##### 



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 1934For the quarterly period ended
    March 31, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    Commission file
    number 1-33350
   SOURCEFIRE, INC.
 (Exact Name of Registrant as
    Specified in its Charter)
   Delaware

52-2289365(State or Other Jurisdiction
    of
    Incorporation or Organization)

(I.R.S. Employer
    Identification No.)9770 Patuxent Woods Drive
    Columbia, Maryland(Address of Principal
    Executive Offices)

21046(Zip Code)    Registrants telephone number including area
    code:       410-290-1616
   o þ
   Rule 12b-2
   o o þ
   Rule 12b-2 o þ




---



##### 



Sourcefire,
    Inc.
    IndexForm 10-Q
  PagePART I. FINANCIAL
    INFORMATIONItem 1.


Financial
    Statements (Unaudited)Consolidated Balance Sheets as of
    March 31, 2007 and December 31, 2006


3Consolidated Statements of
    Operations for the three months ended March 31, 2007 and
    2006


4Consolidated Statement of Changes
    in Convertible Preferred Stock and Stockholders Equity
    (Deficit) for the three months ended March 31,
    2007


5Consolidated Statements of Cash
    Flows for the three months ended March 31, 2007 and
    2006


6Notes to Consolidated Financial
    Statements


7Item 2.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


15Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


26Item 4.


Controls and
    Procedures


27PART II. OTHER
    INFORMATIONItem 1.


Legal
    Proceedings


27Item 1A.


Risk
    Factors


28Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds


42Item 3.


Defaults Upon
    Senior Securities


43Item 4.


Submission of
    Matters to a Vote of Security Holders


43Item 5.


Other
    Information


43Item 6.


Exhibits


43Signatures


44




---



##### 



PART I.
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  SOURCEFIRE,
    INC.
  CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands, except share and per share
    data)
  March 31


December 312007


2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents

$
99,253


$
13,029Held-to-maturity
    investments


10,700



12,385Accounts receivable, net of
    allowance for doubtful accounts of $150 in 2007 and $166 in 2006


10,976



16,507Inventory


3,384



2,099Prepaid expenses and other current
    assets


1,840



919Total current assets


126,153



44,939Property and equipment, net


3,440



2,546Held-to-maturity
    investments, less current portion


1,514



908Other assets


397



1,559Total assets

$
131,504


$
49,952Liabilities, convertible
    preferred stock and stockholders equity
    (deficit)Current liabilities:Accounts payable

$
2,544


$
3,081Accrued compensation and related
    expenses


1,540



1,783Other accrued expenses


1,642



1,312Current portion of deferred revenue


12,460



11,735Current portion of long-term debt






675Other current liabilities


653



501Total current liabilities


18,839



19,087Deferred revenue, less current
    portion


2,870



2,380Long-term debt, less current portion






637Other long-term liabilities


78



Total liabilities


21,787



22,104Series A convertible preferred
    stock, $0.001 par value; 2,495,410 shares authorized
    at December 31, 2006, 2,475,410 shares issued and
    outstanding at December 31, 2006; aggregate liquidation
    preference of $14,093 at December 31, 2006; no shares
    authorized, issued or outstanding at March 31, 2007






10,308Warrants to purchase Series A
    convertible preferred stock






25Series B convertible preferred
    stock, $0.001 par value; 7,132,205 shares authorized,
    issued and outstanding at December 31, 2006; aggregate
    liquidation preference of $19,947 at December 31, 2006; no
    shares authorized, issued or outstanding at March 31, 2007






14,265Series C convertible preferred
    stock, $0.001 par value; 5,404,043 shares authorized,
    issued and outstanding at December 31, 2006; aggregate
    liquidation preference of $26,050 at December 31, 2006; no
    shares authorized, issued or outstanding at March 31, 2007






18,270Series D convertible preferred
    stock, $0.001 par value; 3,264,449 shares authorized,
    issued and outstanding at December 31, 2006; aggregate
    liquidation preference of $29,847 at December 31, 2006; no
    shares authorized, issued or outstanding at March 31, 2007






