ITEM 1.    BUSINESS

Overview

        Tucows primary line of business is the sale of Internet services through a global Internet-based distribution network of resellers. These resellers are a heterogeneous group of companies including Internet service providers, web hosting providers and telecommunications and cable companies. Tucows refers to its customers or clients as managed service providers, or MSPs, and sometimes as resellers. The Internet services which Tucows currently provides include domain name registration and security and identity products through digital certificates. These services are provided through Tucows' Open Shared Reseller System, or OpenSRS, platform which provides the technical infrastructure that allows MSPs to register and manage the provisioning of Tucows services to their end-users. Tucows' services are provided on a wholesale or private label basis, allowing MSPs to deal directly with their own end-user customers. By using Tucows' services, MSPs are able to avoid the costs and complexities of building in-house systems and to focus on their customer acquisition and retention strategies.

        Tucows' objective is to use its global sales and distribution channel to become a leading distributor of Internet services on a global basis.

        Tucows secondary line of business is the maintenance and distribution of a large library of software comprised mostly of freeware and shareware. This software is made available to global end-users on a local basis through a separate distribution network which has some overlap with the network of Tucows' primary business.

        Tucows' web site (www.tucows.com) is the public interface for MSPs and Tucows' software libraries. Tucows' web site also creates overall brand awareness for Tucows, solidifies Tucows' reputation for

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serving the interests of Internet end-users and creates significant opportunities for Tucows to develop and expand relationships with MSPs.

Developments in 2002

        During January 2002, as a result of the significant downturn in the emerging new economy and the overall decline in the on-line advertising industry, Tucows sold 85% of its interest in the web-based newsletter publishing company, Eklektix Inc. ("Eklektix") to Eklektix's management. Tucows recorded a loss in the amount of approximately $44,000 on this sale. The carrying value of Tucows' investment in Eklektix at December 31, 2002 was nil.

        In March 2002, Tucows sold the business of Liberty Registry Management Services ("Liberty RMS") to Afilias Limited ("Afilias"). In November 2000, the Internet Corporation for Assigned Names and Numbers ("ICANN"), selected Afilias to operate the registry for the .info top level domain names. Afilias and Liberty RMS entered into two year contract for Liberty RMS to provide technical registry management services for the registry operations for the .info registry. Liberty RMS began accepting real-time registrations in early September 2001. The difficult economic environment that existed post launch resulted in monthly registration volumes being well below those anticipated by Afilias and Tucows. As a result, Tucows believed that it would require a longer time frame than its two-year contract to recover the high fixed cost component of implementing and maintaining the registry. Therefore, as a step in Tucows' effort to achieve profitability, Tucows sold the business of Liberty RMS and certain software technology required to provide registry services to Afilias. Tucows received cash proceeds of approximately $1 million in connection with the sale of the business of Liberty RMS. In addition, Afilias agreed that if it was selected to provide back end registry services to support the .org registry, it would pay Tucows a royalty on each name registered or renewed in such registry, up to maximum of $1 million. Effective as of January 1, 2003, the registry operator for the .org registry selected Afilias to provide its back end registry services. Tucows believes Afilais may meet these performance criteria during 2003 and earn the maximum payment of $1 million. Prior to the sale of the business of Liberty RMS to Affilias, Tucows held, and it continues to hold, a 7.38% interest in Afilias. Moreover, Tucows remains a registrar for the .info registry.

        On August 16, 2002, Tucows sold all the assets and certain liabilities associated with its search and reference services, Electric Library and Encyclopedia.com, to Alacritude, LLC, an unrelated party. Total consideration received consisted of cash proceeds of approximately $1.6 million (including an intellectual property license fee of $100,000). Tucows recognized a gain on disposition of these assets in the amount of approximately $1.8 million.

        Tucows holds an 11% interest in bigchalk.com, inc. ("bigchalk"), a privately held company. The carrying value of this investment at December 31, 2002 was nil. On December 31, 2002, Tucows received notice that bigchalk had received sufficient written consents from its stockholders to approve the merger of bigchalk with a wholly-owned subsidiary of ProQuest Information and Learning Company, Curious Acquisition, Inc. Under the terms of the merger agreement, bigchalk's common stockholders will receive $0.0001 per share. Accordingly, any proceeds received by Tucows will be immaterial.

Industry Background

Emergence of the Managed Services Industry

        The Internet has emerged as a global medium, enabling millions of people to share information, communicate, and conduct business electronically. The growth in Internet users, combined with the web's reach has created a powerful channel for conducting commerce, marketing and advertising. This growth in Internet usage and e-commerce provides significant opportunities for organizations of all types and sizes to improve operational efficiencies and produce additional revenues through new

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Internet-only channels. Conversely, the Internet has given rise to additional competitive pressures due to shifting and increasingly diversified supplier and consumer demands. These pressures are leading organizations to adopt new Internet based business models, requiring the use of a wide array of e-business applications and services that perform a variety of vital functions, including:

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access to the Internet;



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domain name registration;



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high performance web hosting and server hosting facilities;



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e-mail and other advanced messaging, or groupware, applications;



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e-commerce enabling applications;



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hosted customer relationship management software and services; and



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hosted billing and administration software and services.

        Tucows refers to Internet businesses that provide these applications and services as managed service providers, or MSPs. These businesses often operate as:

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Internet service providers, which provide end-users with access to the Internet through dial-up, high speed and dedicated private line hook-ups;



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telecommunications companies and cable service providers;



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web hosting companies, which offer corporate customers and individual users hosting of their web site on a commercial web server at a unique domain registered to the customer;



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system and network management providers, which offer high end server hosting facilities for web based businesses and corporations;



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domain name MSPs, who facilitate domain name registrations in .com, .net, .org, .info, .biz, .name and country code domains;



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value-added MSPs of internal and external networks, which are typically consultants that assist companies with systems management, application procurement, installation, maintenance and training; and



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original equipment manufacturers of network servers and appliances.

        MSPs typically provide a critical component of an end-user's Internet presence and have a very high level of interaction with the Internet end-user. End-users can range from individuals to large corporations. MSPs tend to specialize in one particular application or service. Once an MSP has secured an end-user as a customer by providing excellent service in one area of specialty, it has an opportunity to provide this customer with additional applications and services. In most cases, end-users will contact MSPs first when they seek to learn more about, or to purchase, additional applications and services. Providing a range of applications and services to end-users creates stronger relationships between MSPs and end-users, increases the costs of switching to another MSP and leads to increased revenues per end-user. The relationship between MSPs and end-users typically involves the payment of recurring fees, which results in end-users being more receptive to purchasing additional applications and services.

Trend Towards Outsourcing

        While MSPs are capitalizing on the growth in Internet usage and the demand for new e-business applications and services, they also face significant competition from numerous other MSPs offering similar applications and services. This has led to a greater focus on core competencies, as MSPs are

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increasingly seeking to outsource non-core applications and services that they provide to their end-users. Outsourcing enables these MSPs to better focus on their customer acquisition and retention efforts by eliminating the need to own, develop and support non-core applications in-house.

Domain Name Registration Background

        The Internet domain name registration system is composed of two principal functions: registry and registrar. The registry maintains the database that contains the domain names registered in the top level domains and their corresponding Internet protocol addresses. The registrar acts as an intermediary between the registry and individuals and businesses, referred to as registrants, seeking to register domain names.

        The domain name system is organized according to industry custom by levels, so that, for example, in the domain name mybrand.com, .com is the top level domain and mybrand is the second level domain. Top level domains are classified as either generic, or gTLDs, or country code, or ccTLDs. The gTLDs that are currently accepting registrations are .com, .net, .org, .info, .biz and .name.

