##### 





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
    DECEMBER 31, 2007o

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

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
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Exchange on Which RegisteredCommon Stock, $0.001 par value


Nasdaq Global Market   Securities registered pursuant to Section 12(g) of the
    Act: none
      o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large Accelerated Filer
    o

Accelerated Filer
    oNon-Accelerated Filer
    þ

Smaller reporting Company
    o(Do not check if smaller reporting company)   Rule 12b-2 o þ
       DOCUMENTS INCORPORATED BY
    REFERENCE
  Form 10-K




---



##### 





SOURCEFIRE,
    INC.
    ANNUAL REPORT ON
    FORM 10-K
    FOR THE YEAR ENDED DECEMBER 31, 2007
    TABLE OF CONTENTS
  PART IItem 1

Business


2Item 1A

Risk Factors


13Item 1B

Unresolved Staff Comments


27Item 2

Properties


27Item 3

Legal Proceedings


27Item 4

Submission of Matters to a Vote of Security
    Holders


28PART IIItem 5

Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


28Item 6

Selected Financial Data


30Item 7

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


31Item 7A

Quantitative and Qualitative Disclosures about
    Market Risk


44Item 8

Financial Statements and Supplementary Data


44Item 9

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosures


44Item 9A(T)

Controls and Procedures


44Item 9B

Other Information


45PART IIIItem 10

Directors, Executive Officers and Corporate
    Governance


46Item 11

Executive Compensation


46Item 12

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


46Item 13

Certain Relationships and Related Transactions,
    and Director Independence


46Item 14

Principal Accountant Fees and Services


46PART IVItem 15

Exhibits and Financial Statement Schedules


46Signatures


47




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##### 



Form 10-K
  FORWARD-LOOKING
    STATEMENTS
    
    expected growth in the markets for network security products;
    our plans to continue to invest in and develop innovative
    technology and products for our existing markets and other
    network security markets;
    the timing of expected introductions of new or enhanced products;
    our expectation of growth in our customer base and increasing
    sales to existing customers;
    our plans to increase revenue through more relationships with
    original equipment manufacturers, resellers, distributors,
    government suppliers and co-marketers;
    our plans to grow international sales;
    our plans to acquire and integrate new businesses and
    technologies;
    our plans to hire more network security professionals and
    broaden our knowledge base; and
    our plans to hire additional sales personnel and the additional
    revenue we expect them to generate.          ® ® tm tm tm tm tm
 1




---



##### 



PART I
    BUSINESS Item 1.
    BUSINESS  Overview
  tm
  ® tm tm tm
    
    Seed the market by offering high quality, low cost network
    security solutions while providing a migration path for
    customers that require enterprise-class manageability,
    scalability and performance.
    Ensure product quality as many eyes inspect the open
    code base that forms the foundation for Sourcefire commercial
    product offerings.
    Maximize protection as Snort rules and ClamAV signatures are
    provided by Sourcefire and a variety of third-party sources, and
    customers can create their own custom rules and signatures.
    Embrace a community of open source evangelists
    willing to contribute time and effort in inspecting, evaluating,
    and ultimately using Sourcefires open source security
    solutions.   2




---



##### 



2007
    Developments
    
    January 16th  Sourcefire announced its position as a
    Leader in Gartner IPS Magic Quadrant report
    March 8th  Sourcefire Initial Public Offering
    March 22nd  Sourcefire announced exercise of
    over-allotment option in connection with Initial Public Offering
    April 16th  Sourcefire launched Enterprise Threat
    Management (ETM) strategy
    May 2nd  Sourcefire announced Real-time User
    Awareness (RUA) product
    June 26th  Sourcefire added to Russell 3000 Index
    July 9th  Sourcefire launched 10Gbps 3D9800 Sensor
    August 10th  Sourcefire named Douglas McNitt as
    General Counsel
    August 17th  Sourcefire acquired ClamAV open source
    network anti-virus project
    September 17th  Sourcefire launched 3D System 4.7,
    including Adaptive IPS and NetFlow Analysis
    September
    23rd 
    Sourcefire increased international growth with Australian
    expansion
    October 1st  Sourcefire joined the PCI Security
    Standards Council
    December 12th  Sourcefire announced Certified ClamAV
    Support  Initial
    Public Offering
    Acquisition
    of ClamAV
    Our
    Industry
   3




---



##### 



Greater Sophistication, Severity and Frequency of Network
    Attacks.
  Increasing Risks from Unknown
    Vulnerabilities.
  Diverse Demands on Security
    Administrators. start-up
  Increasing Visibility of Negligence
    Lawsuits. and/or
  Heightened Government and Industry
    Regulation.
  
    The Payment Card Industry Data Security Standard, or PCI DSS,
    which provides guidelines to help organizations that process
    credit card payments prevent credit card fraud, hacking and
    various other security vulnerabilities and threats. A company
    processing, storing, or transmitting payment card data must be
    PCI DSS compliant or risk losing its ability to process credit
    card payments.
    The Health Insurance Portability and Accountability Act of 1996,
    or HIPAA, and its related rules, which establish requirements
    for safeguards to protect the confidentiality, integrity and
    availability of electronic protected health information.
    The Financial Services Modernization Act of 1999, commonly known
    as the Gramm-Leach-Bliley Act, which includes provisions to
    protect consumers personal financial information held by
    financial institutions. 4