23,879Total convertible preferred stock






66,747Commitments and contingent
    liabilitiesStockholders equity (deficit):Preferred stock, $0.001 par
    value; 20,000,000 shares authorized at March 31, 2007;
    no shares issued and outstanding at March 31, 2007






Common stock, $0.001 par
    value; 240,000,000 shares authorized; 23,999,716 and
    3,491,764 shares issued and outstanding at March 31,
    2007 and December 31, 2006, respectively


24



3Additional paid-in capital


151,083



Accumulated deficit


(41,390
)


(38,902
)Total stockholders equity
    (deficit)


109,717



(38,899
)Total liabilities, convertible
    preferred stock and stockholders equity (deficit)

$
131,504


$
49,952    3




---



##### 



SOURCEFIRE,
    INC.
   CONSOLIDATED
    STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share
    data) Three Months EndedMarch 312007


2006(Unaudited)Revenue:Products

$
5,650


$
5,423Technical support and professional
    services


4,805



3,109Total revenue


10,455



8,532Cost of revenue:Products


1,556



1,397Technical support and professional
    services


728



610Total cost of revenue


2,284



2,007Gross profit


8,171



6,525Operating expenses:Research and development


2,501



2,082Sales and marketing


5,947



4,810General and administrative


2,328



1,259Depreciation and amortization


362



289Total operating expenses


11,138



8,440Loss from operations


(2,967
)


(1,915
)Other income (expense):Interest and investment income


538



19Interest expense


(35
)


(22
)Other income (expense)


(12
)


(7
)Total other income (expense)


491



(10
)Loss before income taxes


(2,476
)


(1,925
)Income tax expense


(12
)


Net loss


(2,488
)


(1,925
)Accretion of preferred stock


(870
)


(715
)Net loss attributable to common
    stockholders


(3,358
)

$
(2,640
)Net loss attributable to common
    stockholders per share:Basic and diluted

$
(0.39
)

$
(0.79
)Weighted average shares
    outstanding used in computing per share amounts:Basic and diluted


8,623,982



3,338,306    4




---



##### 



SOURCEFIRE,
    INC.
   CONSOLIDATED STATEMENT OF CHANGES IN
    CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFICIT)
 (Amounts in thousands, except share data)
 (unaudited)
  Warrants toPurchase





























AccumulatedSeries A




















Stockholders Equity (Deficit)Series A Convertible


Convertible


Series B Convertible


Series C Convertible


Series D Convertible








AdditionalPreferred Stock


Preferred


Preferred Stock


Preferred Stock


Preferred Stock


Common Stock


Paid-inShares


Amount


Stock


Shares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Capital


Deficit


TotalBalance at December 31, 2006


2,475,410


$
10,308


$
25



7,132,205


$
14,265



5,404,043


$
18,270



3,264,449


$
23,879



3,491,764


$
3


$



$
(38,902
)

$
(38,899
)Exercise of common stock options






































20,396



1



12







13Vesting of restricted common stock














































103







103Compensation expense for stock
    option vesting














































421







421Issuance of common stock in initial
    public offering, net of issuance costs of $8,963






































6,185,500



6



83,814







83,820Accretion of convertible preferred
    stock to redemption value






140











186







237







307











(870
)






(870
)Conversion of preferred stock to
    common stock


(2,475,410
)


(10,448
)


(25
)


(7,132,205
)


(14,451
)


(5,404,043
)


(18,507
)


(3,264,449
)


(24,186
)


14,302,056



14



67,603







67,617Net loss for the three months ended
    March 31, 2007


















































(2,488
)


(2,488
)Balance at March 31, 2007





$



$







$







$







$




23,999,716


$
24


$
151,083


$
(41,390
)

$
109,717    5




---



##### 



SOURCEFIRE,
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 (Amounts
    in thousands)
  Three Months EndedMarch 312007


2006(Unaudited)Operating activitiesNet loss

$
(2,488
)

$
(1,925
)Adjustments to reconcile net loss
    to net cash provided by operating activities:Depreciation and amortization