        There are over 300 different country code top level domains, such as.us for the United States, .ca for Canada, .cn for China, .co.uk and .org.uk for the United Kingdom and .jp for Japan, representing over 240 countries. Each registry for country code domain names is responsible for maintaining and operating its own database of registered domain names. Some country code domains are unrestricted and allow anyone, from anywhere, to register their domain names on a first-come, first-served basis. Others require that prospective registrants have a local presence in the country to be able to register domain names in that country. While there have been movements directed at creating uniform domain name registration rules and registrar administration guidelines, there has been no international uniformity.

        From January 1993 until April 1999, Network Solutions, now a part of VeriSign, Inc. ("VeriSign"), was the sole entity authorized by the U.S. government to act as registrar and registry for domain names in the .com, .net and .org top level domains. VeriSign continues to act as sole registry for the .com and .net domains, maintaining the files in the shared registration system for these domains and the directory databases listing these domain names and their numerical Internet protocol addresses.

        In October 1998, the Department of Commerce called for the formation of a non-profit corporation to oversee the management of the .com, .net and .org domains and in November 1998, appointed ICANN as this non-profit corporation. In January 2000, Tucows began operations as an ICANN accredited registrar and began to register domain names in the .com, .net and .org domains. As of March 4, 2003, there were 163 ICANN-accredited registrars, of which 123 are active.

        In November 2000, ICANN approved bids for the following seven new generic top level domain registries: .info, .biz, .pro, .name, .museum, .coop and .aero. To date, .info, .biz and .name have begun selling registrations.

Growth in Domain Name Registrations

        Because end-users typically require a domain name to receive, enhance or better personalize their use of new e-business applications and services, it is critical that MSPs provide domain name registration and related support services. Tucows believes that, despite volatility induced by economic recession, the market for domain name registrations will continue to trend upward gradually because of the continuing growth and convergence to the Internet and the development of the domain name registration industry, including the introduction of new gTLDs. This growth will be driven primarily by:

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Individuals.    As more people begin to use the Internet and as online activities become a greater part of family communications and identities, individuals will want to establish their own unique presence on the Internet;

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Organizations.    Because of the significant growth in electronic commerce and the increasing focus on the global promotion and protection of their identities, organizations will continue to be significant users of domain name registration services;



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Small Offices and Home Offices.    As small offices and home offices increasingly move their businesses online, the demand for domain name registration and related online applications and services will continue; and



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International Markets.    Although the Internet's historical growth has primarily been driven by the U.S. market, adoption of the Internet continues to grow internationally. This growth will lead to a greater demand for domain name registrations.

        Further, organizations use domain names for a number of distinct purposes including promoting:

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Products and Services.    Registering products and services as domains and establishing Internet identities related to particular products and services which are key components of a promotional, marketing and brand protection strategy;



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Events.    Events, such as movies, sporting events and political campaigns, which represent additional name registration opportunities as individuals or organizations increasingly turn to the Internet to differentiate and promote their events; and



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Regional Commerce.    Businesses are increasingly localizing their global on-line presence and commerce efforts to accommodate different cultures, currencies, languages and delivery requirements. Tucows believes that this trend will lead to an increased demand for country code registrations.

The Need for a Dedicated Outsourcing Solution

        Offering e-business applications and services such as domain name registration is a complex technological challenge. Historically, MSPs would need to build proprietary, in-house systems or source applications and services from a fragmented array of third party providers. The ability to offer a large number of disparate services requires:

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tracking of administration, billing and usage;



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integrating information and functionality from multiple sources;



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delivering content, applications and services in a robust, scalable and efficient manner;



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implementing and managing these services with a sufficient level of technical human resources; and



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ensuring system reliability and redundancy.

        Tucows believes that MSPs will continue to seek a reliable, trustworthy and comprehensive source to deliver many of these applications and services.

Tucows' Solution

        Tucows manages an Internet-based distribution network through which Tucows delivers business applications and services and digital software content to a network of over 8,000 MSPs in over 100 countries. Tucows' services are designed to allow MSPs to provide a higher level of customer service and performance, to enhance revenue per customer through offering additional products and services, to avoid the costs and complexities of building in-house systems and to focus on their customer

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acquisition and retention strategies. Tucows believes that its services to MSPs offer the following benefits:

An Attractive Outsourcing Proposition

        Applications and services distributed by Tucows allow its MSPs to focus on their customer acquisition and retention while avoiding the costs of developing, implementing and maintaining hardware and software systems extraneous to their core businesses. Tucows' services simplify product integration and administration for its MSPs and provide them with applications at economies of scale. Web certificates and domain name registration services are provided on a generic basis that allows Tucows' MSPs to interact directly with their clientele, thus strengthening the MSP's relationships and enhancing the MSP's brand. Tucows also acts as the technical and administrative intermediary with domain regulators and provides input on domain policy on behalf of its MSPs.

Ease of Integration and Support

        Tucows' OpenSRS software system operates using open source principles. Open source is an industry term used to indicate a permissive software license that allows the recipient to use the software for any purpose, view the operating source code for the software, make modifications to this source code, distribute and retain legal rights to any modifications. The open source methodology provides the following benefits to Tucows and its MSPs:

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Reliability.    Tucows' software platform is subject to extensive review and validation by third party developers in a public forum. The system has been tested in different operating environments;



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Scalability.    Tucows enables its clients to offer domain names and other easily integrated additional applications and services to their end-users;



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Flexibility.    Tucows enables its clients to offer a variety of applications and services from multiple sources such as VeriSign, national registries and web certificate providers; and



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Ease of Use.    Tucows allows its clients to administer a variety of applications and services from a single, easy to use interface.

Experience in Focusing on Solutions for MSPs

        Tucows focuses on the challenges facing its MSPs as they compete to attract and retain their clients. For example, the OpenSRS domain name registration system was developed to provide a cost-efficient, reliable and generic domain name registration system. Its expanded operational capabilities now enable Tucows' clients to attract and retain their customers with the sale of additional applications and services, such as web certificates. Tucows has also developed a system that avoids bottle-necks and disruptions when downloading information on the Internet by locating software libraries closer to end-users on its MSPs' networks.

Global Reach

        By working directly with a global customer base, Tucows has acquired experience that enables it to manage a number of regional challenges, including language differences, local regulations and process requirements, privacy legislation and payment regulations. Tucows supports MSPs located in over 100 countries.

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Tucows' Strategy

        Tucows' objective is to use its global network of MSPs to become a leading distributor of Internet services. The key elements of its strategy include:

Continue the Private Label Focus

        Tucows plans to continue to offer its Internet applications and services to its MSPs on a wholesale, or private label, basis. Tucows believes that its MSP customers view it as a partner, rather than as a competitor, for providing applications and services to end-users. Tucows focuses on addressing its MSP customers' technical requirements and business objectives and on providing applications and services that MSPs require to grow their businesses. Tucows is dedicated to providing a high degree of flexibility to its MSPs' end-users by offering products and services from a wide variety of third party providers in any given application category. By delivering applications and services on a private label basis, Tucows avoids the high marketing costs typically related to building a brand on the Internet. Tucows uses its MSPs' marketing efforts and allows them to maintain their relationships with and promote their brands to their end-users. Tucows has built its business and its brand, through use and reputation, not marketing and public relations.

Continue to Use Network Effects

        Tucows believes that the growth of its MSP network and the growth of the range of applications and services it distributes will be interrelated. As the number of MSPs in Tucows' network increases, Tucows believes that it will be able to distribute applications and services to a larger number of end-users, which will make it more attractive for third parties to provide applications and services to Tucows for distribution. In turn, as Tucows acquires more applications and services for distribution, there will be more incentive for MSPs to become part of the Tucows network.