---



##### 




    The Sarbanes-Oxley Act of 2002, which mandates that public
    companies demonstrate due diligence in the disclosure of
    financial information and maintain internal controls and
    procedures for the communication, storage and protection of such
    data.
    The Federal Information Security Management Act, or FISMA, which
    requires federal agencies, including contractors and other
    organizations that work with the agencies, to develop, document
    and implement an agency-wide information security program.
    State privacy laws that regulate the privacy of personal
    information. Californias SB1386, for example, requires
    notification to any California resident whose unencrypted
    personal information was, or is reasonably believed to have
    been, acquired by an unauthorized person.  Our
    Products
    Snort ®
  Sourcefire Vulnerability Research Team (VRT)
    Subscriptions  zero-day 30-day
  ClamAVtm
  Certified ClamAV Support
    Sourcefire Defense
    Centertm
 5




---



##### 



Sourcefire
    3Dtm
    Sensors
  Sourcefire
    IPStm
    (Intrusion Prevention System) 
  Sourcefire
    RNAtm
    (Real-time Network Awareness)  and/or
  Sourcefire
    RUAtm
    (Real-time User Awareness) 
  Sourcefire NetFlow Analysis  and/or
  Sourcefire Intrusion Agent for Snort
  Our
    Services
    Sourcefire Customer Support  over-the-phone
  Sourcefire Product Services
 6




---



##### 



Sourcefire Education & Certification 
  Our
    Competitive Strengths
    Real-Time Approach to Network Security. e-commerce and/or
  Comprehensive Network and User
    Intelligence.
  The Open Source Community.
 7




---



##### 



Leading-Edge Performance.
  Significant Security Expertise.
  Broad Industry Recognition.
  Our
    Growth Strategy
    Continue to Develop Innovative Network Security
    Technology.
  Grow Our Customer Base.
 8




---



##### 



Further Penetrate Our Existing Customer
    Base.
  Expand Our OEM Alliances and Distribution
    Relationships.
  Strengthen Our International Presence.
  Selectively Pursue Acquisitions of Complementary Businesses
    and Technologies.
  Awards
    and Certifications
    
    Gartner Magic Quadrant.  In January 2007 and
    again in February 2008, Sourcefire announced it was recognized
    by Gartner, Inc. as being a Leader in the Magic
    Quadrant for Network Intrusion Prevention System Appliances
    report.
    ICSA Certification.  Our 3D3800 Sensor achieved
    Network Intrusion Prevention certification from ICSA Labs.
    Sourcefire is currently the only major IPS vendor to hold this
    certification.
    IT Executive of the Year.  Sourcefire founder
    and CTO, Martin Roesch, was named Commercial IT Executive of the
    Year by the Tech Council of Maryland.
    Bossie Awards.  InfoWorld named Snort and
    ClamAV as Bossie (Best in Open Source Security) winners,
    recognizing Sourcefires open source leadership.
    SC Awards Finalist.  Sourcefire was named a
    finalist in four categories in the 2007 SC Awards. 9




---



##### 



Customers
      Sales and
    Marketing
    Sales.
  follow-up
    Strategic Relationships. meet-in-the-middle
  Marketing.
  Research
    and Development
   10




---



##### 



Vulnerability Research Team.
    Manufacturing
    and Suppliers
  just-in-time
  Intellectual
    Property
      Seasonality
   11




---



##### 



Competition
    
    large companies, including Cisco Systems, Inc., IBM Corporation,
    Juniper Networks, Inc., 3Com Corporation, Check Point Software
    Technologies, Ltd. and McAfee, Inc., that sell competitive
    products and offerings, as well as other large software
    companies that have the technical capability and resources to
    develop competitive products;
    software or hardware network infrastructure companies, including
    Cisco Systems, Inc., 3Com Corporation and Juniper Networks,
    Inc., that could integrate features that are similar to our
    products into their own products;
    smaller software companies offering relatively limited
    applications for network and Internet security monitoring,
    detection, prevention or response; and
    small and large companies offering point solutions that compete
    with components of our product offerings.        Employees
    Corporate
    Information
  (410) 290-1616.
 12




---



##### 



Available
    Information
  Form 10-K, Form 10-Q, Form 8-K
  Item 1A.
    RISK
    FACTORS  Form 10-K, Form 10-K.
  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.
     13




---



##### 



and/or
  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; 14




---



##### 




    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.      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.
   15




---



##### 



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.
   16




---



##### 



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;
    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; 17




---



##### 




    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.
    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.
   18




---



##### 



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
  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.  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.
     19




---



##### 



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.
      Claims
    that our products infringe the proprietary rights of others
    could harm our business and cause us to incur significant
    costs.
   20




---



##### 




    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;
    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.
     21




---



##### 



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 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.
   22




---



##### 



just-in-time
  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
    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.
         23




---



##### 



We
    depend on resellers and distributors for our sales; if they fail
    to perform as expected, our revenue will suffer.
    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.
   24




---



##### 



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;
    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.
   25




---



##### 



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.
  Form 10-K
  and/or
  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.
   26




---



##### 



Item 1B.
    UNRESOLVED
    STAFF COMMENTS    Item 2.
    PROPERTIES  month-to-month.
  Item 3.
    LEGAL
    PROCEEDINGS  Consolidated
    IPO Class Action Litigation
  Howard Katz v. Sourcefire, Inc., et
    al. No. 1:07-cv-01210-WMN. Mark
    Reaves v. Sourcefire, Inc. et al No. 1:07-cv-01351-JFM Raveill v. Sourcefire, Inc. et al No. 1:07-cv-01425-WMN. Barry Pincus v. Sourcefire, Inc., et al. No. 1:07-cv-04720-RJH. Pincus
  and/or
       27




---



##### 



Item 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS    PART II
  Item 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    Information
    High


LowYear ended December 31, 2007:First Quarter (from March 9, 2007)

$
18.83


$
14.75Second Quarter

$
17.61


$
10.71Third Quarter

$
15.00


$
7.96Fourth Quarter

$
10.50


$
7.23     Dividend
    Policy
   28




---



##### 



Stock
    Performance Graph
    COMPARISON OF 9
    MONTH CUMULATIVE TOTAL RETURN*
 Among
    Sourcefire, Inc., The Russell 2000 Index
 And
    The RDG Software Composite Index
  
  *
    
    $100
    invested on 3/9/07 in stock or 2/28/07 in index-including
    reinvestment of dividends. Fiscal year ending December 31.  3/9/07


3/07


4/07


5/07


6/07


7/07


8/07


9/07


10/07


11/07


12/07Sourcefire, Inc.