370



297Provision for doubtful accounts


(16
)


(46
)Amortization of unearned
    compensation






5Non-cash stock compensation


524



26Amortization of (premium) discount
    on
    held-to-maturity
    investments


(123
)


6Changes in operating assets and
    liabilities:Accounts receivable


5,547



5,065Inventory


(1,284
)


230Prepaid expenses and other assets


(1,350
)


(38
)Accounts payable


(537
)


(888
)Accrued expenses


82



370Deferred revenue


1,216



(308
)Other current liabilities


235



(93
)Net cash provided by operating
    activities


2,176



2,701Investing activitiesPurchase of property and equipment


(1,263
)


(290
)Purchase of
    held-to-maturity
    investments


(5,950
)


Proceeds from maturities of
    held-to-maturity
    investments


7,150



2,000Net cash (used in) provided by
    investing activities


(63
)


1,710Financing activitiesBorrowings of long-term debt


113



Repayments of long-term debt


(1,424
)


(130
)Proceeds from issuance of common
    stock, net of underwriters discount of $6,495


86,288



Proceeds from exercise of stock
    options


12



3Payment of equity offering costs


(878
)


Net cash provided by (used in)
    financing activities


84,111



(127
)Net increase in cash and cash
    equivalents


86,224



4,284Cash and cash equivalents at
    beginning of period


13,029



1,106Cash and cash equivalents at end
    of period

$
99,253


$
5,390    6




---



##### 



SOURCEFIRE,
    INC.NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS
    March 31, 2007
    (Unaudited)
   1.
    Initial
    Public Offering    2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
  Form 10-Q Regulation S-X. Form S-1
  Use of
    Estimates
    Accounts
    Receivable and Allowance for Doubtful Accounts
    and/or
  Inventories
  first-in,
 7




---



##### 



SOURCEFIRE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Revenue
    Recognition
  when-and-if-available
    and/or SOP 98-9, Modification of
    SOP 97-2,
    Software Revenue Recognition with Respect to Certain
    Transactions.
       8




---



##### 



SOURCEFIRE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
     Warranty
    Income
    Taxes
  Accounting for Income Taxes.
  Stock-Based
    Compensation
  Share-Based
    Payment
  Accounting for Stock Based Compensation Accounting
    for Stock Issued to Employees
 9




---



##### 



SOURCEFIRE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
       Three Months EndedMarch 312007


2006Average risk-free interest rate


4.69
%


4.70
%Expected dividend yield


0.0
%


0.0
%Expected useful life


6.25
years


6.25
yearsExpected volatility


78.1
%


81.2
%        10




---



##### 



SOURCEFIRE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
     Three Months EndedMarch 312007


2006Cost of sales product

$
2


$
Cost of sales services


6



Stock based compensation expense
    included in cost of sales


8



Research and development


81



5Sales and marketing


209



13General and administrative


226



13Stock-based compensation included
    in operating expenses


516



31Total stock-based compensation

$
524


$
31Effect on net loss per share:Basic and diluted

$
0.06


$
0.01   No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services
  Net
    Loss Attributable to Common Stockholders Per Share
      Three Months EndedMarch 312007


2006Options to purchase common stock


3,260,274



2,551,926Shares of common stock into which
    outstanding warrants are convertible


36,944



36,944Shares of common stock into which
    outstanding preferred stock is convertible






12,292,005Unvested shares of restricted
    common stock


87,835



70,062Total


3,385,053



14,950,937    11




---



##### 



SOURCEFIRE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
   Fair
    Value of Financial Instruments
  held-to-maturity
  Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes, an interpretation
    of SFAS No. 109, Accounting for Income Taxes
  Fair Value Measurements
  3.
    Property
    and Equipment    March 31


December 312007


2006Furniture, fixtures and equipment

$
5,553


$
5,025Leasehold improvements


1,705



969Total property and equipment


7,258



5,994Less accumulated depreciation and
    amortization


3,818



3,448Net property and equipment

$
3,440


$
2,546   4.
    Debt    5.
    Stock
    Incentive Plans     12




---



##### 



SOURCEFIRE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
        WeightedAverage


