Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2001

OR

For the transition period from                                      to                                     

Commission file number 0-28284

Tucows Inc.
(Exact Name of Registrant as Specified in Its Charter)

Registrant's telephone number, including area code: (416) 535-0123

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value
(Title of Class)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        As of March 26, 2002, the aggregate market value of common stock held by non-affiliates of the registrant, based upon the last reported sale price for the registrant's Common Stock on the OTC Bulletin Board maintained by Nasdaq on such date was $12.7 million (calculated by excluding shares owned beneficially by directors and executive officers as a group from total outstanding shares solely for the purpose of this response).

        The number of shares of the registrant's Common Stock outstanding as of the close of business on March 26, 2002 was 64,626,429.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain portions of the definitive Proxy Statement of Tucows Inc. to be used in connection with the 2002 Annual Meeting of Shareholders (the "Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent provided herein. Except as specifically incorporated by reference herein, the Proxy Statement is not to be deemed filed as part of this Annual Report on Form 10-K.

TUCOWS INC.

ANNUAL REPORT ON FORM 10-K

For Fiscal Year Ended December 31, 2001

TABLE OF CONTENTS

PART I

ITEM 1.    BUSINESS

        This Report on Form 10-K contains, in addition to historical information, forward-looking statements by Tucows with regard to its expectations as to financial results and other aspects of its business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as may, should, anticipate, believe, plan, estimate, expect and intend, and other similar expressions are intended to identify forward-looking statements. These forward-looking statements may include statements about, for example, statements regarding the consequences of Tucows' August 2001 merger with Infonautics, Inc., the continued growth and success of Tucows' business, the introduction of new products and services and their success, and the ability to further develop and achieve commercial success for the Tucows' business strategy. These statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Factors that may cause such a difference include the risks described under "Risk Factors" below and in Tucows' other filings with the Securities and Exchange Commission, or SEC. All forward-looking statements included in this document are based on information available to Tucows as of the date of this document, and Tucows assumes no obligation to update these cautionary statements or any forward-looking statements. These statements are not guarantees of future performance.

        Tucows offers its Internet services through a global Internet-based distribution network of resellers. These resellers are a heterogeneous group of companies including Internet service providers, web hosting providers, telecommunications and cable companies. Tucows refers to its customers as managed service providers, or MSPs and sometimes as resellers. Tucows' services are provided on a wholesale or private label basis, allowing MSPs to deal directly with their own end-user customers. By using Tucows' services, MSPs are able to avoid the costs and complexities of building in-house systems and to focus on their customer acquisition and retention strategies.

        Tucows' objective is to use its global sales and distribution channel to become a leading distributor of e-business applications and services on the Internet.

        Tucows' OpenSRS platform provides a technical infrastructure that allows MSPs to register and manage the delivery of domain names and other digital applications and services to end-users. Tucows' accelerated content delivery system, a network of over 629 partners located around the world, allows partners to quickly and efficiently deliver software and digital content to their consumers. Through the website, www.tucows.com, and its accelerated content delivery system and search and reference services, Tucows served over 990 million page views and facilitated over 100 million digital content downloads during the year ended December 31, 2001.

        The Tucows website was founded in 1994 as a resource for aggregating and offering software for download. The Tucows website was acquired by ComputerLink Online Limited in 1995, which was subsequently re-named Tucows Interactive Limited. Tucows Interactive Limited was primarily in the business of providing Internet access and related services and carried on its business of aggregating and offering software for download through its Tucows division. On April 26, 1999, Tucows Inc. was incorporated to purchase substantially all of the assets of the content business of the Tucows division from Tucows Interactive Limited, and the original owners of ComputerLink Online sold the significant majority of their interest.

        On August 28, 2001, Tucows concluded an acquisition of Infonautics, Inc., an unrelated provider of personalized information agents and websites. The acquisition was done as a merger of a subsidiary of Infonautics into Tucows (Delaware) Inc. (formerly, Tucows Inc.). In the acquisition, Infonautics issued

1

51,685,432 shares of common stock to Tucows (Delaware) Inc. stockholders, which amounted to an approximately 80% interest of the consolidated company. On completion of the acquisition, Infonautics changed its name to Tucows Inc.