100.00




113.75




77.28




88.27




90.32




78.44




61.85




58.62




63.27




52.36




53.84Russell 2000



100.00




101.07




102.89




107.10




105.53




98.32




100.54




102.27




105.20




97.65




97.59RDG Software Composite



100.00




101.26




106.17




110.27




107.74




104.49




105.72




110.02




124.97




114.33




120.22   Use of
    Proceeds
  Form S-1, No. 333-138199),
     29




---



##### 



Item 6.
    SELECTED
    FINANCIAL DATA    Year Ended December 31,2007


2006


2005


2004


2003(In thousands, except share, per share and other operating
    data)Consolidated statement of operations data:Revenue:Products


34,332



30,219



23,589



12,738



8,153Services


21,527



14,707



9,290



3,955



1,328Total revenue


55,859



44,926



32,879



16,693



9,481Cost of revenue:Products


9,523



8,440



6,610



4,533



2,570Services


3,360



2,632



1,453



872



436Total cost of revenue


12,883



11,072



8,063



5,405



3,006Gross profit


42,976



33,854



24,816



11,288



6,475Operating expenses:Research and development


11,902



8,612



6,831



5,706



3,751Sales and marketing


25,860



20,652



17,135



12,585



9,002General and administrative


10,599



5,017



5,120



2,905



2,141Depreciation and amortization


1,649



1,230



1,103



752



441In-process research and development


2,947















Total operating expenses


52,957



35,511



30,189



21,948



15,335Loss from operations


(9,981
)


(1,657
)


(5,373
)


(10,660
)


(8,860
)Other income (expense), net


4,604



792



(85
)


164



16Loss before income taxes


(5,377
)


(865
)


(5,458
)


(10,496
)


(8,844
)Income tax expense


(244
)


(67
)










Net loss


(5,621
)


(932
)


(5,458
)


(10,496
)


(8,844
)Accretion of preferred stock


(870
)


(3,819
)


(2,668
)


(2,451
)


(1,262
)Net loss attributable to common stockholders


(6,491
)


(4,751
)


(8,126
)


(12,947
)


(10,106
)Net loss attributable to common stockholders per common share:Basic and diluted


(0.32
)


(1.40
)


(2.54
)


(4.97
)


(4.69
)Shares used in per common share calculations:Basic and diluted


20,434,792



3,389,527



3,200,318



2,602,743



2,156,725 30




---



##### 



Year Ended December 31,2007


2006


2005


2004


2003(In thousands, except share, per share and other operating
    data)Other operating data:Number of sales in excess of $500,000


15



14



9



5



2Number of new 3D customers


266



273



149



136



161Cumulative number of Fortune 100 3D customers at end of period


29



26



24



17



10Number of full-time employees at end of period


240



182



135



107



84   Consolidated
    Balance Sheet Data
  Year Ended December 31,2007

2006

2005

2004

2003Cash and cash equivalents


33,071



13,029



1,106



3,563



5,315Held-to-maturity
    investments


73,956



13,293



2,005



5,751



Total assets


141,678



49,952



21,250



20,016



10,316Long-term debt






1,312



990



461



345Total liabilities


32,484



22,104



16,340



10,177



5,166Total convertible preferred stock






66,747



40,007



37,339



19,958Total stockholders equity (deficit)


109,194



(38,899
)


(35,097
)


(27,500
)


(14,808
)   Item 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Introduction
  Form 10-K
  
    Overview.  This section provides a general
    description of our business, the performance indicators that
    management uses in assessing our financial condition and results
    of operations, and anticipated trends that management expects 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 years
    ended December 31, 2007.
    Liquidity and Capital Resources.  This section
    provides an analysis of our cash flows for the year ended
    December 31, 2007 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 the part of management in
    application. Our significant accounting policies, including
    those considered to be critical accounting policies, are
    summarized in Note 2 to the accompanying consolidated
    financial statements.  Overview
  tm
 31




---



##### 



2007
    Developments
  Initial
    Public Offering
    Acquisition
    of ClamAV
    Key
    Financial Metrics and Trends
  Pricing
    and Discounts
    Revenue
  on-site
 32




---



##### 



12-month
  U.S.-based
    Cost of
    Revenue
     33




---



##### 



Gross
    Profit
    Operating
    Expenses
  Research and Development.
    Sales and Marketing.
      General and Administrative.
     34




---



##### 



In-process research and development
    costs.
    Stock-Based Compensation.
    Results
    of Operations
    Years Ended





Years EndedDecember 31


Variance


December 31


Variance2007


2006


$


%


2006


2005


$


%Revenue:Products

$
34,332


$
30,219


$
4,113



14
%

$
30,219


$
23,589


$
6,630



28
%Technical support and professional services


21,527



14,707



6,820



46
%


14,707



9,290



5,417



58
%Total revenue


55,859



44,926



10,933



24
%


44,926



32,879



12,047



37
%Cost of revenue:Products


9,523



8,440



1,083



13
%


8,440



6,610



1,830



28
%Technical support and professional services


3,360



2,632



728



28
%


2,632



1,453



1,179



81
%Total cost of revenue


12,883



11,072



1,811



16
%


11,072



8,063



3,009



37
%Gross profit


42,976



33,854



9,122



27
%


33,854



24,816



9,038



36
%Operating expenses:Research and development


11,902



8,612



3,290



38
%


8,612



6,831



1,781



26
%Sales and marketing


25,860



20,652



5,208



25
%


20,652



17,135



3,517



21
%General and administrative


10,599



5,017



5,582



111
%


5,017



5,120



(103
)