AggregateNumber of


Range of


Exercise


IntrinsicShares


Exercise Prices


Price


ValueOutstanding at December 31,
    2006


3,199,903


$
0.24 to $11.34


$
2.96Granted


124,973


$
12.26 to $15.49


$
13.74Exercised


(20,396
)

$
0.24 to $5.26


$
0.61Forfeited


(44,206
)

$
2.03 to $10.41


$
7.08Outstanding at March 31, 2007


3,260,274


$
0.24 to $15.49


$
3.32


$
46,620Exercisable at March 31, 2007


1,841,046


$
0.24 to $9.48


$
1.11


$
30,388Vested and expected to vest at
    March 31, 2007


3,047,390






$
3.12


$
44,185       Options Outstanding


Options ExercisableWeighted


Weighted Average





WeightedAverage


Remaining





AverageNumber of


Exercise


Contractual Life


Number of


ExerciseRange of Exercise Prices

Shares


Prices


(Years)


Shares


Prices$0.24  $0.35


1,027,045


$
0.29



6.0



986,598


$
0.28$1.12  $2.05


1,207,089


$
1.63



7.7



727,777


$
1.53$3.68  $11.34


901,167


$
7.60



9.3



126,671


$
5.21$12.26  $15.49


124,973


$
13.74



9.9







3,260,274


$
3.32



7.7



1,841,046


$
1.11     Weighted-AverageNumber of


Grant DateShares


Fair ValueUnvested at December 31, 2006


27,709


$
7.63Granted


60,126


$
14.83Restrictions Lapsed






Forfeited






Unvested at March 31, 2007


87,835


$
12.56  13




---



##### 



SOURCEFIRE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
     6.
    Business
    and Geographic Segment Information      2007


2006United States

$
7,670


$
6,229All foreign countries


2,785



2,303Consolidated total

$
10,455


$
8,532   7.
    Legal
    Proceedings        8.
    Commitments
    and Contingencies  18-month
 14




---



##### 



ITEM 2.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Certain statements contained in this Quarterly Report on From
    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 our other Securities and Exchange Commission filings,
    including our final prospectus dated March 8, 2007, which
    we filed in connection with our IPO. Our actual results could
    differ materially from those discussed in or implied by the
    forward-looking statements.
  Overview
      RNA. and/or
  Intrusion Sensors. ® and/or
  Defense Center.
 15




---



##### 



Initial
    Public Offering
    Key
    Financial Metrics and Trends
  Pricing
    and Discounts
    Revenue
  on-site
  12-month
  U.S.-based
   16




---



##### 



Cost
    of Revenue
      Gross
    Profit
    Operating
    Expenses
  Research and Development.
 17




---



##### 



Sales and Marketing.
      General and Administrative.
      Stock-Based Compensation.
     18




---



##### 



Critical
    Accounting Policies and Estimates
      Revenue Recognition. No. 97-2, SOP 97-2, SOP 98-4 SOP 98-9.
  
    persuasive evidence of an arrangement exists (e.g., a
    signed contract);
    delivery of the product has occurred and there are no remaining
    obligations or substantive customer acceptance provisions;
    the fee is fixed or determinable; and
    collection of the fee is probable.  and/or
  Accounting for Stock-Based Compensation. Share-Based Payment
  Accounting for Stock Based Compensation Accounting
    for Stock Issued to Employees
 19




---



##### 



Accounting for Income Taxes. Accounting for Income Taxes.
 20




---



##### 



Warranty.
  Bad Debt Reserve.
  Inventory Valuation.
  Results
    of Operations
    Three Months EndedMarch 31