Capitalize on Additional Revenue Opportunities

        By increasing the number of applications and services Tucows offers and by promoting them to its MSPs, Tucows believes that it will be able to produce higher revenues from its customers. Tucows provides domain name registration, software distribution services and web certificates, advertising and co-branding services and search and reference sites. To create further opportunities for revenue growth, Tucows also intends to offer, generally on an outsourced, private label basis from one integrated interface:

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Domain name registration services for the new gTLDs as they become available in the marketplace. As the domain name market matures, and Tucows' renewal and transfer efforts become increasingly important to increasing the lifetime economic value of its customer base, Tucows is committed to making its automated transfer and renewal services more efficient and easier to use;



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Renewal services to encourage Tucows' customers to renew their domain name registrations with it. Tucows believes that renewals will allow Tucows to increase profitability by lowering overall marketing costs. Over time, Tucows believes that its focus on customer service and the adoption by its customers of its additional products and services will have a positive impact on renewals;



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Messaging products, including web based and regular e-mail and integration with offline messaging; and



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Payment processing, allowing Tucows' MSPs to receive money from end-users in a much more seamless fashion, especially internationally.

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        To provide a full range of features and performance capabilities in its product categories, Tucows intends to offer services from numerous third party providers. This allows its MSPs to provide their end-users with the ability to choose the products and services that are best suited to their individual needs.

Build Strategic Alliances

        Tucows intends to continue developing strategic alliances to expand its product offerings, extend its platform and increase its sales. For example, Tucows has entered into a strategic relationship with GeoTrust, Inc. ("GeoTrust") to provide security products such as secure e-commerce transactions, identity verification and trust authentication services designed specifically for small and medium-sized businesses doing business online.

Tucows' Products and Services

        Tucows offers its applications and services to its network of MSPs and directly to end-users. Tucows principal applications and services include domain name registration services, digital certificate delivery and digital content distribution. Tucows also continues to operate its Newshub web site as well as offer its Sleuth search technology to the market. However, these products are not material to Tucows' operations.

Domain Name Registration Services

        Tucows offers wholesale and retail domain name registration services for numerous gTLD's and ccTLDs. Key components of Tucows' domain name registration services include:

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OpenSRS.    Tucows' wholesale service is designed to enable MSPs to register domain names for their end-users. Pricing is based on a per name, per year charge. Tucows imposes no restrictions on the prices charged by Tucows' clients to their customers;



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Domain Direct—www.domaindirect.com.    Tucows' retail domain name registration service is designed to enable consumers to establish an internet presence using Domain Direct's Domain Control Panel. Included in the service are tools for domain name registration, personalized e-mail addresses, domain forwarding and web hosting that allow customers to register, develop, use and manage their web sites; and



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Hosted Registrar Services.    A service that allows ICANN accredited registrars to use Tucows' technical systems to process domain name registrations. Hosted registrar services enable registrars to use a proven system without incurring the costs of building their own technical infrastructure. Hosted registrar services also include professional service elements, including custom development, data management and systems administration.

Digital Certificate Delivery

        Tucows has entered into a partnership with GeoTrust to provide Tucows' MSPs with the ability to purchase security products such as secure e-commerce transactions, identity verification and trust authentication services through the OpenSRS system. Digital certificates authenticate identities over the Internet and secure transactions between buyers and merchants. Tucows offers these services exclusively to MSPs on a private label basis so that they may involve their brands in selling security products to their end-users, which is especially important in a trust-related service such as digital certificates.

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Digital Content Distribution

        Tucows distributes software and other digital content both directly to customers and through its accelerated content delivery network. Tucows digital content distribution services include:

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Tucows web site, www.tucows.com, which is designed to provide customers with fast access to Tucows' extensive libraries of software and digital content. Primary navigation is designed around users selecting the libraries of interest to them, such as Windows or Linux. There are eight main libraries containing a total of over 36,000 titles. Each software title in Tucows' library is reviewed, virus-tested and rated on a scale of one to five. Revenue is produced from the Tucows web site through advertising and co-branding agreements;



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Tucows accelerated content delivery network which sends Tucows' software and digital content libraries to its MSPs' networks, which are the initial access points where their end-users connect to the Internet. Tucows has entered into relationships with over 1,000 partners around the world. Each partner that agrees to use the accelerated content delivery network is expected to download the content libraries it offers at least once a day. Advantages of this service include:



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Bandwidth Savings and Faster Downloads.    Having Tucows' software libraries on its MSPs' local networks conserves Internet bandwidth and reduces the MSPs' bandwidth costs. Because traffic from the subscriber base remains local to the MSPs' network, customers receive a faster download;



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Flexible and Customizable.    Tucows enables content providers to choose from among a broad range of software libraries so that they are able to customize their offerings to best satisfy local interests; and



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Tucows Rating System.    Each software title offered by Tucows is reviewed by Tucows' editorial staff, allowing MSPs' end-users to sort through the huge range of alternative software titles available to them in any given category; and




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Tucows Author Resource Center, or ARC.    ARC provides software developers who rely on Tucows as a primary source of distribution with the tools to both manage and promote their software on the Tucows web site through advertising services, including keyword search placements, banners, promotional placements, expedited reviews and premium data services to Tucows' large, technologically sophisticated audience. The advertising sales business model is based on both the audience cost-per-thousand variable and the cost-per-click-through variable.

Customer Support

        Tucows seeks to provide superior customer service by anticipating the technical requirements and business objectives of its MSPs. Tucows also provides its MSPs with technical advice to help them understand how Tucows' applications and services can be customized for their particular needs. MSPs may contact Tucows by e-mail or Tucows toll-free telephone number. A library of frequently asked questions and answers is made available to all MSPs through Tucows' web site.

        Tucows' customer service team consists of trained technicians who provide support in many languages. These staff members handle general inquiries, investigate the status of orders and payments and answer technical questions about Tucows' applications and services. In response to customer inquiries, customer service representatives monitor site and network operations, refer complex problems to technical teams for resolution and make recommendations for future enhancements.

        Tucows also uses its own online discussion forums to communicate with its MSPs. These forums have been used to discuss:

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suggestions or feedback on new features;

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marketing promotions;



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domain policy positions; and



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negotiation of agreements.

        These forums are open to the public, which increases the level of scrutiny Tucows faces and the standard to which it is held. This, in turn, produces credibility with the MSPs. Problems are raised that are often solved by other customers who have faced similar situations. This greatly increases the speed and breadth of response the customer is able to receive in a cost effective manner.

Technology and Infrastructure

        Tucows employs advanced software and hardware, combining internal expertise with industry standard technology to create a proprietary software and platform infrastructure.

Tucows OpenSRS Platform

        The Tucows OpenSRS platform provides the technical infrastructure that allows MSPs to provision Internet services to their customers without having to make substantial investments in their own software or hardware. In 2000, the OpenSRS platform was primarily used to provision domain name registration services. Since then, a number of significant enhancements and architectural changes have been made to the OpenSRS platform to extend its capabilities to provision additional Internet services like security and identity products and email. In addition, Tucows extends the facilities offered by its OpenSRS platform to other ICANN-accredited registrars to register domain names under their own registrar tag.

        The key components of Tucows' transactional platform include:

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Tucows' OpenSRS Server. This system acts as an interface between third party suppliers, including VeriSign's global registry service, GeoTrust, Afilias and NeuLevel and Tucows' MSPs. This is the component of the platform through which all MSPs provision services and complete transactions. It allows MSPs and their customers to add, delete, change and transfer domain names and other Internet services in an automated fashion.

The OpenSRS server also provides MSPs with a comprehensive set of tools to allow them to easily administer and manage the domain names of their clients, the registrants. These tools are accessible by Tucows' MSPs through the Internet and enable them to monitor domain name registrations as they occur, and perform other administrative functions. The tools also allow Tucows' MSPs to efficiently manage a large number of domains belonging to a single registrant. For example, the administrative contact for a large number of domains can be changed using a single screen.

The OpenSRS server also facilitates country code top level domains and multilingual domains, including the ability to process the different communication protocols, price points, taxes and policies of the various top level domains.