        Tucows, through its subsidiary Liberty Registry Management Services Inc., has a two year contract with Afilias Limited to provide the back-end registry services for the .info registry. The .info registry began accepting real-time registrations in early September 2001. The difficult economic environment that has existed since the launch has resulted in monthly registration volumes being well below those anticipated by Afilias and Tucows. As a result, Tucows now believes that it will require a longer timeframe than its two-year contract to recover the high fixed cost component of implementing and maintaining the registry. Therefore, as a step in Tucows' effort to achieve profitability, Tucows entered into a definitive agreement to sell the business of Liberty RMS and certain software technology required to provide registry services, to Afilias on March 25, 2002. Under the agreement, consideration for this sale will comprise $1 million in cash, up to $1 million in contingent consideration based on future performance criteria and working capital adjustments. Completion of this sale is subject to standard closing arrangements. Tucows retains its 7.38% stake in Afilias and remains a registrar for the registry.

        Tucows uses the content provided by its group of independent authors to provide a platform for advertisers to create brand awareness and to sell products to Tucows' large, technologically sophisticated audience. The website creates brand awareness for Tucows, solidifies its reputation for serving the interests of Internet end-users and creates significant opportunities to develop and expand relationships with MSPs.

        Tucows' search and reference sites—Electric Library and Encyclopedia.com—provide information in response to users' questions and preferences from sites that are highly differentiated from traditional search engines and directories. Tucows' search and reference sites obtain revenue primarily through subscription fees and also through advertising, affiliate marketing and co-branding.

Industry Background

Emergence of the Managed Services Industry

        The Internet has emerged as a global medium, enabling millions of people to share information, communicate, and conduct business electronically. The growth in Internet users, combined with the web's reach has created a powerful channel for conducting commerce, marketing and advertising. This growth in Internet usage and e-commerce provides significant opportunities for organizations of all types and sizes to improve operational efficiencies and produce additional revenues through new Internet-only channels. Conversely, the Internet has given rise to additional competitive pressures due to shifting and increasingly diversified supplier and consumer demands. These pressures are leading organizations to adopt new Internet based business models, requiring the use of a wide array of e-business applications and services that perform a variety of vital functions, including:

•

access to the Internet;



•

domain name registration;



•

high performance web hosting and server hosting facilities;



•

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



•

e-commerce enabling applications;



•

hosted customer relationship management software and services; and



•

hosted billing and administration software and services.

2

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

•

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



•

telecommunications companies and cable service providers;



•

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;



•

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



•

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



•

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



•

original equipment manufacturers of network servers and appliances.

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

Trend towards Outsourcing

        While MSPs are capitalizing on the growth in Internet usage and the demand for new e-business applications and services, they also face significant competition from numerous other MSPs offering similar applications and services. This has led to a greater focus on core competencies, as MSPs are increasingly seeking to outsource non-core applications and services that they provide to their end-users. Outsourcing enables these MSPs to better focus on their customer acquisition and retention efforts by eliminating the need to own, develop and support non-core applications in-house.

Domain Name Registration Background

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

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

3

most common gTLDs are .com, .net and .org. The new .info, .biz and .name gTLDs were introduced in the second half of 2001.

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

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

        In October 1998, the Department of Commerce called for the formation of a non-profit corporation to oversee the management of the .com, .net and .org domains and in November 1998, the Internet Corporation for Assigned Names and Numbers, commonly known as ICANN, was recognized 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 February 28, 2002, there were over 145 ICANN-accredited registrars, of which approximately 100 are active.

        In November 2000, ICANN approved bids for the following seven new generic top-level domain registries: .info, .biz, .pro, .name, .museum, .coop and .aero. To date, .info, .biz and .name have begun selling registrations, and Tucows anticipates that .pro, will begin selling registrations through registrars in the second quarter of 2002.

Growth in Domain Name Registrations

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

•

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



•

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



•

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



•

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.

