ITEM 1. BUSINESS

Overview

        Tucows provides Internet services and digital software content to end-users worldwide through a global Internet-based distribution network of more than 6,000 Service Providers in over 100 countries. Tucows is an accredited registrar with the Internet Corporation for Assigned Names and Numbers, generally known as ICANN, and generates revenue primarily through the provision of domain name registration and other Internet services to Service Providers who offer such services to their own customers. These Service Providers are a heterogeneous group of companies, including Internet Service Providers, web hosting providers and telecommunications and cable companies (collectively referred to as "Service Providers") that typically provide a critical component of an end-user's Internet presence and have a very high level of interaction with the end-user. In addition to domain name registration services, Tucows currently provides Service Providers with security and identity services (through digital certificates), billing services, billing, provisioning and customer care software solutions, email services, managed Domain Name Services, or DNS, blogware and website building tools, and plans to introduce a number of additional Internet services in the future. Tucows primarily distributes its services to Service Providers using its Open Shared Reseller System, or "OpenSRS" platform, which provides the technical infrastructure that allows Service Providers to register and manage the provisioning of Tucows' services to their end-users. Tucows provides services for Service Providers to either consume directly or bundle and resell to end users. This allows Service Providers to deal directly with their own end-user customers. By using Tucows' services, Service Providers are able to avoid the costs and complexities of building in-house systems and to focus on their customer acquisition and retention strategies. Registrars who do not want to incur the costs and complexities of building and maintaining their own platforms

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utilize Tucows' Open Hosted Reseller System, or "OpenHRS," platform to provision Tucows' services to their end-users.

        Tucows' goal is to leverage its global distribution channel, its expanding line of service offerings and its reputation for exemplary customer service and support to become the preferred supplier of a broad range of Internet services to the Service Provider channel on a global basis.

        In addition to generating revenue through the provision of domain name registration and other Internet services, Tucows generates advertising and other revenue through its online libraries of shareware, freeware and online services available at its web site www.tucows.com. Advertising revenue is generated from third party advertisers and from software developers who rely on Tucows as a primary source of distribution. Software developers use Tucows' Author Resource Center to submit their products for inclusion in the Tucows libraries and to purchase promotional placement of their software in the library categories as well as other promotional services on a cost per click or flat rate basis. The libraries are available to end-users around the world via Tucows' Internet facilities and via a global network of Internet service companies who elect to mirror the Tucows libraries locally. Tucows also generates revenue from companies who contract with it to provide them with co-branded content.

Industry Background

Emergence of the Internet 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 its extensive reach has created a powerful channel for conducting commerce, marketing and advertising. This growth of Internet usage in general, and, specifically, for electronic commerce ("e-commerce" or "e-business") provides significant opportunities for organizations of all types and sizes to improve operational efficiencies and generate additional revenues through the use of Internet channels. The Internet has also 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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email and other advanced messaging, or groupware, applications; and



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e-commerce enabling applications.

        Tucows refers to businesses that provide these applications and services as Service Providers. 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 Service Providers, who facilitate domain name registrations in.com,.net,.org,.info,.biz,.name and country code domains;



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value-added Service Providers 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.

        Service Providers 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. Service Providers tend to specialize in one particular application or service. Once a Service Provider 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 Service Providers 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 Service Providers and end-users, increases the costs of switching to another Service Provider and leads to increased revenues per end-user. The relationship between Service Providers and end-users typically involves the payment of recurring fees, which we believe results in end-users being more receptive to purchasing additional applications and services.

Trend Towards Outsourcing

        While Service Providers 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 Service Providers offering similar applications and services. This has led to a greater focus on core competencies, as Service Providers are increasingly seeking to outsource non-core applications and services that they provide to their end-users. Outsourcing enables these Service Providers to focus better 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 comprised of two principal components: the registry and the registrar. The registry maintains the database that contains the domain names registered in the top level domains, or "TLDs", 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 from which Tucows is currently accepting registrations are.com,.net,.org,.info,.biz and.name.

        There are over 300 different ccTLDs, 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 is no international uniformity.