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Tucows OpenSRS Client. Resellers access the OpenSRS server either through a web interface, through the API or by running the open source Tucows Client code on their servers. The end user accesses the resellers' systems, which then uses one of the above methods, to interface with Tucows OpenSRS to complete the transaction. The client-server environment allows resellers and registrants to add, renew, transfer and manage the domains they own. In addition, resellers can also perform administration and reporting for all domains that were registered through them. Detailed reporting is available for the resellers to efficiently manage their portfolio and the open source nature of the OpenSRS client allows resellers to easily integrate the client code into their billing, payment and other administrative systems.

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Digital Content Distribution Network Architecture

        Tucows manages an extensive network for distributing software and other digital content using proprietary software and standard hardware. The key elements of the accelerated content delivery network include main hubs that Tucows owns and servers that are owned by MSPs located at their facilities. Bandwidth and update times are minimized by utilizing mirroring software that sends compressed and incremental updates to Tucows' mirrors which results in Tucows' mirror sites being able to keep their libraries more current and provide MSPs customers with fresher content. As of December 31, 2002, Tucows network reached over 1,000 servers in over 100 countries.

Competition

        The market for Internet services including domain name registrations, software and content distribution, content notification and search and reference sites and other e-business services is rapidly evolving and highly competitive. Tucows' competition may be divided into groups consisting of:

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other domain name registrars who market private label offerings to MSPs;



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domain name registrars who market domain names primarily on a retail basis, such as Network Solutions, Register.com and GoDaddy, and who compete with Tucows' MSPs for end-users;



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providers of content and services to web sites and MSPs, such as Openwave, and Critical Path;



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providers of content notification and search and reference sites, such as Yahoo! and Northern Light;



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providers of software downloads and other open source related content, such as CNET and VA Linux;



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Internet service providers and web hosting providers, such as Concentric Network, DIGEX and Genuity;



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major technology providers, such as Cisco Systems, IBM, Intel and Nortel Networks;



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Internet portals, such as AOL and Yahoo; and



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telecommunications, cable and wireless companies.

        Tucows expects to experience significant competition from the companies identified above, and, as its business develops and Tucows competes in an increasingly broad range of e-business services, Tucows expects to encounter competition from other providers of Internet services. Internet service providers, web hosting companies, e-mail hosting companies, outsourced application companies, country code registries and major telecommunication firms may broaden their service offerings to include outsourced domain name registrations and other e-business solutions.

        Tucows believes that the primary competitive factors in its domain name registration and digital content distribution businesses are:

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providing cost savings over in-house solutions by relieving customers of expenses of acquiring and maintaining hardware and software and the associated administrative burden;



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providing greater functionality and access to e-business applications and services, which in turn enables customers to choose the application that best suit their end-users' needs;



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enabling MSPs to maintain their relationships with their end-users; and



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facilitating scalability through an infrastructure designed to support millions of transactions across millions of end-users.

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        While Tucows believes that its products and services compare favorably with these competitive factors, many of Tucows' current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources which may help them to develop domain name registration and digital content distribution services that are superior or achieve greater market recognition. New technologies and the expansion of existing technologies may increase competitive pressures on Tucows.

U.S. Government Regulation of Domain Names

        The Internet domain name registration system is composed of two principal functions: registry and registrar. The registry maintains the database that contains the domain names registered in the top level domains and their corresponding Internet protocol addresses. The registrar acts as an intermediary between the registry and individuals and businesses, referred to as registrants, seeking to register domain names.

        Under a 1993 cooperative agreement with the U.S. Department of Commerce, Network Solutions, which is now a part of VeriSign, was authorized to act as the sole registry and sole registrar for domain names in the .com, .net and .org, top level domains. In October 1998, the Department of Commerce amended the Network Solutions cooperative agreement to call for the formation of a not-for-profit corporation to oversee the management of, and create policies about, domain names in the .com, .net and .org top level domains. The Department of Commerce also proposed that additional registrars be authorized to register domain names in these domains based upon the idea that competitive registrars would benefit consumers and businesses. ICANN was recognized as this not-for-profit corporation by the Department of Commerce in November 1998.

        ICANN's authority is based upon voluntary compliance with its consensus policies. While these policies do not constitute law in the United States or elsewhere, they have a significant influence on the domain name registration system. On December 1, 1999, ICANN's first substantive policy, the Uniform Domain Name Dispute Resolution Policy, became effective. This dispute resolution policy was created to address the problem of cybersquatting, or registering the trademark of another as a domain name with the intent to wrongfully profit from the goodwill in that name created by the trademark holder. As ICANN creates additional policies governing the domain name registration system, Tucows will be affected by these policies.

        Additionally, there have been ongoing legislative developments and judicial decisions concerning trademark infringement claims, unfair competition claims, and dispute resolution policies relating to the registration of domain names. To help protect itself from liability in the face of these ongoing legal developments, Tucows has taken the following precautions:

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Tucows' standard registration agreement requires that each registrant indemnify, defend and hold Tucows harmless for any dispute arising from the registration or use of a domain name registered in that person's name; and



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since December 1, 1999, Tucows has required its MSPs to ensure that all registrants are bound to the Uniform Domain Name Dispute Resolution Policy as approved by ICANN.

        Despite these precautions, Tucows cannot assure you that its indemnity and dispute resolution policies will be sufficient to protect it against claims asserted by various third parties, including claims of trademark infringement and unfair competition.

        New laws or regulations concerning domain names and domain name registrars may be adopted at any time. Tucows responses to uncertainty in the industry or new regulations could increase its costs or prevent it from delivering its domain name registration services over the Internet, which could delay

12

growth in demand for Tucows' services and limit the growth of its revenues. New and existing laws may cover issues such as:

•

pricing controls;



•

the creation of additional generic top level domains and country code domains;



•

consumer protection;



•

cross-border domain name registrations;



•

trademark, copyright and patent infringement;



•

domain name dispute resolution; and



•

other claims based on the nature of content of domain names and domain name registration.

        In November 1999, the Anticybersquatting Consumer Protection Act, or the ACPA, was enacted by the United States government. This law seeks to curtail a practice commonly known in the domain name registration industry as cybersquatting. A cybersquatter is generally defined in the ACPA as one who registers a domain name that is identical or similar to another party's trademark, or the name of another living person, with the bad faith intent to profit from use of the domain name. The ACPA states that registrars may not be held liable for registration or maintenance of a domain name for another person absent a showing of the registrar's bad faith intent to profit from the use of the domain name. Registrars may be held liable, however, if they do not comply promptly with procedural provisions of the ACPA. For example, if there is litigation involving a domain name, the registrar is required to deposit a certificate representing the domain name registration with the court. If Tucows is held liable under the ACPA, any liability could have a material adverse effect on its business, financial condition and results of operations.

Intellectual Property

        Tucows believes that it is well positioned in the content services and domain name registration markets in part due to its highly recognized brand, Tucows. Its success and ability to compete are dependent on its ability to develop and maintain the proprietary aspects of its brand name and technology. Tucows relies on a combination of trademark, trade secret and copyright laws and contractual restrictions to protect its intellectual property rights. These legal protections cannot guarantee protection of Tucows' intellectual property. Despite precautions, third parties could obtain and use Tucows' intellectual property without authorization. The validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving, and the laws of some foreign countries do not protect intellectual property to the same extent as do the laws of the United States.

        Tucows has registered the Tucows trademark in the United States and in other countries and will seek to register additional service marks and trademarks, as appropriate.

        Tucows seeks to limit disclosure of its intellectual property by requiring employees and consultants with access to its proprietary information to execute confidentiality, non-disclosure and work-for-hire agreements with Tucows. All Tucows employees are required to execute confidentiality and non-use agreements which provide that any rights they may have in copyrightable works or patentable technologies accrue to Tucows. Before entering into discussions with potential content providers and network partners about Tucows' business and technologies, Tucows generally requires that these parties enter into a non-disclosure agreement. If these discussions result in a license or other business relationship, Tucows also generally requires that the agreement containing the parties' rights and obligations include provisions for the protection of Tucows' intellectual property rights.