(2
)%Depreciation and amortization


1,649



1,230



419



34
%


1,230



1,103



127



12
%In-process research and development costs


2,947







2,947



100
%














0
%Total operating expenses


52,957



35,511



17,446



49
%


35,511



30,189



5,322



18
%Loss from operations


(9,981
)


(1,657
)


(8,324
)


(502
)%


(1,657
)


(5,373
)


3,716



69
%Other income (expense), net


4,604



792



3,812



481
%


792



(85
)


877



1032
%Income (loss) before income taxes


(5,377
)


(865
)


(4,512
)


(522
)%


(865
)


(5,458
)


4,593



84
%Income tax expense


(244
)


(67
)


(177
)


(264
)%


(67
)






(67
)


N/ANet Loss

$
(5,621
)

$
(932
)

$
(4,689
)


(503
)%

$
(932
)

$
(5,458
)

$
4,526



83
%  35




---



##### 



Years Ended December 312007


2006


2005Revenue:Products


61
%


67
%


72
%Technical support and professional services


39
%


33
%


28
%Total revenue


100
%


100
%


100
%Cost of revenue:Products


17
%


19
%


20
%Technical support and professional services


6
%


6
%


5
%Total cost of revenue


23
%


25
%


25
%Gross profit


77
%


75
%


75
%Operating expenses:Research and development


22
%


19
%


21
%Sales and marketing


46
%


46
%


52
%General and administrative


19
%


11
%


16
%Depreciation and amortization


3
%


3
%


3
%In-process research and development costs


5
%


0
%


0
%Total operating expenses


95
%


79
%


92
%Loss from operations


(18
)%


(4
)%


(17
)%Other income (expense), net


8
%


2
%


0
%Income (loss) before income taxes


(10
)%


(2
)%


(17
)%Income tax expense


0
%


0
%


0
%Net Loss


(10
)%


(2
)%


(17
%)   Comparison
    of Years Ended December 31, 2007 and 2006
  Revenue.
  Cost of Revenue.
 36




---



##### 



Gross Profit.
  Research and Development.
  Sales and Marketing.
  General and Administrative.
  Depreciation and Amortization.
  In-process research and development costs.
  Other income (expense).
  Provision for income taxes.
  Comparison
    of Years Ended December 31, 2006 and 2005
  Revenue.
 37




---



##### 



Cost of Revenue.
  Gross Profit.
  Research and Development.
  Sales and Marketing.
  General and Administrative.
  Depreciation and Amortization.
 38




---



##### 



Seasonality
    Quarterly
    Timing of Revenue
    Liquidity
    and Capital Resources
  Cash
    Flows
  held-to-maturity
    held-to-maturity held-to-maturity
    Liquidity
    Requirements
     39




---



##### 



Contractual
    Obligations
    Payments Due by PeriodLess thanTotal


One Year


1-3 Years


3-5 YearsOperating Leases

$
4,371


$
1,529


$
2,260


$
582Purchase Commitments(1)


7,639



7,639







     (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 inventory over an
    18-month
    period. The value of the purchase commitment is approximately
    $800,000 of which $340,000 has been purchased to date.
    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 December 31, 2007, we had total purchase
    commitments for inventory of approximately $7.2 million,
    exclusive of the commitment described above.  Critical
    Accounting Policies and Estimates
      Revenue Recognition. No. 97-2, SOP 97-2, SOP 98-4 SOP 98-9.
   40




---



##### 



Accounting for Stock-Based
    Compensation. Accounting for Stock Based
    Compensation Accounting for Stock Issued to Employees
        2007


2006Average risk-free interest rate


4.63
%


4.68
%Expected dividend yield


0.0
%


0.0
%Expected useful life


6.25 years



6.25 yearsExpected volatility


74.8
%


77.2
%Fair value of stock option awards granted during the year

$
8.63


$
5.47   Average risk-free interest rate
 41




---



##### 



Expected dividend yield
  Expected useful life Share-Based Payment
  Expected volatility
              Accounting for Income Taxes. Accounting for Income Taxes.
  Warranty.
 42




---



##### 



Allowance for Doubtful Accounts.
  Inventories. first-in,
  Recent
    Accounting Pronouncements
  Fair Value
    Measurements FAS 157-b FAS 157-b.
  The Fair
    Value Option for Financial Assets and Financial Liabilities
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of ARB No. 51
 43




---



##### 



Item 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Foreign
    Currency Risk
    Interest
    Rate Sensitivity
  held-to-maturity
  Item 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA    Item 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    Item 9A(T).
    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-K.
  Limitations.
 44




---



##### 



Changes in Internal Controls Over Financial
    Reporting. Rules 13a-15(f) 15d-15(f) Form 10-K
  No Report of Managements Assessment Regarding Internal
    Control Over Financial Reporting.
  Item 9B.
    OTHER
    INFORMATION   45




---



##### 



PART III  Item 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    Item 11.
    EXECUTIVE
    COMPENSATION    Item 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    Item 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE    Item 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   PART IV  Item 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    page F-1
     46




---



##### 



SIGNATURES    SOURCEFIRE, INC.
  By:
    /s/  E.
    Wayne Jackson, III     Form 10-K
  Signature

Title

Date/s/  E.
    Wayne Jackson, IIIE.
    Wayne Jackson, III

Chief Executive Officer and Director (principal executive
    officer)

February 28, 2008/s/  Todd
    P. HeadleyTodd
    P. Headley

Chief Financial Officer and Treasurer (principal financial
    officer)

