $
    11,138
    
    
    $
    4,113
    
    
    
    37
    %Percentage of total revenue
    
    
    112
    %
    
    
    107
    %
   23




---



##### 



Other income
 Three Months EndedMarch 31,
    
    Variance2008
    
    2007
    
    $
    
    %Other income, net
    
    $
    1,204
    
    
    $
    491
    
    
    $
    713
    
    
    
    145
    %Percentage of total revenue
    
    
    9
    %
    
    
    5
    %
  Income tax expense
 Three Months EndedMarch 31,
    
    Variance2008
    
    2007
    
    $
    
    %Income tax expense
    
    $
    62
    
    
    $
    12
    
    
    $
    50
    
    
    NM
   Seasonality
  Quarterly Timing of Revenue
  24




---



##### 



Liquidity and Capital Resources
 Cash Flows
 Operating
Activities.
 Investing
Activities.
 Financing
Activities.
  Liquidity Requirements
      25




---



##### 



Contractual Obligations
  Payments Due by PeriodLess thanTotal
    
    One Year
    
    1-3 Years
    
    3-5 YearsOperating Leases
    
    $
    4,372
    
    
    $
    1,530
    
    
    $
    2,260
    
    
    $
    582Purchase Commitments(1)
    
    
    5,134
    
    
    
    5,134
    
    
    
    
    
    
    
    
 
 (1)
    
    We purchase components from a variety of suppliers and use several contract
manufacturers to provide manufacturing services for our products. During the normal course of
business, in order to manage manufacturing lead times and help ensure adequate component
supply, we enter into agreements with contract manufacturers and suppliers that allow them to
procure inventory based upon information provided by us. In certain instances, these
agreements allow us the option to cancel, reschedule, and adjust our requirements based on our
business needs prior to firm orders being placed. Consequently, a portion of our reported
purchase commitments arising from these agreements are firm, non-cancelable and unconditional
commitments. As of March 31, 2008, we had total purchase commitments for inventory of
approximately $5.1 million. Critical Accounting Policies and Estimates
   Revenue Recognition. Software Revenue Recognition,
   26




---



##### 



Accounting for Stock-Based Compensation. Accounting for Stock Based Compensation Accounting for Stock Issued to Employees,
   Accounting
for Income Taxes. Accounting for Income Taxes
 Accounting for Uncertainty in
Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes
 Warranty.
 27




---



##### 



Allowance for Doubtful Accounts.
 Inventories
 Recent Accounting Pronouncements
 Fair Value Measurements Effective Date of FASB Statement No. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations
 Non-controlling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 28




---



##### 



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
  Interest Rate Sensitivity
  Item 4. CONTROLS AND PROCEDURES
 Evaluation of Sourcefires Disclosure Controls and Internal Controls.
 Limitations.
 29




---



##### 



Changes in Internal Controls Over Financial Reporting.
 30




---



##### 



PART II. OTHER INFORMATION
 Item 1. LEGAL PROCEEDINGS
  Item 1A. RISK FACTORS
  Our expected transition to a new chief executive officer could be disruptive to our business, and
our inability to hire or retain other key personnel would also slow our growth.
 
    We are in the process of implementing a new enterprise resource planning system and any material
disruption, malfunction or problem with the implementation or operation of this system may result
in disruption to our business, operating processes and internal controls.
 31




---



##### 



As a result of becoming a public company, we are obligated to develop and maintain proper and
effective internal controls over financial reporting and are subject to other requirements that
will be burdensome and costly. We may not complete our analysis of our internal controls over
financial reporting in a timely manner, or these internal controls may not be determined to be
effective, which may adversely affect investor confidence in our company and, as a result, the
value of our common stock.
    32




---



##### 



We have had operating losses since our inception, we expect operating expenses to increase in the
foreseeable future and we may never reach or maintain profitability.
  We face intense competition in our market, especially from larger, better-known companies, and we
may lack sufficient financial or other resources to maintain or improve our competitive position.
     33




---



##### 



New competitors could emerge or our customers or distributors could internally develop alternatives
to our products, and either such development could impair our sales.
  Our quarterly operating results are likely to vary significantly and be unpredictable, in part
because of the purchasing and budget practices of our customers, which could cause the trading
price of our stock to decline.
  
    
    the budgeting cycles, internal approval requirements and funding available to our
existing and prospective customers for the purchase of network security products;
    
    the timing, size and contract terms of orders received, which have historically been
highest in the fourth quarter (representing more than one-third of our total revenue in
recent years), but may fluctuate seasonally in different ways;
    
    the level of perceived threats to network security, which may fluctuate from period to
period;
    
    the level of demand for products sold by original equipment manufacturers, or OEMs,
resellers and distributors that incorporate and resell our technologies;
    
    the market acceptance of open-source software solutions;
    
    the announcement or introduction of new product offerings by us or our competitors,
and the levels of anticipation and market acceptance of those products;
    
    price competition;
    
    general economic conditions, both domestically and in our foreign markets;
    
    the product mix of our sales; and
    
    the timing of revenue recognition for our sales.
   34




---



##### 



Economic, market and political conditions may adversely affect our revenue growth and our efforts
to achieve profitability.
  