4

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

•

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



•

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



•

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

The Need for a Dedicated Outsourcing Solution

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

•

tracking of administration, billing and usage;



•

integrating information and functionality from multiple sources;



•

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



•

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

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

Tucows' Solution

        Tucows manages an Internet-based distribution network through which Tucows delivers business applications and services and digital software content to a network of over 5,000 MSPs in over 100 countries. Tucows' services are designed to allow MSPs to provide a higher level of customer service and performance, to enhance revenue per customer through offering additional products and services, to avoid the costs and complexities of building in-house systems and to focus on their customer acquisition and retention strategies. Tucows believes that its services to MSPs offer the following benefits:

An Attractive Outsourcing Proposition.

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

5

Ease of Integration and Support

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

•

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;



•

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



•

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



•

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

Experience in Focusing on Solutions for MSPs

        Tucows focuses on the challenges facing its MSPs as they compete to attract and retain their clients. For example, the OpenSRS domain name registration system was developed to provide a cost-efficient, reliable and generic domain name registration system. Its expanded operational capabilities now enable Tucows' clients to attract and retain their customers with the sale of additional applications and services, such as web certificates. Tucows has also developed a system that avoids bottle-necks and disruptions when downloading information on the Internet by locating software libraries closer to end-users on its MSPs' networks. Tucows' search and reference sites provide users with relevant information they cannot conveniently locate in any one place elsewhere on the Internet.

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 local currency exchange and payment regulations. Tucows supports MSPs located in over 100 countries.

Tucows' Strategy

        Tucows' objective is to use its global network of MSPs to become a leading distributor of e-business applications and services on the Internet. The key elements of its strategy include:

Continue the Private Label Focus

        Tucows plans to continue to offer its e-business applications and services to its MSPs on a wholesale, or private label, basis. Tucows believes that its MSP customers view it as a partner, rather than as a competitor, for providing applications and services to end-users. Tucows focuses on addressing its MSP customers' technical requirements and business objectives and on providing applications and services that MSPs require to grow their businesses. Tucows is dedicated to providing a high degree of flexibility to its MSPs' end-users by offering products and services from a wide variety of third party providers in any given application category. By delivering applications and services on a private label basis, Tucows avoids the high marketing costs typically related to building a brand on the Internet. Tucows uses its MSPs' marketing efforts and allows them to maintain their relationships with and

6

promote their brands to their end-users. Tucows has built its business and its brand, through use and reputation, not marketing and public relations.

Continue to use Network Effects

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

Capitalize on Additional Revenue Opportunities

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

•

Domain name registration services for the new gTLDs, including .name and .pro and additional multilingual domain names when and if 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;



•

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



•

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



•

Payment processing, allowing Tucows' MSPs to receive 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 its MSPs to provide their end-users with the ability to choose the products and services that are best suited to their individual needs.

Build Strategic Alliances

        Tucows intends to continue developing strategic alliances to expand its product offerings, extend its platform and increase its sales. For example, Tucows has entered into a strategic relationship with Entrust, Inc. to provide digital certificates.

Tucows' Products and Services

        Tucows offers its applications and services to its network of MSPs and directly to end-users. Its principal applications and services include domain name registration services, digital certificate delivery and digital content distribution.

7

Domain Name Registration Services

        Tucows offers wholesale and retail domain name registration services in the .com, .net, .org, .info, .biz and .name generic top level domains, or gTLD's, and the co.uk, org.uk, .ca, .cc and .tv country code top-level domains, or ccTLDs. Since November 2000, Tucows has participated in the multilingual .com, .net and .org test through which the registry began to accept multilingual domain name registrations and domain names using certain non-Roman characters. Multilingual domain names are now available supporting 35 scripts (Latin, Cryillic, etc.) that are used in hundreds of languages. Key components of Tucows' domain name registration services include:

•

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



•

Domain Direct—www.domaindirect.com.    Tucows' retail domain name registration service allows consumers to register, develop, use and manage their web sites. Included in the service is the ability to refer a domain name to a free web site such as Geocities or Tripod to avoid the expense of web hosting; and



•

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 Entrust, Inc. to provide Tucows' MSPs with the ability to purchase digital certificates through the OpenSRS system. Digital certificates authenticate identities over the Internet and secure transactions between buyers and merchants. Tucows offers this service exclusively to MSPs on a private label basis so that they may involve their brand in selling digital certificates to their end-users, which is especially important in a trust-related service such as digital certificates.