February 28, 2008/s/  Nicholas
    G. MargaritesNicholas
    G. Margarites

Chief Accounting Officer and
    Vice President of Finance
    (principal accounting officer)

February 28, 2008/s/  Martin
    F. RoeschMartin
    F. Roesch

Chief Technology Officer and Director

February 28, 2008/s/  Asheem
    ChandnaAsheem
    Chandna

Director

February 28, 2008/s/  Tim
    A. GuleriTim
    A. Guleri

Director

February 28, 2008/s/  Joseph
    R. ChinniciJoseph
    R. Chinnici

Director

February 28, 2008/s/  Steven
    R. PolkSteven
    R. Polk

Director

February 28, 2008/s/  Arnold
    L. PunaroArnold
    L. Punaro

Director

February 28, 2008  47




---



##### 



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of Independent Registered Public
    Accounting Firm

F-2Consolidated Balance Sheets at December 31,
    2007 and 2006

F-3Consolidated Statements of Operations for the
    years ended December 31, 2007, 2006 and 2005

F-4Consolidated Statements of Changes in Convertible
    Preferred Stock and Stockholders Equity (Deficit) for the
    years ended December 31, 2007, 2006 and 2005

F-5Consolidated Statements of Cash Flows for the
    years ended December 31, 2007, 2006 and 2005

F-6Notes to Consolidated Financial Statements

F-7  F-1




---



##### 



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                F-2




---



##### 



SOURCEFIRE,
    INC.
   CONSOLIDATED BALANCE SHEETS
  December 31


December 312007


2006(Amounts in thousands, except share andper share data)ASSETSCurrent assets:Cash and cash equivalents

$
33,071


$
13,029Held-to-maturity
    investments


69,816



12,385Accounts receivable, net of allowance for doubtful accounts of
    $160 in 2007 and $166 in 2006


20,689



16,507Inventory


4,863



2,099Prepaid expenses and other current assets


2,651



919Total current assets


131,090



44,939Property and equipment, net


4,041



2,546Intangible assets, net of accumulated amortization of $42 in
    2007 and $0 in 2006


592



Held-to-maturity
    investments, less current portion


4,140



908Restricted cash


1,000



Other assets


815



1,559Total assets

$
141,678


$
49,952LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
    STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
5,930


$
3,081Accrued compensation and related expenses


3,151



1,783Other accrued expenses


1,458



1,312Current portion of deferred revenue


18,417



11,735Current portion of long-term debt






675Other current liabilities


832



501Total current liabilities


29,788



19,087Deferred revenue, less current portion


2,610



2,380Long-term debt, less current portion






637Other long-term liabilities


86



Total liabilities


32,484



22,104Commitments and contingenciesSeries 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 December 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 December 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 December 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 December 31, 2007






23,879Total convertible preferred stock






66,747Stockholders equity (deficit):Preferred stock, $0.001 par value; 20,000,000 shares
    authorized; no shares issued and outstanding at
    December 31, 2007 and December 31, 2006






Common stock, $0.001 par value; 240,000,000 shares
    authorized; 24,642,433 and 3,491,764 shares issued and
    outstanding at December 31, 2007 and December 31,
    2006, respectively


24



3Additional paid-in capital


153,693



Accumulated deficit


(44,523
)


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


109,194



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

$
141,678


$
49,952  F-3




---



##### 



SOURCEFIRE,
    INC.
   CONSOLIDATED STATEMENTS OF OPERATIONS
  Year Ended December 312007


2006


2005(Amounts in thousands, except share andper share data)Revenue:Products

$
34,332


$
30,219


$
23,589Technical support and professional services


21,527



14,707



9,290Total revenue


55,859



44,926



32,879Cost of revenue:Products


9,523



8,440



6,610Technical support and professional services


3,360



2,632



1,453Total cost of revenue


12,883



11,072



8,063Gross profit


42,976



33,854



24,816Operating expenses:Research and development


11,902



8,612



6,831Sales and marketing


25,860



20,652



17,135General and administrative


10,599



5,017



5,120Depreciation and amortization


1,649



1,230



1,103In-process research and development


2,947







Total operating expenses


52,957



35,511



30,189Loss from operations


(9,981
)


(1,657
)


(5,373
)Other income (expense):Interest and investment income


4,665



784



101Interest expense


(35
)


(87
)


(98
)Other income (expense)


(26
)


95



(88
)Total other income (expense)


4,604



792



(85
)Loss before income taxes


(5,377
)


(865
)


(5,458
)Income tax expense


(244
)


(67
)


Net loss


(5,621
)


(932
)


(5,458
)Accretion of preferred stock


(870
)


(3,819
)


(2,668
)Net loss attributable to common stockholders

$
(6,491
)

$
(4,751
)

$
(8,126
)Net loss attributable to common stockholders per share:Basic and diluted

$
(0.32
)

$
(1.40
)

$
(2.54
)Weighted average shares outstanding used in computing per share
    amounts:Basic and diluted


20,434,792



3,389,527



3,200,318    F-4




---



##### 





SOURCEFIRE,
    INC.
   CONSOLIDATED STATEMENTS OF CHANGES IN
    CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFICIT)
  Warrants toPurchaseSeries A Convertible


Series A


Series B Convertible


Series C Convertible


Series D Convertible








AdditionalPreferred Stock


Convertible


Preferred Stock


Preferred Stock


Preferred Stock


Common Stock


Paid-in


Unearned


AccumulatedShares


Amount


Preferred Stock


Shares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Capital


Compensation


Deficit


Total(Amounts in thousands, except share data)Balance at January 1, 2005


2,475,410


$
8,938



25



7,132,205


$
12,435



5,404,043


$
15,941






$




3,292,882


$
3


$



$
(75
)