Variance2007


2006


$


%Revenue:Products

$
5,650


$
5,423


$
227



4
%Technical Support and Professional
    Services


4,805



3,109



1,696



55
%Total revenue


10,455



8,532



1,923



23
%Cost of revenue:Products


1,556



1,397



159



11
%Technical Support and Professional
    Services


728



610



118



19
%Total cost of revenue


2,284



2,007



277



14
%Gross profit


8,171



6,525



1,646



25
% 21




---



##### 



Three Months EndedMarch 31


Variance2007


2006


$


%Operating expenses:Research and development


2,501



2,082



419



20
%Sales and marketing


5,947



4,810



1,137



24
%General and administrative


2,328



1,259



1,069



85
%Depreciation and amortization


362



289



73



25
%Total operating expenses


11,138



8,440



2,698



32
%Operating loss


(2,967
)


(1,915
)


(1,052
)


55
%Other income (expense), net


491



(10
)


501



5,010
%Loss before income taxes


(2,476
)


(1,925
)


(551
)


29
%Income tax expense


(12
)






(12
)


100
%Net loss

$
(2,488
)

$
(1,925
)

$
(563
)


29
%     Three Months EndedMarch 312007


2006Revenue:Products


54
%


64
%Technical Support and Professional
    Services


46



36Total revenue


100



100Cost of revenue:Products


15



16Technical Support and Professional
    Services


7



7Total cost of revenue


22



23Gross profit


78



77Operating expenses:Research and development


24



24Sales and marketing


57



56General and administrative


22



15Depreciation and amortization


3



3Total operating expenses


106



98Operating loss


(28
)


(21
)Other income (expense), net


5



(1
)Loss before income taxes


(23
)


(22
)Income tax expense






Net loss


(23
)%


(22
)%   Comparison
    of Three Months Ended March 31, 2007 and 2006
  Revenue.
 22




---



##### 



Cost of Revenue.
  Gross Profit.
  Research and Development.
  Sales and Marketing.
  General and Administrative.
  Depreciation and Amortization.
 23




---



##### 



Other income (expense).
  Provision for income taxes.
  Seasonality
    Quarterly
    Timing of Revenue
    Liquidity
    and Capital Resources
  held-to-maturity
       24




---



##### 



Operating
    Activities
    Investing
    Activities
    Financing
    Activities
    Credit Facility.
  Working
    Capital and Capital Expenditure Needs
     25




---



##### 



Contractual
    Obligations
    Payments Due by PeriodLess thanTotal


One Year


1-3 Years


3-5 YearsOperating Leases

$
5,220


$
1,615


$
2,584


$
1,021Purchase Commitments(1)


1,836



1,570



266



     (1)
    
    We entered into a purchase commitment with a hardware
    manufacturing vendor with whom we have a current arrangement.
    Under the terms of this commitment, we have agreed to purchase a
    fixed quantity of new appliance inventory over an
    18-month
    period. The value of the purchase commitment is approximately
    $800,000, and we expect to commence making payments under this
    commitment beginning in May 2007 once the new appliance
    configuration is accepted. Additionally, 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, 2007, we had total purchase commitments for
    inventory of approximately $1.0 million, exclusive of the
    commitments described above.  Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes, an interpretation
    of FAS 109, Accounting for Income Taxes
  Fair Value Measurements
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Foreign
    Currency Risk
   26




---



##### 



Interest
    Rate Sensitivity
  held-to-maturity
  ITEM 4.
    CONTROLS
    AND PROCEDURES  Evaluation of Sourcefires Disclosure Controls and
    Internal Controls. Rules 13a-15(e) 15d-15(e) Rule 13a-15(c) Form 10-Q.
  Limitations.
 PART II.
    OTHER INFORMATION  ITEM 1.
    LEGAL
    PROCEEDINGS   27




---



##### 



ITEM 1A.
    RISK
    FACTORS  Form 10-Q, Form 10-Q.
  We
    have had operating losses since our inception and 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.
     28




---



##### 



and/or
  New
    competitors could emerge or our customers or distributors could
    internally develop alternatives to our products and either
    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; 29




---



##### 




    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.      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.
   30




---



##### 



If our
    new products and product enhancements do not achieve sufficient
    market acceptance, our results of operations and competitive
    position will suffer.
      