    
    general economic and business conditions;
    
    the overall demand for network security products and services; and
    
    constraints on budgets and changes in spending priorities of corporations and government
agencies.
  The market for network security products is rapidly evolving, and the complex technology
incorporated in our products makes them difficult to develop. If we do not accurately predict,
prepare for and respond promptly to technological and market developments and changing customer
needs, our competitive position and prospects will be harmed.
  If our new products and product enhancements do not achieve sufficient market acceptance, our
results of operations and competitive position will suffer.
  35




---



##### 




    
    delays in introducing new, enhanced or modified products;
    
    defects, errors or failures in any of our products;
    
    inability to operate effectively with the networks of our prospective customers;
    
    inability to protect against new types of attacks or techniques used by hackers;
    
    negative publicity about the performance or effectiveness of our intrusion prevention
or other network security products;
    
    reluctance of customers to purchase products based on open source software; and
    
    disruptions or delays in the availability and delivery of our products, which problems
are more likely due to our just-in-time manufacturing and inventory practices.
  If existing customers do not make subsequent purchases from us or if our relationships with our
largest customers are impaired, our revenue could decline.
   If we cannot attract sufficient government agency customers, our revenue and competitive position
will suffer.
  
    
    Procurement.Contracting with public sector customers is highly competitive and can
be expensive and time-consuming, often requiring that we incur significant upfront time
and expense without any assurance that we will win a contract;
    
    Budgetary Constraints and Cycles.Demand and payment for our products and services
are impacted by public sector budgetary cycles and funding availability, with funding
reductions or delays adversely impacting public sector demand for our products, including
delays caused by continuing resolutions or other temporary funding arrangements;
 36




---



##### 




    
    Modification or Cancellation of Contracts.Public sector customers often have
contractual or other legal rights to terminate current contracts for convenience or due
to a default. If a contract is cancelled for convenience, which can occur if the
customers product needs change, we may only be able to collect for products and services
delivered prior to termination. If a contract is cancelled because of default, we may
only be able to collect for products and alternative products and services delivered to
the customer;
    
    Governmental Audits.National governments and state and local agencies routinely
investigate and audit government contractors administrative processes. They may audit
our performance and pricing and review our compliance with applicable rules and
regulations. If they find that we improperly allocated costs, they may require us to
refund those costs or may refuse to pay us for outstanding balances related to the
improper allocation. An unfavorable audit could result in a reduction of revenue, and may
result in civil or criminal liability if the audit uncovers improper or illegal
activities; and
    
    Replacing Existing Products.Many government agencies already have installed network
security products of our competitors. It can be very difficult to convince government
agencies or other prospective customers to replace their existing network security
solutions with our products, even if we can demonstrate the superiority of our products.
 We are subject to risks of operating internationally that could impair our ability to grow our
revenue abroad.
  
    
    economic or political instability in foreign markets;
    
    greater difficulty in accounts receivable collection and longer collection periods;
    
    unexpected changes in regulatory requirements;
    
    difficulties and costs of staffing and managing foreign operations;
    
    import and export controls;
    
    the uncertainty of protection for intellectual property rights in some countries;
    
    costs of compliance with foreign laws and laws applicable to companies doing business
in foreign jurisdictions;
    
    management communication and integration problems resulting from cultural differences
and geographic dispersion;
    
    multiple and possibly overlapping tax structures; and
    
    foreign currency exchange rate fluctuations.
  In the future, we may not be able to secure financing necessary to operate and grow our business as
planned.
  37




---



##### 



Our inability to acquire and integrate other businesses, products or technologies could seriously
harm our competitive position.
  If other parties claim commercial ownership rights to Snort or ClamAV, our reputation, customer
relations and results of operations could be harmed.
  Our products contain third party open source software, and failure to comply with the terms of the
underlying open source software licenses could restrict our ability to sell our products.
 ® TM
  38




---



##### 




    
    the terms of open source license agreements may be unclear and subject to varying
interpretations, which could result in unforeseen obligations regarding our proprietary
products;
    
    it may be difficult to determine the developers of open source software and whether
such licensed software infringes another partys intellectual property rights;
    
    competitors will have greater access to information by obtaining these open source
products, which may help them develop competitive products; and
    
    open source software potentially increases customer support costs because licensees
can modify the software and potentially introduce errors.
 We could be prevented from selling or developing our products if the GNU General Public License and
similar licenses under which our products are developed and licensed are not enforceable or are
modified so as to become incompatible with other open source licenses.
   Efforts to assert intellectual property ownership rights in our products could impact our standing
in the open source community, which could limit our product innovation capabilities.
  Our proprietary rights may be difficult to enforce, which could enable others to copy or use
aspects of our products without compensating us.
  39