$
(27,428
)

$
(27,500
)Exercise of common stock options






































114,800







59











59Stock-based compensation expense














































415











415Accretion of convertible preferred stock to redemption value






660











883







1,125



















(474
)






(2,194
)


(2,668
)Amortization of unearned compensation


















































55







55Net loss for 2005






















































(5,458
)


(5,458
)Balance at December 31, 2005


2,475,410



9,598



25



7,132,205



13,318



5,404,043



17,066











3,407,682



3







(20
)


(35,080
)


(35,097
)Exercise of common stock options






































84,082







143











143Issuance of restricted common stock














































83











83Stock-based compensation expense














































703











703Issuance of Series D redeemable convertible preferred
    stock, net of direct issuance costs of $79






























3,264,449



22,921























Accretion of convertible preferred stock to redemption value






710











947







1,204







958











(929
)






(2,890
)


(3,819
)Amortization of unearned compensation


















































20







20Net loss for 2006






















































(932
)


(932
)Balance 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






































305,077



1



332











333Exercise of common stock warrant






































30,543



















Issuance of restricted common stock






































329,882



















Cancellation of restricted common stock






































(2,389
)


















Stock-based compensation expense














































2,646











2,646Excess tax benefits relating to share-based payments














































106











106Issuance of common stock in IPO, net of issuance costs of $8,901






































6,185,500



6



83,876











83,882Accretion 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 2007






















































(5,621
)


(5,621
)Balance at December 31, 2007





$











$







$







$




24,642,433


$
24


$
153,693


$



$
(44,523
)

$
109,194  F-5




---



##### 





SOURCEFIRE,
    INC.
   CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended December 312007


2006


2005(Amounts in thousands)Operating activitiesNet loss

$
(5,621
)

$
(932
)


(5,458
)Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:Depreciation and amortization


1,678



1,261



1,127Provision for doubtful accounts


(126
)


55



57Stock-based compensation


2,646



806



470Amortization of (premium) discount on
    held-to-maturity
    investments


(1,441
)


(81
)


126Write-off of acquired in-process research and development costs


2,947







Changes in operating assets and liabilities:Accounts receivable


(4,056
)


(3,645
)


(5,120
)Inventory


(2,764
)


(344
)


(1,065
)Prepaid expenses and other assets


(2,027
)


(238
)


(229
)Accounts payable


2,849



901



360Accrued expenses


1,514



681



11Deferred revenue


6,912



3,520



4,994Other liabilities


417



84



269Net cash provided by (used in) operating activities


2,928



2,068



(4,458
)Investing activitiesPurchase of property and equipment


(3,131
)


(1,285
)


(2,207
)Purchase of
    held-to-maturity
    investments


(125,154
)


(13,207
)


Proceeds from maturities of
    held-to-maturity
    investments


65,932



2,000



3,620Cash paid for acquisition of ClamAV, including direct
    acquisition costs of $81


(3,581
)






Cash held in escrow related to acquisition of ClamAV


(1,000
)






Net cash provided by (used in) investing activities


(66,934
)


(12,492
)


1,413Financing activitiesBorrowings under revolving promissory note










2,250Repayments of borrowings under revolving promissory note










(2,250
)Borrowings of long-term debt


113



887



1,000Repayments of long-term debt


(1,425
)


(565
)


(471
)Proceeds from issuance of Series D redeemable convertible
    preferred stock, net of offering costs






22,921



Proceeds from issuance of common stock, net of
    underwriters discount of $6,495


86,288







Proceeds from exercise of stock options


333



143



59Excess tax benefits relating to share-based payments


106







Payment of equity offering costs


(1,367
)


(1,039
)


Net cash provided by financing activities


84,048



22,347



588Net increase (decrease) in cash and cash equivalents


20,042



11,923



(2,457
)Cash and cash equivalents at beginning of year


13,029



1,106



3,563Cash and cash equivalents at end of year

$
33,071


$
13,029


$
1,106Supplemental cash flow informationCash paid for interest


35



68



70Cash paid for income taxes


106



25



    F-6




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS
  1.
    Description
    of Business and Basis of Presentation  Organization
    and Description of Business
  tm
  ® tm
        2.
    Summary
    of Significant Accounting Policies  Basis
    of Presentation
    Use of
    Estimates
     F-7




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Cash
    and Cash Equivalents
    Held-to-Maturity
    Investments
  held-to-maturity Held-to-maturity held-to-maturity
  held-to-maturity
  As of December 31,2007


2006Fair





FairAmortized


Market


Amortized


MarketCost


Value


Cost


Value(In thousands)Money market

$
4,902


$
4,902


$
1,168


$
1,168Corporate debt investments


29,824



29,842



3,756



3,751Asset-backed securities


19,847



19,896







Commercial paper


38,490



38,600



15,265



15,270Total investments


93,063


$
93,240



20,189


$
20,189Amounts classified as cash equivalents


(19,107
)






(6,896
)Total
    held-to-maturity
    investments

$
73,956






$
13,293Current

$
69,816






$
12,385Long-term

$
4,140






$
908   Allowance
    for Doubtful Accounts
    Inventories
  first-in,
 F-8




---



##### 



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




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Warranty
    Commissions
    Shipping
    and Handling Costs
    Research
    and Development Costs
    Advertising
    Costs
   F-10




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Foreign
    Currency Translation
  Foreign Currency Translation.
    Income
    Taxes
  Accounting for Income Taxes.
  Accounting for Uncertainty in Income Taxes, an interpretation
    of SFAS No. 109, Accounting for Income Taxes
  Intangible
    Assets
        Accounting for the Impairment
    or Disposal of Long-Lived Assets
  Stock-Based
    Compensation
   F-11