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        Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which Tucows' services are or will be made available. Tucows also expects to license proprietary rights such as trademarks or copyrighted material to network partners during planned national and international expansion.

Seasonality

        During the summer months, and possibly during other times of the year such as major holidays, Internet usage often declines. As a result, Tucows' sites may experience reduced user traffic. For example, Tucows' experience shows that new user registrations and site usage declines during the summer months and around the year-end holidays. Seasonality may also affect advertising and affiliate performance which could in turn affect Tucows' sites' performance. These seasonal effects could cause fluctuations in Tucows' financial results as well as Tucows' performance statistics reported and measured by services such as Media Metrix, Inc.

Employees

        Tucows believe that one of its strengths is the quality and dedication of its people and the shared sense of being part of a team. Tucows strives to maintain a work environment that fosters professionalism, excellence, diversity and cooperation among its employees. As of December 31, 2002, Tucows had 141 full time employees.

         Elliot Noss has served as Tucows' president and chief executive officer since May 1999 and served as vice president of corporate services for Tucows Interactive Limited, which was acquired by Tucows in May 1999, from April 1997 to May 1999.

         Michael Cooperman has served as Tucows' chief financial officer since January 2000. From October 1997 to September 1999, Mr. Cooperman was the chief executive officer of Archer Enterprise Systems Inc., a developer of sales force automation software.

         Graham Morris has served as Tucows' chief operating officer since June 2001. From September 2000 to June 2001, Mr. Morris served as Tucows' executive vice president, content. Before joining Tucows, he spent 15 years at Telemedia Publishing, a Canadian consumer magazine publishing company, where he became president in 1996.

         Supriyo Sen has served as Tucows' chief technology officer since February 2001. Before joining Tucows, from May 2000 to February 2001, Mr. Sen was vice president, marketing at GoLinQ.com, an Internet software company focused on e-commerce solutions for small and medium businesses. Before that, Mr. Sen spent 14 years at Hitachi Data Systems, a multi-national computer hardware company, where he served at various times as vice president, knowledge center, vice president, corporate strategy and vice president, marketing.

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         Scott Swedorski has served as Tucows' editor-in-chief with responsibility for the editorial content of the Tucows software libraries since 1994 when he founded the Tucows.com web site.

Risk Factors

        Tucows' business faces significant risks. The risks described below may not be the only risks Tucows faces. Additional risks that Tucows does not yet know of or that it currently thinks are immaterial may also impair its business operations. If any of the events or circumstances described in the following risks actually occur, Tucows' business, financial condition or results of operations could suffer, and the trading price of its common stock could decline.

Tucows common stock has been delisted, and investors may find it more difficult to sell Tucows common stock.

        Tucows common stock was delisted from the Nasdaq SmallCap market in June 2001. Tucows common stock is now quoted on the OTC Bulletin Board maintained by Nasdaq. The fact that Tucows common stock is not listed is likely to make trading Tucows shares more difficult for broker-dealers, shareholders and investors, potentially leading to further declines in share price. It may also make it more difficult for Tucows to raise additional capital. An investor may find it more difficult to sell Tucows common stock or to obtain accurate quotations of the share price of Tucows common stock. Management has not determined when or whether it will apply again for listing on the Nasdaq SmallCap market.

        Tucows is also subject to an SEC rule concerning the trading of so-called penny stocks. Under this rule, broker-dealers who sell securities governed by the rule to persons who are not established customers or accredited investors must make a special suitability determination and must receive the purchaser's written consent to the transaction prior to the sale. This rule may deter broker-dealers from recommending or selling Tucows' stock, which may negatively affect the liquidity of Tucows' stock.

Tucows' stock price may vary significantly, which may make it difficult to resell your shares when you want to at prices you find attractive.

        Tucows' stock price has varied significantly recently and if it continues to vary, the price of its common stock may decrease in the future regardless of Tucows operating performance. Investors may be unable to resell their shares of common stock following periods of volatility because of the market's adverse reaction to this volatility.

        The following factors may contribute to this volatility:

•

actual or anticipated variations in Tucows' quarterly operating results;



•

interruptions in Tucows' services;



•

seasonality of the markets and businesses of Tucows' customers;



•

announcements of new technologies or new services by Tucows or its competitors;



•

changes in financial estimates or recommendations by securities analysts;



•

Tucows' ability to accurately select appropriate business models and strategies;



•

the impact that terrorist acts or military action may have on global economic conditions and the impact that this will have on Tucows' customers or business;



•

the operating and stock price performance of other companies that investors may view as comparable to Tucows;



•

news relating to Tucows' industry as a whole; and

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•

news relating to trends in Tucows' markets.

        The stock market in general, and the market for Internet-related companies, including Tucows, in particular, have experienced extreme volatility. This volatility often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may cause the price of Tucows' stock to drop, regardless of Tucows' performance.

A limited number of principal shareholders control Tucows, which may limit your ability to influence corporate matters.

        Four principal shareholders beneficially own approximately 52% of Tucows voting stock. These shareholders could control the outcome of any corporate transaction or other matter submitted to Tucows shareholders for approval, including mergers, consolidations and the sale of all or substantially all of Tucows' assets, and also could prevent or cause a change in control. The interests of these shareholders may differ from the interests of Tucows' other shareholders.

        Third parties may be discouraged from making a tender offer or bid to acquire Tucows because of this concentration of ownership.

Tucows' quarterly and annual operating results may fluctuate and its future revenues and profitability are uncertain.

        Tucows' quarterly operating results have varied and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of Tucows' control. Tucows' quarterly and annual operating results may be adversely affected by a wide variety of factors, including:

•

Tucows' ability to maintain revenue growth at current levels or anticipate a decline in revenue from any of its services;



•

Tucows' ability to identify and develop new technologies or services and to commercialize those technologies into new services in a timely manner;



•

the mix of Tucows' services sold during the quarter or year;



•

Tucows' ability to make appropriate decisions which will position it to achieve further growth;



•

changes in Tucows' pricing policies or those of its competitors and other competitive pressures on selling prices;



•

Tucows' ability to identify, hire, train, motivate, and retain highly qualified personnel, and to achieve targeted productivity levels;



•

market acceptance of Internet services generally and of new and enhanced versions of Tucows services in particular;



•

Tucows' ability to establish and maintain a competitive advantage;



•

the continued development of Tucows' global distribution channel and its ability to compete successfully as part of Tucows' sales and marketing strategy;



•

the number and significance of service enhancements and new service and technology announcements by Tucows competitors;



•

Tucows ability to identify, develop, deliver, and introduce in a timely manner new and enhanced versions of its current service offerings which anticipate market demand and address customer needs;



•

changes in foreign currency exchange rates and issues relating to the conversion to the Canadian dollar;

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•

interruptions in Tucows' services;



•

seasonality of the markets and businesses of Tucows' customers;



•

news relating to Tucows' industry as a whole; and



•

Tucows' ability to enforce its intellectual property rights.

        Tucows operating expenses may increase. Tucows bases its operating expense budgets on expected revenue trends that are more difficult to predict in periods of economic uncertainty. As a result of current economic conditions, Tucows intends to reduce discretionary spending; however, Tucows will continue to selectively incur expenditures in areas that it believes will strengthen its position in the marketplace. If Tucows does not meet revenue goals, it may not be able to meet reduced operating expense levels and its operating results will suffer. It is possible that in one or more future quarters, Tucows operating results may be below Tucows' expectations and the expectations of public market analysts and investors. In that event, the price of Tucows common stock may fall.

Tucows has a history of losses and although it was profitable and cash flow positive for the year ended December 31, 2002, it cannot assure you that it will be able to sustain profitability or positive cash flow.