Digital Content Distribution

        Tucows distributes software and other digital content both directly to consumers and through its accelerated content delivery network.

        Its digital content distribution services include:

•

Tucows website, www.tucows.com, is designed to provide consumers with fast access to Tucows' extensive libraries of software and digital content. Primary navigation is designed around users selecting the libraries of interest to them, such as Windows or Linux. There are eight main libraries containing a total of over 30,000 titles. Each software title in Tucows' library is reviewed, virus-tested and rated on a scale of one to five. Revenue is produced from the Tucows website through advertising and co-branding agreements; and



•

The accelerated content delivery network sends Tucows' software and digital content libraries to its MSPs' networks, which are the initial access points where end-users connect to the Internet. Tucows has entered into relationships with approximately 629 partners around the world. Each partner that agrees to use the accelerated content delivery network is expected to download the content libraries it offers at least once a day. Advantages of this service include:



•

Bandwidth Savings and Faster Downloads.    Having Tucows' software libraries on its clients' local networks conserves Internet bandwidth and reduces the client's bandwidth costs.

8

Because traffic from the subscriber base remains local to the client's network, consumers receive a faster download;

•

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



•

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

Search and Reference Sites

        Tucows' search and reference sites employ a series of Web search capabilities that provide relevant information in response to end users' questions and preferences from sites that are highly differentiated from traditional search engines. Tucows' current search and reference sites include:

•

Electric Library, or eLibrary, a subscriber based, comprehensive digital archive for information seekers of all ages. Users can do business, school or personal research on both current and historical events. Subscribers ask plain English questions and eLibrary searches a very large text and image database designed for both content depth and interface simplicity to provide answers. eLibrary aggregates hundreds of full-text periodicals, major international newswires, classic books, hundreds of maps and thousands of photographs, as well as major works of literature, art and reference.



•

Encyclopedia.com is a basic, easy-to-use research tool for anyone on the Internet. The site was launched in January 1998. The site contains the complete text of The Complete Columbia Encyclopedia, and more than 52,000 articles from the encyclopedia have been assembled to provide free, quick, and useful information on almost any topic.



•

Newshub integrates and reports headlines from varied news sources very frequently, to provide a reliable source of breaking news. Headlines are reported in topic-oriented channels. Newshub syndicates its content to partners such as portal sites and company intranets, and provides both standard and customized newsfeeds. Newshub's automated, intelligent agent technology allows for the mining and aggregating of news headlines and other online informational content from a variety of different sources.



•

Tucows also holds an 11% interest in bigchalk.com, inc. which provides a broad spectrum of educational Internet services to teachers, students, parents, librarians and school administrators in the K-12 educational and public library markets.

Customer Support

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

        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.

9

        Tucows employs a number of customer service techniques that are specific to its applications and services and to the Internet. For example, Tucows uses the Internet to provide support directly to MSPs by effecting changes on their computers residing on their networks, often behind firewalls.

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

•

suggestions or feedback on new features;



•

marketing promotions;



•

domain policy positions; and



•

negotiation of agreements.

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

Technology and Infrastructure

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

Tucows OpenSRS Platform

        The OpenSRS platform provides a way for MSPs to access applications and services, without having to make substantial investments in their own software or hardware. The client software is distributed on the MSPs' servers, which provides the OpenSRS platform with a high degree of scalability. It allows Tucows to add customers and services without overburdening its own centralized systems. As the client code is open source, Tucows MSPs can supplement Tucows software so that it better integrates with their own systems.