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for
    Stock Based Compensation Accounting
    for Stock Issued to Employees
  Net
    Loss Attributable to Common Stockholders Per Share
      December 312007


2006


2005Options to purchase common stock


3,063,588



3,199,903



2,412,223Shares of common stock into which outstanding warrants are
    convertible






36,944



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






14,302,128



12,292,005Unvested shares of restricted common stock






27,709



75,448Total


3,063,588



17,566,684



14,816,620     Fair
    Value of Financial Instruments
  held-to-maturity
  Recent
    Accounting Pronouncements
  Fair Value
    Measurements FAS 157-b
 F-12




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  FAS 157-b.
  The Fair
    Value Option for Financial Assets and Financial Liabilities
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements, an amendment of ARB No. 51
  3.
    Property
    and Equipment    As of December 31,2007


2006Furniture, fixtures and equipment

$
7,427


$
5,025Leasehold improvements


1,698



9699,125



5,994Less accumulated depreciation and amortization


5,084



3,448Net property and equipment

$
4,041


$
2,546     4.
    Acquisition   F-13




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      5.
    Income
    Taxes    Year Ended December 31,2007


2006


2005Current:Federal

$
47


$
11


$
State


63



14



Foreign


162



42



Deferred:Federal


(1,804
)


(147
)


(1,924
)State


(526
)


168



(132
)Foreign


(29
)Total provision for (benefit from) taxes before valuation
    allowance


(2,087
)


88



(2,056
)Change in valuation allowance


2,331



(21
)


2,056Total provision for taxes

$
244


$
67


$
  F-14




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    As of December 31,2007


2006Deferred tax assets:Net operating loss carryforward

$
8,864


$
9,721Accrued expenses


592



127Deferred rent


164



55Deferred revenue


1,037



451Allowance for doubtful accounts


60



62Unearned compensation


1,110



292In-process research and development


1,089



Property and equipment


253



171Other


161



11Total deferred tax assets


13,330



10,890Deferred tax liabilities:Prepaid expenses


(255
)


(174
)Total deferred tax liabilities


(255
)


(174
)Net future income tax benefit


13,075



10,716Valuation allowance for deferred tax assets


(13,046
)


(10,716
)Net deferred tax asset

$
29


$
        F-15




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    paid-in-capital
      December 312007


2006


2005Tax benefit at U.S. statutory rate of 34%

$
(1,828
)

$
(294
)

$
(1,856
)Effect of permanent differences


64



48



(71
)State income taxes, net of federal benefit


42



9



(129
)Foreign taxes and rate differentials


20



11Effect of change in valuation allowance for deferred tax assets


1,946



293



2,056Total

$
244


$
67


$
   6.
    Debt and
    Warrants             F-16




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    7.
    Convertible
    Preferred Stock        8.
    Share
    Based Compensation          2007


2006Average risk-free interest rate


4.63
%


4.68
%Expected dividend yield


0.0
%


0.0
%Expected useful life


6.25 years



6.25 yearsExpected volatility


74.8
%


77.2
%Fair value of stock option awards granted during the year

$
8.63


$
5.47  F-17




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Average risk-free interest rate
  Expected dividend yield
  Expected useful life Share-Based Payment
  Expected volatility
      Number


Range of


Weighted Average


Aggregateof Shares


Exercise Prices


Exercise Price


Intrinsic ValueOutstanding at January 1, 2007


3,199,903


$
0.24 to $11.34


$
2.96Granted


422,221


$
9.55 to $15.49


$
12.34Exercised


(305,077
)

$
0.24 to $ 5.26


$
1.10Forfeited


(253,459
)

$
0.24 to $15.49


$
7.53Outstanding at December 31, 2007


3,063,588


$
0.24 to $15.49


$
4.05


$
15,226Vested and exercisable at December 31, 2007


2,029,797


$
0.24 to $11.34


$
1.92


$
13,219Vested and expected to vest at December 31, 2007


2,734,524






$
3.59


$
14,529  F-18




---



##### 



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


Weighted Average


Options ExercisableRange of

Number of


Average


Contractual


Number


Weighted AverageExercise Prices

Shares


Exercise Prices


Life (Years)


of Shares


Exercise Prices$0.24 - $0.32


841,280


$
0.29



5.30



841,280


$
0.29$1.14 - $2.03


1,122,598


$
1.63



6.94



864,776


$
1.55$3.69 - $10.41


780,778


$
7.96



7.69



314,025


$
7.03$11.34 - $15.49


318,932


$
12.93



9.19



9,716


$
11.343,063,588


$
4.05



6.92



2,029,797


$
1.92         Weighted AverageNumber of


Grant DateShares


Fair ValueUnvested at December 31, 2006


27,709


$
7.63Granted


302,173



10.62Restrictions Lapsed


(31,813
)


8.64Forfeited


(2,389
)


10.55Unvested at December 31, 2007


295,680


$
10.56      F-19




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007


2006Cost of sales product

$
22


$
2Cost of sales services


69



2Stock based compensation expense included in cost of sales


91



4Research and development


408



140Sales and marketing


1,011



367General and administrative


1,136



295Stock-based compensation included in operating expenses


2,555



802Total stock-based compensation

$
2,646


$
806Effect on net loss per share:Basic and diluted

$
0.13


$
0.24   9.
    Shares Reserved
    for Future Issuance    Options to purchase common stock