        Although Tucows was cash flow positive from operations by approximately $3.4 million and achieved profitability of approximately $1.9 million for the year ended December 31, 2002, this profitability was primarily due to the gain of approximately $3.8 million on the sale of certain assets. The proceeds on the sale of the assets against which the gain was recorded are not, however, included in the cash flow from operations figure. This was offset by the write-down in the value of Tucows' investment in bigchalk of approximately $1.0 million and an operating loss of approximately $980,000. Tucows incurred net losses of approximately $13.4 million for the year ended December 31, 2001, including approximately $5.0 million of amortization and write down of intangible assets and negative cash flow from operating activities of $6.1 million. For the year ended December 31, 2000, Tucows incurred a net loss of $37.7 million that included $22.9 million of amortization and write down of intangible assets, and negative cash flow from operating activities of $0.5 million.

        As of December 31, 2002, Tucows had an accumulated deficit of approximately $59.7 million. Tucows anticipates that its operating expenses will increase. If an increase in operating expenses is not accompanied by a corresponding increase in revenues, Tucows operating results will suffer, particularly as most of Tucows revenue is recorded as deferred revenue and is then recognized ratably over the term of the service, while Tucows operating expenses are expensed in full when incurred. Accordingly, although Tucows was profitable and had positive cash flow from operations for the year ended December 31, 2002, it cannot assure you that it will be able to sustain or increase its profitability or cash flow in the future.

Tucows has only been operating as a domain name registrar since January 2000 and because it operates in a new industry for private label Internet applications and services, it is exposed to risks that affect its ability to conduct its business.

        Competition in the domain name registration industry was introduced in 1999. Tucows entered the domain name registration business in January 2000 and, therefore, has a limited operating history as a domain name registrar upon which its business and prospects can be evaluated. As a company operating in a newly competitive and rapidly evolving industry, Tucows faces risks and uncertainties relating to its ability to implement its business plan successfully. Tucows cannot assure you that it will adequately address these risks and uncertainties or that its business plans will be successful.

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If Tucows cannot obtain or develop additional applications and services that meet the evolving business needs of its MSPs, the market for its services will not grow and may decline.

        Part of Tucows' strategy is to expand its services by offering its MSPs additional applications and services that address their evolving business needs. Tucows cannot be sure that it will be able to license these applications and services at a commercially viable cost or at all or that it will be able to cost-effectively develop the applications in-house. If Tucows cannot obtain or develop these applications on a cost-effective basis and cannot expand the range of its service offerings, the market for its services will not grow and may decline, and sales of its services may suffer as MSPs turn to alternate providers that are able to more fully supply their business needs. Tucows may not produce sufficient revenues to offset the related costs and will remain dependent on domain name registrations as a primary source of revenue, and revenue may fall below anticipated levels.

Governmental and regulatory policies or claims concerning the domain name registration system, and industry reactions to those policies or claims, may cause instability in the industry and disrupt Tucows' domain name registration business.

        Before 1999, Network Solutions, which is now a part of VeriSign, managed the domain name registration system for the .com, .net and .org domains on an exclusive basis under a cooperative agreement with the U.S. government. In November 1998, the Department of Commerce authorized ICANN to oversee key aspects of the domain name registration system. ICANN has been subject to strict scrutiny by the public and by the government. For example, in the United States, Congress has held hearings to evaluate ICANN's selection process for new top level domains. In addition, ICANN faces significant questions regarding its financial viability and efficacy as a private sector entity. ICANN's president recently recommended a restructuring of the organization to address perceived shortcomings such as a lack of accountability to the public and a failure to maintain a diverse representation of interests on its board of directors. Tucows continues to face the risks that:

•

the U.S. or any other government may reassess its decision to introduce competition into, or ICANN's role in overseeing, the domain name registration market;



•

the Internet community or the Department of Commerce or U.S. Congress may refuse to recognize ICANN's authority or support its policies, which could create instability in the domain name registration system;



•

ICANN may attempt to impose additional fees on registrars if it fails to obtain funding sufficient to run its operations;



•

the terms of the registrar accreditation process could change in ways that are disadvantageous to Tucows; and



•

International regulatory bodies, such as the International Telecommunications Union or the European Union, may gain increased influence over the management and regulation of the domain name registration system, leading to increased regulation in areas such as taxation and privacy.

        In addition, ICANN has established policies and practices for itself and the companies it accredits to act as domain name registries and registrars. Some of ICANN's policies and practices, and the policies and practices adopted by registries and registrars in the domain name business, could be found to conflict with the laws of one or more jurisdictions.

        If any of these risks occur they could create instability in the domain name registration system business. These risks could also disrupt or suspend portions of Tucows' domain name registration business, which would result in reduced revenue.

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Tucows may not be able to maintain or improve its competitive position, and may be forced to reduce its prices, because of strong competition from VeriSign and other competitive registrars.

        Before the introduction of competition into the domain name registration industry in 1999, Network Solutions was the only entity authorized by the U.S. government to serve as the registrar for domain names in the .com, .net and .org domains. This position allowed Network Solutions to develop a substantial customer base, which gives it advantages in securing customer renewals and in developing and marketing ancillary products and services. On June 9, 2000, VeriSign, a provider of Internet trust services, acquired Network Solutions. The acquisition of Network Solutions by VeriSign has facilitated cross-marketing between the two companies and has strengthened VeriSign's competitive advantage by enabling it to couple registration services with an expanded range of products and services.

        Tucows faces significant competition from VeriSign as Tucows seeks to increase its revenue from domain name registration services. Tucows also faces competition from the continued introduction of registrars into the domain name registration industry. As of December 31, 2002, ICANN had accredited 163 competitive registrars, including Tucows, to register domain names in one or more of the gTLDs, though not all of these accredited registrars are operational. The continued introduction of competitive registrars and resellers into the domain name registration industry and the rapid growth of some competitive registrars and resellers who have already entered the industry may make it difficult for Tucows to maintain its current market share. Some of these registrars may have longer operating histories, greater name recognition, particularly in international markets, or greater resources than Tucows. Tucows expects that competition will increase in the near term and that its primary long-term competitors may not yet have entered the market. As a result, Tucows may not be able to compete effectively.

        In response to increasing competition in the domain name registration industry, Tucows may be required to reduce the prices it charges for its core domain name registration business. The VeriSign registry charges registrars who use its shared registration system $6 for each registration, which most users, including Tucows, pass on to their customers. Some of Tucows' competitors offer registration services at a price level minimally above the $6 VeriSign registry fee for each domain name registered in the .com, .net and .org registry. Other competitors, including VeriSign, have reduced and may continue to reduce their pricing for domain name registrations both for short-term promotions and on a permanent basis. Some of Tucows' competitors have also offered domain name registrations free in a bundle of other products, deriving their revenues from other products and services. Although Tucows offers discounts and rebates based on volume or participation in other programs Tucows offers, Tucows does not presently intend to reduce its prices. If Tucows should reduce prices in order to remain competitive, Tucows' revenues may decline.

If the growth rate of the market for new domain names continues to fall, Tucows' net revenue from registrations may fall below anticipated levels.

        The .com, .net and .org domain name markets are now stabilizing and Tucows does not expect these markets to continue to experience the same high level of growth they have experienced in the past. The VeriSign registry has reported a decline in the number of registrations starting in the third quarter of 2000.

        In 2002, the VeriSign registry recorded approximately 10.6 million new registrations compared to 10.8 million new registrations during 2001, reflecting the slow-down in the growth and expansion of the Internet market for new domain names.

        The renewal and transfer of existing domain registrations as a proportion of the total domain name market has increased and is expected to increase further in 2003. The VeriSign registry reported approximately 14.5 million renewals and transfers for 2002, up from approximately 11.1 million for 2001.

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        A continuing decline in the market for new domain names would restrict the growth of Tucows' domain name registration business and its revenues may decline.

The introduction of new generic top level domains may cause significant fluctuations in Tucows' financial results and may make it difficult to predict future performance.