---



##### 



Claims that our products infringe the proprietary rights of others could harm our business and
cause us to incur significant costs.
   
    
    be very expensive and time consuming to defend;
    
    require us to indemnify our customers for losses resulting from such claims;
    
    cause us to cease making, licensing or using software or products that incorporate the
challenged intellectual property;
    
    cause product shipment and installation delays;
    
    require us to redesign our products, which may not be feasible;
 40




---



##### 




    
    divert managements attention and resources; or
    
    require us to enter into royalty or licensing agreements in order to obtain the right
to use a necessary product or component.
  We rely on software licensed from other parties, the loss of which could increase our costs and
delay software shipments.
    Defects, errors or vulnerabilities in our software products would harm our reputation and divert
resources.
  
    
    expenditure of significant financial and product development resources in efforts to
analyze, correct, eliminate or work-around errors or defects or to address and eliminate
vulnerabilities;
    
    loss of existing or potential customers;
    
    delayed or lost revenue;
    
    delay or failure to attain market acceptance;
 41




---



##### 




    
    increased service, warranty, product replacement and product liability insurance
costs; and
    
    negative publicity, which would harm our reputation.
  Our networks, products and services are vulnerable to, and may be targeted by, hackers.
  We utilize a just-in-time contract manufacturing and inventory process, which increases our
vulnerability to supply disruption.
  We depend on a single source to manufacture our enterprise class intrusion sensor product; if that
sole source were to fail to satisfy our requirements, our sales revenue would decline and our
reputation would be harmed.
  We depend on resellers and distributors for our sales; if they fail to perform as expected, our
revenue will suffer.
  42




---



##### 



If we do not continue to establish and effectively manage our OEM relationships, our revenue could
decline.
  Our inability to effectively manage our expected headcount growth and expansion and our additional
obligations as a public company could seriously harm our ability to effectively run our business.
  The price of our common stock may be subject to wide fluctuations.
  
    
    quarterly variations in our operating results compared to market expectations;
    
    changes in expectations as to our future financial performance, including financial
estimates or reports by securities analysts;
    
    changes in market valuations of similar companies;
    
    liquidity and activity in the market for our common stock;
    
    actual or expected sales of our common stock by our stockholders;
 43




---



##### 




    
    strategic moves by us or our competitors, such as acquisitions or restructurings;
    
    general market conditions; and
    
    domestic and international economic, legal and regulatory factors unrelated to our
performance.
  We and certain of our officers and directors have been named as co-defendants in, and are the
subject of, certain legal proceedings which may result in substantial costs and divert managements
attention and resources.
   Sales of substantial amounts of our common stock in the public markets, or the perception that they
might occur, could reduce the price that our common stock might otherwise attain.
  Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition
of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current management.
  44




---



##### 



Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Item 3. DEFAULTS UPON SENIOR SECURITIES
  Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Item 5. OTHER INFORMATION
  Item 6. EXHIBITS
  Incorporation by ReferenceExhibit
    
    
    
    
    
    File
    
    
    
    
    
    
    
    Filed withNumber
    
    Exhibit Description
    
    Form
    
    Number
    
    Exhibit
    
    File Date
    
    this 10-Q3.1
    
    Sixth Amended and Restated Certificate of
Incorporation
    
    10-Q
    
    1-33350
    
    
    3.1
    
    
    5/4/20073.2
    
    Fourth Amended and Restated Bylaws
    
    10-Q
    
    1-33350
    
    
    3.2
    
    
    5/4/20074.1
    
    Form of stock certificate of common stock
    
    S-1/A
    
    333-138199
    
    
    4.1
    
    
    3/6/200710.1
    
    Transition Agreement with E. Wayne Jackson, III
    
    
    
    
    
    
    
    
    
    
    
    X10.2
    
    2008 Management Incentive Compensation Plan
    
    
    
    
    
    
    
    
    
    
    
    X10.3
    
    Executive Retention Plan
    
    
    
    
    
    
    
    
    
    
    
    X10.4
    
    Executive Change in Control Plan
    
    
    
    
    
    
    
    
    
    
    
    X31.1
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    
    
    X
 45




---



##### 



SIGNATURES
  SOURCEFIRE, INC.By:
    /s/ E. Wayne Jackson, IIIE. Wayne Jackson, IIIChief Executive
Officer (duly authorized officer)By:

/s/
Todd P. HeadleyTodd P. HeadleyChief Financial Officer and
Treasurer
(principal financial officer)By:

/s/
Nicholas G. MargaritesNicholas G. MargaritesChief Accounting Officer and Vice
President of Finance(principal accounting officer) 46