3,063,588Employee Stock Purchase Plan






1,000,000Equity-based awards available for grant under the 2007 Plan






2,547,8606,611,448   10.
    Operating
    Leases    2008

$
1,5292009


1,3492010


9112011


5412012


41$
4,371     11.
    Business
    and Geographic Segment Information   F-20




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2007


2006


2005United States

$
41,882


$
36,598


$
27,027All foreign countries


13,977



8,328



5,852Consolidated total

$
55,859


$
44,926


$
32,879     2007


2006


2005United States

$
8,608


$
5,972


$
4,710All foreign countries


517



22



14Consolidated total

$
9,125


$
5,994


$
4,724   12.
    Defined
    Contribution Retirement Plan    13.
    Employee
    Stock Purchase Plan    14.
    Legal
    Proceedings  Howard Katz v. Sourcefire, Inc., et
    al. No. 1:07-cv-01210-WMN. Mark
    Reaves v. Sourcefire, Inc. et al No. 1:07-cv-01351-JFM Raveill v. Sourcefire, Inc. et al No. 1:07-cv-01425-WMN. Barry Pincus v. Sourcefire, Inc., et al. No. 1:07-cv-04720-RJH. Pincus
  and/or
 F-21




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            15.
    Commitments
    and Contingencies  18-month
      16.
    Allowances
    for Doubtful Account  Balance at





Write-Offs


BalanceBeginning


Charged to


Net of


at Endof Year


Expenses


Recoveries


of Year(In thousands)Year ended December 31, 2005

$
70


$
125


$
(68
)

$
127Year ended December 31, 2006


127



55



(16
)


166Year ended December 31, 2007


166



126



(132
)


160  F-22




---



##### 



SOURCEFIRE,
    INC.
   NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  17.
    Summarized
    Quarterly Consolidated Financial Information    Three Months EndedDec. 31,


Sept. 30,


June 30,


March 31,


Dec. 31,


Sept. 30,


June 30,


March 31,2007


2007


2007


2007


2006


2006


2006


2006(Unaudited)(In thousands, except share data)Total revenue

$
19,338


$
14,806


$
11,260


$
10,455


$
15,992


$
10,867


$
9,535


$
8,532Gross profit


14,541



11,341



8,923



8,171



11,867



8,329



7,133



6,525Income (loss) from operations


(365
)


(4,214
)


(2,435
)


(2,967
)


1,701



(91
)


(1,352
)


(1,915
)Net income (loss)


808



(2,844
)


(1,097
)


(2,488
)


1,984



205



(1,196
)


(1,925
)Net income (loss) attributable to common stockholders

$
808


$
(2,844
)

$
(1,097
)

$
(3,358
)

$
852


$
(926
)

$
(2,037
)

$
(2,640
)Net income (loss) attributable to common stockholders per common
    share  basic


0.03



(0.12
)


(0.05
)


(0.39
)


0.25



(0.27
)


(0.61
)


(0.79
)Net income (loss) attributable to common stockholders per common
    share  diluted


0.03



(0.12
)


(0.05
)


(0.39
)


0.04



(0.27
)


(0.61
)


(0.79
)      F-23




---



##### 



EXHIBIT INDEX
  Incorporation by ReferenceExhibit





File





Filed withNumber

Exhibit Description

Form

Number

Exhibit

File Date

this 10-K3
.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

3/6/20074
.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

3/1/200710
.1

Fourth Amended and Restated Investor Rights Agreement

S-1

333-138199


10
.1

10/25/200610
.2

Employment Agreement of E. Wayne Jackson, III

S-1/A

333-138199


10
.4

12/12/200610
.3

Employment Agreement of Thomas M. McDonough

S-1/A

333-138199


10
.5

12/12/200610
.4

Employment Agreement of Martin F. Roesch

S-1/A

333-138199


10
.6

12/12/200610
.5

Employment Agreement of Todd P. Headley

S-1/A

333-138199


10
.7

12/12/200610
.6

Employment Agreement of Michele M. Perry-Boucher

S-1/A

333-138199


10
.8

12/12/200610
.7

Employment Agreement of Douglas W. McNitt

10-Q

1-33350


10
.1

11/7/200710
.8

2007 Sourcefire, Inc. Employee Stock Purchase Plan

8-K

1-33350


10
.1

10/04/200710
.9

Lease Agreement by and between Liberty Property LP and
    Sourcefire, Inc.

S-1

333-138199


10
.10

10/25/200610
.10*

OEM and Distributor Agreement by and between Sourcefire, Inc.
    and Nokia Inc., dated July 14, 2006, as amended on
    July 14, 2006

S-1/A

333-138199


10
.11

3/6/200710
.11*

Manufacturing Services and Supply Agreement by and between
    Patriot Technologies, Inc. and Sourcefire, Inc., dated
    December 12, 2005, as amended on August 4, 2006

S-1/A

333-138199


10
.12

2/23/200710
.12*

Outsourcing Agreement by and between Sourcefire, Inc. and
    Intelligent Decisions, Inc., dated January 31, 2006

S-1/A

333-138199


10
.13

2/23/200710
.13*

OEM Purchase Agreement by and between Bivio Networks, Inc. and
    Sourcefire, Inc., dated February 10, 2005

S-1/A

333-138199


10
.14

3/6/200710
.14*

License Agreement for Commercial Use of MySQL Software by and
    between MySQL Inc. and Sourcefire, Inc., dated June 13,
    2005, as amended on December 29, 2006

S-1/A

333-138199


10
.15

3/6/200710
.15

Form of Indemnification Agreement

S-1/A

333-138199


10
.18

3/1/200710
.16

Transition Agreement between E. Wayne Jackson, III and
    Sourcefire, Inc., dated February 27, 2008











X21
.1

List of Subsidiaries











X23
.1

Consent of Ernst & Young LLP











X24
.1

Power of Attorney (included on the signature page hereof)











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     *
    
    Portions of this exhibit have been omitted and were filed
    separately with the Securities and Exchange Commission pursuant
    to the Registrants application requesting confidential
    treatment under Rule 406 of the Securities Act.