        Tucows anticipates significant demand with the introduction of each new generic top level domain as individuals and companies seek to protect their intellectual property and attempt to register names that have already been claimed in the existing registries. The numbers of new registrations will likely increase and then plateau which will have a corresponding impact on Tucows' net revenues. As a result, Tucows' operating results may fluctuate in the future. If Tucows incurs expenses associated with the introduction of the new generic top level domains and is not able to recover its costs, Tucows' revenues may decline.

If Tucows' MSPs do not renew their domain name registrations through Tucows, its revenues may decline.

        The growth of Tucows' business depends in part on its MSPs' renewal of their domain name registrations through Tucows. The first expirations for .com, .net and .org domain names occurred in January 2001, and Tucows has limited experience with registration renewals for generic top level and country code domain names.

        Tucows also anticipates that its renewal rates will be affected by the high number of registrations that occurred during the initial growth stage of the domain name industry in 2000 by speculators who registered domain names with the intention of reselling them rather than putting them to use and who may not renew a significant portion of the names they registered.

        If MSPs decide, for any reason, not to renew their registrations through Tucows, revenues from domain name registrations will decrease.

Tucows' revenue from domain name registration services is likely to decline if the administration and operation of the Internet no longer relies upon the existing domain name system or if VeriSign's shared registration system no longer functions.

        Future developments in the domain name registration industry may include changes in the administration or operation of the Internet, including the creation and institution of alternative systems for directing Internet traffic without the use of the existing domain name system. Some of Tucows' competitors have begun registering domain names with extensions that rely on these alternative systems. These competitors are not subject to ICANN accreditation requirements and restrictions. The widespread acceptance of any alternate systems could eliminate the need to register a domain name to establish an on-line presence and reduce Tucows' revenues from domain name registrations.

        The success of Tucows' business as a competitive registrar depends upon the continued availability and functionality of the shared registration system, which is maintained by VeriSign. Because the shared registration system has been in general use only since 1999, Tucows cannot assure you that the system will be able to handle the growing traffic caused by the increasing number of registrars or registrations.

        Tucows' ability to provide domain name registration services in the .com, .net and .org domains would be materially harmed, and its revenue from those services would decline, upon any failure of the shared registration system.

Tucows relies on its network of MSPs to distribute its applications and services, and if Tucows is unable to maintain these relationships or establish new relationships, its revenue may decline.

        Tucows obtains revenues by distributing applications and services through its network of MSPs.

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        Tucows also relies on its MSPs to market, promote and sell its services. Tucows' ability to increase revenues in the future will depend significantly on its ability to maintain its customer network, to sell more services through existing MSPs and to develop its relationships with existing MSPs by providing customer and sales support and additional products. MSPs have no obligations to distribute Tucows' applications and services and may stop doing so at any time. If Tucows is not able to maintain its relationships with MSPs, its ability to distribute its applications and services will be harmed, and its revenue may decline.

        If Tucows MSPs should choose to become accredited registrars and choose not to utilize Tucows' hosted registrar service, Tucows' revenues could decline.

A significant portion of Tucows' cash revenues is obtained from a limited number of MSPs, and the loss of any major customers could cause Tucows' cash revenues to decline.

        While no customer accounted for more than 10% of Tucows cash revenues in 2002, approximately 100 MSPs account for approximately 50% of Tucows' transaction volume and cash revenues. Tucows does not expect any customer to account for more than 10% of cash revenues in 2003. If Tucows loses and is unable to replace any major customers, Tucows' cash revenues will decline.

Failure by Tucows to secure agreements with country code registries or a subsequent failure by Tucows to comply with the regulations of the country code registries could cause customers to seek a registrar that offers these services.

        The country code registries require registrars to comply with specific regulations. Many of these regulations vary from country code to country code.

        If Tucows fails to comply with the regulations imposed by country code registries, these registries will likely prohibit Tucows from registering or continuing to register names in their country codes. Any failure on Tucows' part to offer domain name registrations in a significant number of country codes, or in a popular country code would cause Tucows to lose a competitive advantage and could cause MSPs to elect to take their business to a registrar that offers these services.

Tucows operates on a global basis, and clients around the world are required to execute its standard form agreements. Tucows' standard domain name registration agreement may not be enforceable, which could subject Tucows to liability.

        All of Tucows' MSPs must execute Tucows' standard domain name registration agreement as part of the process of registering a domain name. This agreement contains provisions intended to limit Tucows' potential liability arising from its registration of domain names on behalf of its MSPs and their customers, including liability resulting from its failure to register or maintain domain names. If a court were to find that the registration agreement is unenforceable, Tucows could be subject to liability.

Currency fluctuations may adversely affect Tucows.

        Tucows revenue is primarily realized in United States dollars and a significant portion of Tucows' operating expenses is paid in Canadian dollars. Fluctuations in the exchange rate between the United States dollar and the Canadian dollar may have a material effect on Tucows' business, financial condition, and results from operations. In particular, Tucows may be adversely affected by a significant weakening of the United States dollar against the Canadian dollar. Tucows' policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements by entering into foreign exchange forward contracts to hedge a portion of its Canadian dollar exposure. At December 31, 2002, Tucows had $9.0 million in notional forward foreign exchange contracts to convert

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U.S. dollars into Canadian dollars at an average rate of 1.543 which expire on various dates to December 31, 2003.

Tucows depends on third parties for free and low cost web-based content.

        Tucows accesses and provides web-based content for certain of its content notification and other sites. Tucows accesses this content mainly by searching selected web sites and then providing links to relevant content from the individual sites. Usually, Tucows pays no fee, or a small fee, for accessing web-based content in this manner. Tucows' ability to continue to use web-based content in this manner without cost, or for small fees, is fundamental to its goal of providing free, or low cost, content notification sites.

Tucows may be subject to government regulation and legal liabilities which may be costly and may interfere with its ability to conduct business.

        Tucows is not subject to direct regulation by any United States or state government agency other than the laws and regulations applicable to businesses generally. There are few laws or regulations directly applicable to access to or commerce on the Internet. Tucows believes these laws and regulations do not seriously affect its operations and that it is materially in compliance with them.

        Although transmission of Tucows' sites primarily originates in Canada and the United States, the Internet is global in nature. Governments of foreign countries might try to regulate Tucows' transmissions or prosecute it for violations of their laws. Because of the increasing popularity and use of the Internet, federal, state and foreign governments may adopt laws or regulations in the future concerning commercial online services and the Internet, about:

•

user privacy;



•

children;



•

copyrights and other intellectual property rights and infringement;



•

domain names;



•

pricing;



•

content regulation;



•

defamation;



•

taxation; and



•

the characteristics and quality of products and services.

        Laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent. Laws and regulations such as those listed above or others could expose Tucows to substantial liability, if enacted, and increase its costs of compliance and doing business.

Current economic trends and the events of and following September 11, 2001 may have a negative impact on Tucows' sales.

        Tucows' sales are subject to risks arising from adverse changes in domestic and global economic conditions and fluctuations in consumer confidence and spending. As a result, Tucows' sales may decline as a result of factors beyond its control, such as war and terrorism. Although the North American markets suffered a general slowdown prior to the events of September 11, 2001, this slowdown was more pronounced thereafter and may worsen depending upon future events occurring in response to the terrorist attacks on the World Trade Center. These events include ongoing armed

22

conflicts and retaliatory terrorist attacks. Any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the global markets and economy. If the current economic slowdown continues or worsens or if any of the foregoing events occur, Tucows' sales may decline and its business may be adversely affected.

Tucows may be unable to respond to the rapid technological changes in the industry, and its attempts to respond may require significant capital expenditures.

        The Internet and electronic commerce are characterized by rapid technological change. Sudden changes in user and customer requirements and preferences, the frequent introduction of new applications and services embodying new technologies and the emergence of new industry standards and practices could make obsolete the applications, services and systems offered by Tucows. The emerging nature of applications and services in the e-business industry and their rapid evolution will require that Tucows continually improves the performance, features and reliability of its applications and services. The success of Tucows will depend, in part, on its ability:

•

to develop and license new applications, services and technologies that address the increasingly sophisticated and varied needs of its current and prospective customers; and



•

to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

        The development of applications and services and other proprietary technology involves significant technological and business risks and requires substantial expenditures and lead-time. Tucows may be unable to use new technologies effectively or adapt its internally developed technology and transaction-processing systems to customer requirements or emerging industry standards. Updating technology internally and licensing new technology from third parties may require Tucows to incur significant additional capital expenditures.