        From January 1993 until April 1999, Network Solutions (which was acquired by VeriSign, Inc. ("VeriSign") in June 2000) was the sole entity authorized by the U.S. government to act as registrar

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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 November 2003, VeriSign sold its Network Solutions domain name registrar business to the Pivotal Private Equity Group.

        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 the Internet Corporation for Assigned Names and Numbers, generally known as 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 2005, there were 464 ICANN-accredited registrars.

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 Service Providers 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 of and convergence to the Internet and the development of the domain name registration industry, including the introduction of new gTLDs. Tucows believes that this growth will be driven primarily by:

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Individuals. As more people 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 e-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 to grow; 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 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 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 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.

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The Need for a Dedicated Outsourcing Solution

        Offering e-business applications and services such as domain name registration is a complex technological challenge. Historically, Service Providers 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 Service Providers 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 more than 6,000 Service Providers in over 100 countries. Tucows' services are designed to allow Service Providers to:

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provide a higher level of customer service and performance,



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enhance revenue per customer through offering additional products and services,



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avoid the costs and complexities of building in-house systems, and



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focus on their customer acquisition and retention strategies.

        Tucows believes that its services to Service Providers offer the following benefits:

An Attractive Outsourcing Proposition

        Applications and services distributed by Tucows allow its Service Providers to focus on customer acquisition and retention while avoiding the expenditure of capital and human resources to develop, implement and maintain hardware and software systems extraneous to their core businesses. Tucows' services simplify product integration and administration for its Service Providers and provide them with economically feasible applications. Tucows provides domain name registration services, digital certificates and other Internet services on a generic basis that allows its Service Providers to private label these services and interact directly with their clientele, thus strengthening the Service Providers relationships and enhancing the Service Providers brand. Tucows also acts as the technical and administrative intermediary with domain regulators and provides input on domain policy on behalf of its Service Providers.

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

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source code, distribute and retain legal rights to any modifications. The open source methodology provides the following benefits to Tucows and its Service Providers:

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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 Service Providers

        Tucows focuses on the challenges facing Service Providers 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 Service Providers' 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 Service Providers located in over 100 countries.

Tucows' Strategy

        Tucows' objective is to leverage its global sales and distribution channel, its expanding line of service offerings and its reputation for exemplary customer service and support to become the preferred supplier of a broad range of Internet services to the Service Provider channel on a global basis. 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 Service Providers on a wholesale, or private label, basis. Tucows believes that its Service Provider customers view Tucows as a partner, rather than as a competitor, for providing applications and services to end-users. Tucows focuses on addressing its Service Provider customers' technical requirements and business objectives and on providing applications and services that Service Providers require to grow their businesses. Tucows is dedicated to providing a high degree of flexibility to its Service Providers' 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 Service Providers' 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.

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Continue to Use Network Effects

        Tucows believes that the growth of its customer base and the growth of the range of applications and services it distributes will be interrelated. As the number of Service Providers 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 Service Providers to become part of the Tucows network.

Capitalize on Additional Revenue Opportunities

        By increasing the number of applications and services Tucows offers, the usability of each of those services and by promoting them to its Service Providers, Tucows believes that it will be able to generate higher revenues from its customers. In addition to domain name registration services, Tucows currently provides Service Providers with security and identity services (through digital certificates), billing services, billing, provisioning and customer care software solutions, email services, managed Domain Name Services, or DNS, blogware and website building tools. Tucows also provides Service Providers with advertising and other sources of revenue through its online libraries of shareware, freeware and online services. Tucows intends to offer, generally on an outsourced, private label basis from one integrated interface, a number of additional Internet services in the future, including:

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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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Services ancillary to domain name registrations. Tucows believes that the acquisition, use and management of domain names is evolving over time, leading to demand for additional services that allow users to take advantage of changes in the marketplace;



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Continued evolution of Tucows' messaging services, publishing services and security services; and



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Billing services, including payment processing, allowing Tucows' Service Providers to receive and report on money from end-users in a much more seamless fashion, especially internationally.