    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.
   31




---



##### 




    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 resulting
    from the current congressional transition;
    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
    other 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.
    Replacing Existing Products.  After we
    announced in October 2005 that we had agreed to be acquired by a
    foreign company, many government agencies were unwilling to buy
    products from us and instead purchased and installed products
    sold by our competitors. The proposed acquisition was terminated
    in April 2006 following objections from the Committee on Foreign
    Investment in the United States. Since that time, we have been
    attempting to retain government agency customers. Many
    government agencies, however, 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; 32




---



##### 




    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.
    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, our
    reputation, customer relations and results of operations could
    be harmed.
   33




---



##### 



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.
  ® and/or
  
    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.    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.
   34




---



##### 



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; 35




---



##### 




    require us to redesign our products, which may not be feasible;
    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
    have been sued by a company claiming that we misappropriated and
    incorporated its proprietary rights into our 3D product
    line and our defense of these claims is costly, diverts the
    attention of our management and may be
    unsuccessful.
        
    our paying substantial monetary damages, which could be tripled
    if any misappropriation is found to have been willful, and which
    may include paying an ongoing significant royalty to NetClarity
    or compensation for lost profits to NetClarity;
    our paying substantial punitive damages;
    our having to provide an accounting of all revenue received from
    selling our 3D product line in its current form;
    the issuance of a preliminary or permanent injunction requiring
    us to stop selling our 3D product line in its current form;
    our having to redesign our 3D product line, which could be
    costly and time-consuming and could substantially delay our 3D
    product line shipments, assuming that a redesign is feasible;
    our having to reimburse NetClarity for some or all of its
    attorneys fees and costs, which would be substantial; 36




---



##### 




    our having to obtain from NetClarity a license to use its
    technology, which might not be available on reasonable terms, if
    at all; or
    our having to indemnify our customers against any losses they
    may incur due to the alleged infringement.        We
    rely on software licensed from other parties, the loss of which
    could increase our costs and delay software
    shipments.
  one-time lump-sum
     37




---



##### 



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;
    increased service, warranty, product replacement and product
    liability insurance costs; and
    negative publicity, which will 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.
  just-in-time
 38




---



##### 



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.
    Our
    inability to hire and retain key personnel would slow our
    growth.
      We
    depend on resellers and distributors for our sales; if they fail
    to perform as expected, our revenue will suffer.
   39




---



##### 



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;
    strategic moves by us or our competitors, such as acquisitions
    or restructurings; 40




---



##### 




    general market conditions; and
    domestic and international economic, legal and regulatory
    factors unrelated to our performance.    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 and may
    dilute your voting power and your ownership interest in
    us.
  locked-up lock-up
      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.
    and/or
 41




---



##### 



and/or
  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.
    ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  Form S-1, No. 333-138199),
     42




---



##### 



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 Reference

FiledExhibit





File





with thisNumber

Exhibit Description

Form

Number

Exhibit

File Date

10-Q3
.1

Sixth Amended and Restated
    Certificate of Incorporation














X3
.2

Fourth Amended and Restated Bylaws














X4
.1

Form of stock certificate of
    common stock

S-1/A


333-138199



4.1


3/6/20074
.2

2002 Stock Incentive Plan

S-1


333-138199



4.2


10/25/20064
.3

2007 Stock Incentive Plan

S-1/A


333-138199



4.3


3/1/20074
.4

Form of Nonstatutory Stock Option
    Grant Agreement under the 2002 Stock Incentive Plan

S-1/A


333-138199



4.4


10/25/20064
.5

Form of Notice of Stock Option
    Award under the 2007 Stock Incentive Plan

S-1/A


333-138199



4.5


3/1/20074
.6

Form of Notice of Restricted Stock
    Purchase Award under the 2007 Stock Incentive Plan

S-1/A


333-138199



4.6


3/1/20074
.7

Form of Notice of Restricted Stock
    Purchase Award for Non-Employee Directors under the 2007 Stock
    Incentive Plan

S-1/A


333-138199



4.7


3/1/200731
.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  43




---



##### 



SIGNATURES    Sourcefire, Inc.
  By:
    /s/  Todd
    P. Headley   Title:
    Chief Financial Officer and    44