        The key components of Tucows' transactional platform include:

•

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

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

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

•

Tucows OpenSRS Client.    The OpenSRS client usually resides on the servers of channel partners and communicates with the OpenSRS server over the Internet using Tucows' published interface protocol. The OpenSRS client also allows MSPs to seamlessly and transparently integrate their existing web sites with Tucows' OpenSRS server. The OpenSRS client also

10

provides MSPs and their end-users with tools to administer multiple domains. The OpenSRS client was developed as open source software, which allows Tucows' MSPs to make changes to the software as required to meet their particular needs and to ease the integration of 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 clients located at their facilities. As of December 31, 2001, the Tucows network reached over 1,000 servers in over 100 countries.

Competition

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

•

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



•

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



•

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



•

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



•

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



•

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



•

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



•

Internet portals, such as AOL and Yahoo; and



•

telecommunications, cable and wireless companies.

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

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

•

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



•

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



•

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

11

•

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 domain name registration and digital content distribution services that are superior or achieve greater market recognition. New technologies and the expansion of existing technologies may increase competitive pressures on Tucows.

U.S. Government Regulation of Domain Names

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

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

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

•

Its 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 MSPs to ensure that all registrants are bound to the Uniform Domain Name Dispute Resolution Policy as approved by ICANN.

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

        New laws or regulations concerning domain names and domain name registrars may be adopted at any time. Tucows responses to uncertainty in the industry or new regulations could increase its costs or

12

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 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.

13

        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, 2001, Tucows had 193 full time employees.

Executive Officers

        The following table sets forth specific information regarding Tucows' executive officers as of March 26, 2002.

        Elliot Noss has served as Tucows' president and chief executive officer since the completion of the merger in August 2001. Before that, he served in the same capacity with Tucows (Delaware) since May 1999 and served as vice president of corporate services for Tucows Interactive Limited, which was acquired by Tucows (Delaware) in May 1999, from April 1997 to May 1999.

        Michael Cooperman has served as Tucows' chief financial officer since the completion of the merger in August 2001. Before that, he served in the same capacity with Tucows (Delaware) 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. From January 1996 to June 1997, he was chief operating officer and a director of SoftQuad International Inc. a developer of SGML and HTML authoring products. He also served as president of SoftQuad International from December 1996 until June 1997.

        Scott Swedorski has served as Tucows' editor-in-chief with responsibility for the editorial content of the Tucows software libraries since the completion of the merger in August 2001. Before that, he served in the same capacity with Tucows (Delaware) since 1994 when he founded the Tucows.com web site.

        Graham Morris has served as Tucows' chief operating officer since the completion of the merger in August 2001. Before that, he served in the same capacity with Tucows (Delaware) since June 2001. Mr. Morris joined Tucows (Delaware) as executive vice president, content, in September 2000. Before

14

joining Tucows (Delaware), he spent 15 years at Telemedia Publishing, a Canadian consumer magazine publishing company, where he became president in 1996.

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

Risk Factors

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

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

        The Tucows common stock was delisted from the Nasdaq SmallCap market because Tucows had failed to maintain a minimum bid price of $1.00 for 30 consecutive trading days as required by Nasdaq's minimum listing requirements. The Tucows common stock is quoted on the OTC Bulletin Board maintained by Nasdaq. Tucows is 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 sale.

        The fact that the 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 the Tucows common stock. Management has not determined when or whether it will apply again for listing on the Nasdaq SmallCap market.

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

        If Tucows' stock price continues to vary significantly, the price of its common stock may decrease in the future regardless of its operating performance. You may be unable to resell your shares of common stock following periods of volatility because of the market's adverse reaction to this volatility.

        The following factors may contribute to this volatility:

•

actual or anticipated variations in Tucows' quarterly operating results;



•

interruptions in Tucows' services;



•

seasonality of the markets and businesses of Tucows' customers;



•

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



•

changes in financial estimates or recommendations by securities analysts;

15

•

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



•

news relating to Tucows' industry as a whole; and



•

news relating to trends in Tucows' markets.

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

        Tucows common stock was delisted from the Nasdaq SmallCap market effective June 21, 2001, and it now is quoted on the OTC Bulletin Board maintained by Nasdaq. The volatility of Tucows' stock price could increase because of this change.

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

        Six principal shareholders beneficially own approximately 75% 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 has incurred losses and expects losses to continue.