        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 Tucows' Service Providers 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 has also entered into a strategic relationship with Stalker Software Inc. and licensed Stalker's Communigate Pro software to provide private labeled email services to Service Providers. MXLogic, Inc. is Tucows' technical partner in its email defense offering. Tucows has also recently entered into an agreement with Akmin Technologies PVT LTD, which enables Tucows' Service Providers to offer website building tools to their end users.

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Tucows' Products and Services

        Tucows offers its applications and services to its network of Service Providers and directly to end-users. Tucows principal applications and services include domain name registration services, digital certificates, billing services, billing, provisioning and customer care software solutions, email services, managed Domain Name Services, or DNS, blogware, website building tools [ and advertising and other revenue through its online libraries of shareware, freeware and online services. 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 gTLDs and ccTLDs. Key components of Tucows' domain name registration services include:

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OpenSRS. Tucows' wholesale service is designed to enable Service Providers 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 email addresses, domain forwarding, domain marketing, blogware 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' Service Providers 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 its Service Providers 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.

Website Builder

        Tucows' website builder tool allows novice end users to create a professional looking website using an easy to use template based tool. Tucows manages the infrastructure allowing its Service Providers to present a private labeled product to their end user customers without overhead expenses.

Blogware

        This product, built by Tucows, allows users to build their own "journal" website. Tucows manages the infrastructure allowing its Service Providers to present a private labeled product to their end user customers without overhead expenses.

Email

        Tucows email service is a Tucows hosted service that provides mailboxes which support POP, IMAP, SMTP and web-mail. Web-mail includes support for groupware functionality including shared

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calendaring, tasks, notes and mailboxes. An email forwarding service is also provided. Tucows offers these services exclusively to its Service Providers on a private label basis so that they may involve their brands in selling email services to their end user customers.

Email Defense

        The email defense service is a Tucows hosted service that provides spam, virus, content and attachment filtering, as well as attack prevention. Tucows offers these services exclusively to its Service Providers on a private label basis, with optional MX Logic co-branding, in order that the Service Provider may feature its own brands in selling email defense services to their end user customers.

Managed DNS

        Tucows hosted DNS provides domains with DNS services, domain and sub-domain forwarding, "domain under construction" and "domain for sale" pages. The managed DNS service includes real-time zone record updates and full Service Provider and administrator management functionality. Tucows offers these services exclusively to its Service Providers on a private label basis in order that that they may feature their brands in selling the managed DNS service to their end user customers.

Billing services, billing, provisioning and customer care solutions

        Platypus Billing System is a complete turnkey back-office solution for ISPs, ASPs, webhosting companies and other companies that provide recurring services. Platypus handles billing, service provisioning, and customer account management. Web tools are provided so that customers can manage their customer accounts online.

        Wombat Help Desk System+ is a Platypus-integrated Help Desk solution that provides total accountability for customer care needs. Wombat automatically routes, tracks and maintains customer care email and phone calls for optimal service desk performance.

        The Tucows Printing Service is an outsourced statement printing service offering Platypus Billing System users statement printing, folding, stuffing and postage metering services.

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, Macintosh, Linux, PDAs, Mobile/Cellular, or Online Services. The main libraries contain a total of over 40,000 titles. Each software title in Tucows' library is reviewed and virus-tested. Most titles are then rated on a scale of three to five. Revenue is produced from the Tucows web site through advertising and co-branding agreements. No barter transactions were undertaken during the year ended December 31, 2004.



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Tucows' accelerated content delivery network, which sends Tucows' software and digital content libraries to its Service Providers' networks, which are the initial access points where their end-users connect to the Internet. Tucows has entered into relationships with over 400 partners around the world, hosting over 1,000 sites. 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 Service Providers' local networks conserves Internet bandwidth and reduces the Service Providers'

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bandwidth costs. Because traffic from the subscriber base remains local to the Service Providers' network, customers receive a faster download.

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Flexibility and Customization. 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.