If Internet usage does not grow or if the Internet does not continue to expand as a medium for commerce, Tucows' business may suffer.

        Tucows' success depends upon the continued development and acceptance of the Internet as a widely used medium for commerce and communication. Rapid growth in the uses of and interest in the Internet is a relatively recent phenomenon and its continued growth cannot be assured. A number of factors could prevent continued growth, development and acceptance, including:

•

the unwillingness of companies and consumers to shift their purchasing from traditional vendors to online vendors;



•

the Internet infrastructure may not be able to support the demands placed on it, and its performance and reliability may decline as usage grows;



•

security and authentication issues may create concerns with respect to the transmission over the Internet of confidential information, such as credit card numbers, and attempts by unauthorized computer users, so-called hackers, to penetrate online security systems; and



•

privacy concerns, including those related to the ability of web sites to gather user information without the user's knowledge or consent, may impact consumers' willingness to interact online.

        Any of these issues could slow the growth of the Internet, which could limit Tucows' growth and revenues.

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Claims of infringement of intellectual property or other rights of third parties against Tucows could result in substantial costs.

        Third parties may assert claims of infringement of patents or other intellectual property rights against Tucows concerning past, current or future technologies.

        Content obtained from third parties and distributed over the Internet by Tucows may result in liability for defamation, negligence, intellectual property infringement, product or service liability and dissemination of computer viruses or other disruptive problems. Tucows may also be subject to claims from third parties asserting trademark infringement, unfair competition and violation of publicity and privacy rights relating specifically to domain names. These claims may include claims under the Anti-cybersquatting Consumer Protection Act, which was enacted to curtail the registration of a domain name that is identical or similar to another party's trademark or the name of a living person with the bad faith intent to profit from use of the domain name.

        These claims and any resultant litigation could result in significant costs of defense, liability for damages and diversion of management's time and attention. Any claims from third parties may also result in limitations on the ability of Tucows to use the intellectual property subject to these claims unless it is able to enter into agreements with the third parties making these claims. If a successful claim of infringement is brought against Tucows and it fails to develop non-infringing technology or to license the infringed or similar technology on a timely basis, it may have to limit or discontinue the business operations which used the infringing technology.

        Tucows relies on technologies licensed from other parties. These third-party technology licenses may infringe on the proprietary rights of others and may not continue to be available on commercially reasonable terms, if at all. The loss of this technology could require Tucows to obtain substitute technology of lower quality or performance standards or at greater cost, which could make its products and services less attractive to customers or increase its costs.

If Tucows fails to protect its proprietary rights, the value of those rights could be diminished.

        Tucows relies upon copyright, trade secret and trademark law, confidentiality and nondisclosure agreements, invention assignment agreements and work for hire agreements to protect its proprietary technology. Tucows owns seven United States patents and has two pending United States patent applications. Tucows cannot ensure that its efforts to protect its proprietary information will be adequate to protect against infringement and misappropriation by third parties, particularly in foreign countries where laws or law enforcement practices may not protect proprietary rights as fully as in the United States.

        Tucows has licensed, and may in the future license, some of its trademarks and other proprietary rights to others. Third parties may also reproduce or use intellectual property rights of Tucows without seeking a license and thus benefit from the technology of Tucows without paying for it. Third parties could also independently develop technology, processes or other intellectual property that are similar to or superior to those used by Tucows. Actions by licensees, misappropriation of the intellectual property rights or independent development by others of similar or superior technology might diminish the value of the proprietary rights of Tucows or damage the reputation of Tucows.

        The unauthorized reproduction or other misappropriation of Tucows' intellectual property rights, including copying the look, feel and functionality of its web site could enable third parties to benefit from Tucows' technology without Tucows receiving any compensation.

        Once any infringement is detected, disputes concerning the ownership or rights to use intellectual property could be costly and time-consuming to litigate, may distract management from operating the

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business and may result in Tucows losing significant rights and its ability to operate all or a portion of its business.

Tucows depends on key personnel to manage its business effectively.

        Tucows depends on the performance of its senior management team and other key employees. Tucows' success will also depend on its ability to attract, integrate, train, retain and motivate these individuals and additional highly skilled technical and sales and marketing personnel. In addition, Tucows does not maintain key person life insurance for any of its officers or key employees. The loss of the services of any of Tucows' senior management team or other key employees or failure to attract, integrate, train, retain and motivate additional key employees could harm Tucows' business.

Tucows could suffer uninsured losses.

        Although Tucows maintains general liability insurance, claims could exceed the coverage obtained or might not be covered by Tucows' insurance. While Tucows typically obtains representations from its technology and content providers and contractual partners concerning the ownership of licensed technology and informational content and obtains indemnification to cover any breach of these representations, Tucows still may not receive accurate representations or adequate compensation for any breach of these representations. Tucows may have to pay a substantial amount of money for claims which are not covered by insurance or indemnification or for claims where the existing scope or adequacy of insurance or indemnification is disputed or insufficient.

Tucows could experience system failures and capacity constraints which would cause interruptions in its services and ultimately cause it to lose customers.

        The ability of Tucows to maintain its computer hardware and software and telecommunications equipment in working order and to reasonably protect them from error and interruption is critical to its success. Failures and interruptions of, and the slowing of response times on, these systems could be caused by:

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an increase in the traffic on Tucows' web sites without any necessary increase in system capacity;



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natural disasters, power losses, telecommunications failures, break-ins and similar events;



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computer viruses and electronic break-ins;



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errors, defects and bugs in software; and



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failure or inability to upgrade technical infrastructure to handle unexpected surges in customer levels and increases in customers' usage of bandwidth.

        Tucows' web site has experienced slower response times because of increased traffic and has occasionally suffered failures of the computer hardware and software and telecommunications systems that it uses to deliver its sites to customers. Substantial or persistent system failures could result in:

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loss of customers;



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loss of or delay in revenue; and



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failure to attract new customers or achieve market acceptance.

Tucows' systems face security risks, and any compromise of the security of these systems could result in liability for damages and in lost customers.

        Tucows' security systems may be vulnerable to unauthorized access by hackers or others, computer viruses and other disruptive problems. Someone who is able to circumvent security measures could

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misappropriate customer or proprietary information or cause interruptions in Internet operations. Internet and online service providers have in the past experienced, and may in the future experience, interruptions in service because of the accidental or intentional actions of Internet users, current and former employees or others. Tucows may need to expend significant capital or other resources to protect against the threat of security breaches or alleviate problems caused by breaches. Unauthorized persons may be able to circumvent the measures that are implemented in the future. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to users accessing Tucows' web sites and the web pages that deliver Tucows' content services. Repeated or substantial interruptions could result in the loss of customers and reduced revenues.

        Many users of online commerce services are highly concerned about the security of transmissions over public networks. Concerns over security and the privacy of users may inhibit the growth of the Internet and other online services generally, and the web in particular, especially as a means of conducting commercial transactions. Users might circumvent the measures Tucows takes to protect customers' private and confidential information, such as credit card numbers. Security breaches could damage Tucows' reputation and expose it to litigation and possible liability, including claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims and for other misuses of personal information, including for unauthorized marketing purposes. Tucows may also incur significant costs to protect against security breaches or to alleviate problems caused by these breaches.

Tucows' Web Site

        Tucows' address on the World Wide Web is www.tucows.com. Tucows makes its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports and other documents, filed with the SEC available free of charge, on its web site, as soon as reasonably practicable after such materials are electronically filed with the SEC.