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Tucows' Rating System. Each software title offered by Tucows is reviewed by Tucows' editorial staff, allowing Service Providers' 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 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 Service Providers. Tucows also provides its Service Providers with technical advice to help them understand how Tucows' applications and services can be customized for their particular needs. Service Providers may contact Tucows by email or through Tucows' toll-free telephone number. A library of frequently asked questions and answers is made available to all Service Providers 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 Service Providers. 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 Service Providers. Problems that are raised 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 provides the technical infrastructure that allows its Service Providers to provide Internet services to their customers without having to make substantial investments in their own software or hardware. In 2000, Tucows used the OpenSRS platform primarily to provide 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 provide additional Internet services such as

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security and identity products, billing services, billing, provisioning and customer care software solutions, email services, managed Domain Name Services, or DNS, blogware and website building tools. In addition, Tucows extends the functionality 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' Service Providers. This is the component of the platform through which all Service Providers provide services and complete transactions. It allows Service Providers and their customers to add, delete, change and transfer domain names and other Internet services in an automated fashion.

The OpenSRS server also provides Tucows' Service Providers 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' Service Providers through the Internet and enable them to monitor domain name registrations as they occur, and perform other administrative functions. The tools also allow Tucows' Service Providers to efficiently manage a large number of domain names belonging to a single registrant. For example, the administrative contact for a large number of domain names 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. Service Providers access the OpenSRS server either through a web interface, through the Application Program Interface, or "API," or by running the open source Tucows client code on their servers. The end-user accesses the Service Providers' systems, which then uses one of the above methods, to interface with Tucows OpenSRS to complete the transaction. The client-server environment allows Service Providers and registrants to add, renew, transfer and manage the domain names they own. In addition, Service Providers can also perform administration and reporting for all domain names that were registered through them. Detailed reporting is available for the Service Providers to efficiently manage their portfolio and the open source nature of the OpenSRS client allows Service Providers to easily integrate the client code into their billing, payment and other administrative systems.

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 Service Providers 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 Service Providers customers with fresher content. As of December 31, 2004, Tucows' network reached over 1,000 sites in over 100 countries.

Competition

        The market for Internet services, including domain name registrations, billing software and services, digital certificates, messaging, publishing, software and content distribution, 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 Service Providers;

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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' Service Providers for end-users;



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providers of billing software and services to telecommunications companies and Service Providers, such as Portal Software and Rodopi;



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providers of messaging services to Service Providers, such as Postini, Everyone.net and Critical Path;



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providers of publishing services to Service Providers, such as Six Apart and CM4All; and



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providers of software downloads and other open source related content, such as CNET.

        Tucows expects to continue 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, Internet portals, web hosting companies, email 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 Service Providers to choose the application that best suit their end-users' needs;



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enabling Service Providers to better manage 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.

        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 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

        Under a 1993 cooperative agreement with the U.S. Department of Commerce, Network Solutions 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

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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:

•

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



•

since December 1, 1999, Tucows has required its Service Providers 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 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

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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.

        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, 2004, Tucows had approximately 160 full time employees. None of Tucows' employees are currently represented by a labor union. Tucows considers its relations with its employees to be good.

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         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.

         David Woroch has served as Tucows' vice president, sales since July 2001. From March 2000 to July 2001, Mr. Woroch served as Tucows' director of sales for North America. Before joining Tucows, Mr. Woroch spent 13 years at IBM Canada in a variety of roles including sales, marketing, finance and strategic planning.

        The executive officers are elected or appointed by Tucows' board of directors to serve until the election or appointment and qualification of their successors or their earlier death, resignation or removal.

RISK FACTORS

         Tucows' business faces significant risks. Some of the following risks relate principally to Tucows' business and the industry and statutory and regulatory environment in which Tucows operates. Other risks relate principally to the securities markets and ownership of Tucows stock. 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 risk factors actually occur, Tucows' business, financial condition or results of operations could suffer, and the trading price of its common stock could decline.

Risks Related to Tucows' Business and Industry

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 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. In addition to Network Solutions, Tucows faces significant competition from other existing registrars and the continued introduction of new registrars in the domain name registration industry. As of December 31, 2004, ICANN had accredited 360 competitive registrars, including Tucows, to register domain names in one or more of the generic top level domains or "gTLD's," though not all of these accredited registrars are operational. The continued introduction of competitive registrars and Service Providers into the domain name registration industry and the rapid growth of some competitive registrars and Service Providers 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.

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        The market for domain name registrations continues to be extremely competitive as participants strive to protect their current market share and improve their competitive position. VeriSign Global Registry Services 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 registry and the ICANN fees for each domain name registered in the.com and.net registry. Other competitors have reduced and may continue to reduce their pricing for domain name registrations both for short-term promotions and on a permanent basis. Tucows' competitors have also offered domain name registrations free in a bundle of other products, deriving their revenues from other products and services. In addition, some of these competitors have experienced a significant increase in their registrations, suggesting that customers are becoming more price sensitive.

        As Tucows' business model is premised upon selling multiple services through its Service Provider channel, Tucows has competed aggressively to attract new clients and retain existing customers. As a result of these actions, Tucows' average selling prices have fallen and Tucows may be required, by marketplace factors or otherwise, to reduce, perhaps significantly, the prices it charges for its core domain name registration and related products and services, especially if its competitors who charge these reduced fees are able to maintain customer service comparable to Tucows. Given the volatile nature of this marketplace, it is difficult to predict whether Tucows' average selling prices will continue to decline. If Tucows continues to reduce its prices in order to remain competitive, this could materially adversely affect Tucows' business, financial position and results of operations.

Each registry and the ICANN regulatory body imposes a charge upon the registrar for the administration of each domain name registration. If these fees increase, they may have an impact upon Tucows' profits.

        At present, the VeriSign registry charges a $6 fee in association with the registration of each domain name. ICANN has recently imposed a $0.25 charge for each domain name registered in the TLDs that fall within its purview. Tucows has no control over these agencies and cannot predict when they may increase their respective fees. Any increase in the fees must either be included in the prices Tucows charges to its Service Providers or it must be imposed as a surcharge. If Tucows absorbs such cost increases or if surcharges act as a deterrent to registration, Tucows may find that its profits are adversely impacted by these third party fees.

If the growth rate of the market for new domain names becomes flat or declines, Tucows' net revenue from registrations may fall below anticipated levels.

        Demand for renewals and new registrations under.com,.net,.org and other top-level domains increased in 2004. According to VeriSign, the total number of registrations under.com and.net grew by 5.1 million in the third quarter of 2004, representing the highest quarterly growth in Internet history. Notwithstanding the recent increase in registrations, Tucows expects the market to continue to grow but does not expect demand for new domain name registrations to return to the high levels experienced in 2000 and 2001. If the market for new domain name registrations becomes flat or declines, it would restrict the growth of Tucows' domain name registration business and Tucows' revenues may decline.

If Tucows is unable to protect its market share or improve its competitive position by maintaining or increasing the renewal of domain name registrations, its business, financial condition and results of operations could be materially adversely affected.

        Tucows competes aggressively to attract new clients and retain existing customers to protect its current market share and improve its competitive position. These actions have resulted in Tucows average selling price declining, which has partially offset the impact of the increased transaction volume on Tucows revenue and profitability. Tucows may face continued pricing pressure in order to remain

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competitive, which would adversely impact its revenues and profitability. Tucows increased its renewal rate for domain name registrations to approximately 65% for the year ended December 31, 2004. While Tucows anticipates the number of new, renewed and transferred-in domain name registrations will incrementally increase, volatility in the market could result in Tucows' customers turning to other registrars or could affect the average selling price Tucows receives, thereby thwarting growth in the number of domain names under Tucows' management.

If Tucows is unable to improve its sales of existing gTLDs, improve its renewal rate or generate alternate revenue streams, its business, financial condition and results of operations could be materially adversely affected.

        Although the overall number of registrations in each new gTLD that has been launched has been significantly lower than the number of.com registrations, the introduction of new gTLDs has contributed to Tucows' revenues. Tucows does not currently anticipate the introduction of any additional commercial gTLDs in the near future that would materially affect its revenues. As a result, in order to grow its revenues Tucows needs to increase sales of existing gTLDs, renewals, transfers or other products and services in lieu of the opportunities that were presented by the new gTLDs in 2001 and early 2002. Tucows' business and results of operations could be materially adversely affected if the market for existing gTLDs does not develop, additional new top level domains are not introduced or if substantial numbers of its customers turn to other registrars for their registration needs.

Tucows relies on its network of Service Providers to renew their domain name registrations through Tucows and to distribute its applications and services, and if Tucows is unable to maintain these relationships or establish new relationships, its revenue may decline.

        The growth of Tucows' business depends on, among other things, its Service Providers' renewal of their customers' domain name registrations through Tucows. Service Providers may choose to renew their domain names with other registrars or their registrants may choose not to renew and pay for renewal of their domain names. If Service Providers decide, for any reason, not to renew their registrations through Tucows, Tucows' revenues from domain name registrations will decrease.

If Tucows is unable to maintain its relationships with its Service Providers, its revenue may decline.

        Tucows obtains revenues by distributing applications and services through its network of Service Providers. Tucows also relies on its Service Providers 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 Service Providers and to develop its relationships with existing Service Providers by providing customer and sales support and additional products. Service Providers 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 Service Providers, its ability to distribute its applications and services will be harmed, and its revenue may decline.

Tucows believes that companies operating on the Internet are facing a period of consolidation. In addition, some of Tucows Service Providers may decide to seek ICANN accreditation. Both of these situations could reduce the number of Tucows active Service Providers, in which case its revenues may suffer.

        If any of Tucows competitors merge with one another they will present a stronger combined force in the market and may attract the business of both existing and prospective Service Providers. Service Providers may opt to build their own technical systems and seek ICANN accreditation in order that they may process domain name applications themselves. If a number of Tucows customers decide to pursue this option, Tucows sales will decrease.

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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 top-level domain (ccTLD) registries require registrars to comply with specific regulations. Many of these regulations vary from ccTLD to ccTLD. If Tucows fails to comply with the regulations imposed by ccTLD registries, these registries will likely prohibit Tucows from registering or continuing to register names in their ccTLD. Any failure on Tucows' part to offer domain name registrations in a significant number of ccTLDs or in a popular ccTLD would cause Tucows to lose a competitive advantage and could cause Service Providers to elect to take their business to a registrar that offers these services.

Tucows' standard domain name registration agreement may not be enforceable, which could subject Tucows to liability.

        Tucows operates on a global basis and all of Tucows' Service Providers 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 Service Providers and their customers, including liability resulting from its failure to register or maintain domain names. If a domestic, foreign or international court were to find that the registration agreement is unenforceable, Tucows could be subject to liability.

If Tucows cannot obtain or develop additional applications and services that are appealing to its customers, Tucows may remain dependent on domain name registrations as a primary source of revenue and its net revenues may fall below anticipated levels.

        A key part of Tucows' long-term strategy is to diversify its revenue base by offering its Service Providers additional value-added products and services that address their evolving business needs. Although Tucows has recently experienced increased sales for new products and services such as email and web certificates, its efforts to date have not resulted in substantial diversification. Tucows cannot be sure that it will be able to license new 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 Service Providers turn to alternate providers that are able to more fully supply their business needs.

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. If the market changes and owners begin to charge fees for access to material from their websites, Tucows will incur additional expenses to provide the service or it may decide that it should no longer provide the service.

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

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

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.

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The law relating to the liability of online services companies for data and content carried on or disseminated through their networks is currently unsettled and could expose Tucows to unforeseen liabilities.

        It is possible that claims could be made against online services companies under U.S. or foreign law for defamation, negligence, copyright or trademark infringement, or other theories based on data or content disseminated through their networks, even if a user independently originated this data or content. Several private lawsuits seeking to impose liability upon Internet service companies have been filed in U.S. and foreign courts. While the United States has passed laws protecting Internet Service Providers from liability for actions by independent users in limited circumstances, this protection may not apply in any particular case at issue. Tucows' ability to monitor, censor or otherwise restrict the types of data or content distributed through its network is limited. Failure to comply with any applicable laws or regulations in particular jurisdictions could result in fines, penalties or the suspension or termination of Tucows' services in these jurisdictions. Tucows' insurance may not be adequate to compensate or may not cover Tucows at all in the event it incurs liability for damages due to data and content carried on or disseminate through Tucows' network. Any costs not covered by insurance that are incurred as a result of this liability or alleged liability, including any damages awarded and costs of litigation, could harm Tucows' business and prospects.

Currency fluctuations may adversely affect Tucows.

        Tucows' revenue is primarily realized in U.S. dollars and a significant portion of Tucows' operating expenses is paid in Canadian dollars. Fluctuations in the exchange rate between the U.S. 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 U.S. dollar against the Canadian dollar on a quarterly and an annual basis. 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 mitigate the exchange risk on a portion of its Canadian dollar exposure. Tucows does not account for these instruments as hedges in its consolidated financial statements. At December 31, 2004, Tucows had $4.5 million in notional forward foreign exchange contracts to convert U.S. dollars into Canadian dollars at rates ranging between 1.2310 and 1.2311 which expire on various dates to March 23, 2005.

If Tucows does not maintain a low rate of credit card chargebacks, it will face the prospect of financial penalties and could lose its ability to accept credit card payments from customers, which would have a material adverse affect on Tucows' business, financial condition and results of operations.

        A substantial majority of Tucows' revenues originates from online credit card transactions. Under current credit card industry practices, Tucows is liable for fraudulent and disputed credit card transactions because Tucows does not obtain the cardholder's signature at the time of the transaction even though the financial institution issuing the credit card may have authorized the transaction. Under credit card association's rules, penalties may be imposed at the discretion of the association. Any such potential penalties would be imposed on Tucows' credit card processor by the association, and under Tucows' contract with its processor, Tucows is required to reimburse it for such penalties. Tucows' current level of fraud protection, based on its fraudulent and disputed credit card transaction history, is within the guidelines established by the credit card associations. However, Tucows faces the risk that one or more credit card associations may, at any time, assess penalties against it or terminate its ability to accept credit card payments from customers, which would have a material adverse affect on Tucows' business, financial condition and results of operations.

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Forecasting Tucows tax rates is complex and subject to uncertainty.

        Tucows is subject to income and other taxes in a number of jurisdictions and its tax structure is subject to review by both domestic and foreign tax authorities. Management must make significant assumptions, judgments and estimates to determine Tucows' current provision for income taxes, deferred tax assets and liabilities and any valuation allowance that may be recorded against its deferred tax assets. Although Tucows believes that its estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in its financial statements and may materially affect its financial results in the period or periods for which such determination is made. Tucows' future effective tax rates could be adversely affected by the following:

•

international income tax authorities, including Canada Revenue Agency and the US Internal Revenue Service, could challenge the validity of Tucows' arms length related party transfer pricing policies or the validity of its contemporaneous documentation;



•

changes in the valuation of Tucows' deferred tax assets; or



•

changes in tax laws or the interpretations of such laws.

While Tucows believes it has adequate internal control over financial reporting, it is required to evaluate its internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. Any adverse results from such evaluation could result in a loss of investor confidence in Tucows financial reports and have an adverse effect on its stock price.

        Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, Tucows expects that beginning with its annual report on Form 10-K for the fiscal year ended December 31, 2006, Tucows will be required to furnish a report by its management on its internal control over financial reporting. Such report will contain among other matters, an assessment of the effectiveness of Tucows' internal control over financial reporting, including a statement as to whether or not its internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in Tucows' internal control over financial reporting identified by management. Such report must also contain a statement that Tucows' auditors have issued an attestation report on management's assessment of such internal controls. Public Company Oversight Board Auditing Standard No. 2 provides the professional standards and related performance guidance for auditors to attest to, and report on, management's assessment of the effectiveness of internal control over financial reporting under Section 404.

        While Tucows believes its internal control over financial reporting is effective, Tucows is still performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. Tucows cannot be certain that it will be able to complete its evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if Tucows' management identifies one or more material weaknesses in its internal control over financial reporting, Tucows will be unable to assert such internal control is effective. If Tucows is unable to assert that its internal control over financial reporting is effective as of December 31, 2006 (or if Tucows' auditors are unable to attest that Tucows' management's report is fairly stated or they are unable to express an opinion on the effectiveness of Tucows internal controls), Tucows could lose investor confidence in the accuracy and completeness of its financial reports, which would have an adverse effect on its stock price.

        Failure to comply with the new rules may make it more difficult for Tucows to obtain certain types of insurance, including director and officer liability insurance, and Tucows may be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for Tucows to attract and retain qualified persons to serve on its Board of Directors, on committees of its Board of Directors, or as executive officers.

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New accounting pronouncements may require Tucows to change the way in which Tucows accounts for its operational or business activities.

        The Financial Accounting Standards Board, or FASB, and other bodies that have jurisdiction over the form and content of Tucows' accounts are constantly discussing proposals designed to ensure that companies best display relevant and transparent information relating to their respective businesses. The effect of the pronouncements of FASB and other bodies may have the effect of requiring Tucows to account for revenues and/or expenses in a different manner than at present. In particular, in fiscal 2005, FASB will require Tucows to expense the fair value of stock options, resulting in increased expenses in Tucows' income statement and a reduction of Tucows' net income and earnings per share. The impact of applying a fair value method of accounting for stock options on a pro-forma basis is disclosed in the Note 2 to the Consolidated Financial Statements.

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.

Current world events and economic trends 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. These events include ongoing armed 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 any of the foregoing events occur, Tucows' sales may decline and its business may be adversely affected.

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

        Tucows' quarterly operating results 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;

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•

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;



•

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. Tucows intends to continue its efforts to control 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.

RISKS RELATED TO THE INTERNET AND TUCOWS' TECHNOLOGY

Tucows' business could be materially harmed if the administration and operation of the Internet no longer rely upon the existing domain name system.

        The domain name registration industry continues to develop and adapt to changing technology. This development may include changes in the administration or operation of the Internet, including the creation and institution of alternate 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 such alternate systems. These competitors are not subject to ICANN accreditation requirements and restrictions. Other competitors have attempted to introduce naming systems that use keywords rather than traditional domain names. The widespread acceptance of any alternative systems could eliminate the need to register a domain name to establish an online presence and could materially adversely affect Tucows' business, financial condition and results of operations.

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:

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



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



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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



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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.

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 the applications, services and systems offered by Tucows obsolete. 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:

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



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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.

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.

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        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 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. In addition, the Federal Trade Commission and state agencies have investigated various Internet companies regarding their use of personal information. The federal government has enacted legislation protecting the privacy of consumers' nonpublic personal information. Tucows cannot guarantee that its current information-collection procedures and disclosure policies will be found to be in compliance with existing or future laws or regulations. Tucows' failure to comply with existing laws, including those of foreign countries, the adoption of new laws or regulations regarding the use of personal information that require Tucows to change the way it conducts business or an investigation of Tucows' privacy practices , could increase the costs of operating Tucows' business.

GOVERNMENTAL AND REGULATORY RISKS

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 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

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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 may continue to evolve both its long term structure and mission 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:

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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;



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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;



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ICANN may lose any one of the several claims pending against it in both the U.S. and international courts, in which case its credibility may suffer and its policies may be discredited;



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



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



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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.

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

        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:

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user privacy;



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children;



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copyrights and other intellectual property rights and infringement;



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domain names;



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pricing;



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content regulation;



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defamation;

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taxation; and



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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.

RISK RELATED TO TUCOWS' STOCK

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

        Five principal shareholders beneficially own approximately 58.7% 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' 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.

        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 is highly volatile, which may make it difficult to resell your shares when you want to, at prices you find attractive.

        Tucows' stock price has varied 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:

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actual or anticipated variations in Tucows' quarterly operating results;



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interruptions in Tucows' services;



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seasonality of the markets and businesses of Tucows' customers;



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



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

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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;



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



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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, has 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.

Investor Information

        Tucows' web site address is www.tucowsinc.com. Tucows makes available through its web site, free of chare, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

        The information on the web site listed above is not and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference in this document.

        Tucows was incorporated in the Commonwealth of Pennsylvania in November 1992. Tucows' executive offices are located at 96 Mowat Avenue, Toronto, Ontario, Canada M6K 3M1. Tucows' telephone number is (416) 535-0123.