        Tucows incurred net losses of approximately $13.4 million for the year ended December 31, 2001, including approximately $8.3 million of amortization and write down of intangible assets and negative cash flow from operating activities of $6.1 million. Tucows is likely to incur additional losses, and it may never become profitable or generate positive cash flow from operating activities. For the year ended December 31, 2000, Tucows incurred a net loss of $37.7 million which included $22.9 million of amortization and write down of intangible assets, and negative cash flow from operating activities of $0.5 million. If Tucows should become profitable, it may not be able to sustain or increase its profitability.

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

        Competition in the domain name registration industry was introduced in 1999. Tucows entered the domain name registration business in January 2000 by providing a wholesale service to customers with primary operations that involve direct dealings with registrants. Tucows' primary customers, which Tucows refers to as managed service providers, or MSPs, have been Internet service providers, web hosting, cable and telecommunications companies. Tucows has a limited operating history as a domain name registrar upon which its current business and prospects can be evaluated.

        As a company operating in a newly competitive and rapidly evolving industry, Tucows faces risks and uncertainties relating to its ability to implement its business plan successfully. Tucows cannot assure you that it will adequately address these risks and uncertainties or that its business plans will be successful.

16

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

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

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

        Before 1999, Network Solutions Inc., which is now a part of VeriSign, managed the domain name registration system for the .com, .net and .org domains on an exclusive basis under a cooperative agreement with the U.S. government. In November 1998, the Department of Commerce authorized ICANN, the Internet Corporation for Assigned Names and Numbers, 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, Congress has held hearings to evaluate ICANN's selection process for new top-level domains.

        Tucows faces the risks that:

•

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



•

the Internet community or the Department of Commerce or U.S. Congress may refuse to recognize ICANN's authority or support its policies.

        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. Two class action lawsuits were filed in Superior Court in California against ICANN, NeuLevel, Inc., which is the registry for the .biz generic top-level domain, and over 60 other defendants including Tucows. The lawsuits claim that the defendants are engaged in unfair competition under state laws because they were pre-registering .biz generic top-level domains (which is alleged to constitute an illegal lottery enterprise). The lawsuits seek a refund of the fees paid to the defendants, additional damages, costs, attorneys' fees and an injunction to stop the pre-registrations. NeuLevel, Inc. has ceased accepting pre-registrations and has decided to refund the fees paid by applications. Although Tucows, in turn, is implementing a plan designed to return fees to the applicants who came through the Tucows system, Tucows management believes the lawsuits to be without merit. Tucows intends to defend itself vigorously in the lawsuits and believes that it should not be subject to any liability or an injunction. The California Superior Court or other courts or governmental agencies may disagree.

        If any of these risks occur or the class action lawsuits, or others like them, are maintained, they could create instability in the domain name registration system business. These risks and the class action lawsuits, or others like them, could also disrupt or suspend portions of Tucows' domain name registration business, which would result in reduced revenue. Any litigation or claims against Tucows

17

could result in significant costs of defense, liability for damages and diversion of management's time and attention.

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

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

        Based on VeriSign's quarterly press releases, the VeriSign registrar registered approximately 8.4 million new, renewed and transferred registrations under the top-level domains for the year ended December 31, 2001. This compares with the approximately 2.8 million new, renewed and transferred domain names that Tucows registered for the year ended December 31, 2001. As of December 31, 2001, the VeriSign registrar supported approximately 13.1 million of the approximately 28.8 million active .com, .net and .org domain names, compared to approximately 2.9 million domain names that Tucows supported as of December 31, 2001.

        Tucows faces significant competition from VeriSign as Tucows seeks to increase its revenue from domain name registration services. Tucows also faces competition from the continued introduction of registrars into the domain name registration industry. The growth of competitive registrars who have entered the industry may make it difficult for Tucows to maintain its current market share. As of December 31, 2001, ICANN had accredited 161 competitive registrars, including Tucows, to register domain names in the .com, .net and .org domains. Some of these registrars may have longer operating histories, greater name recognition, particularly in international markets, or greater resources than Tucows.

        In response to increasing competition in the domain name registration industry, Tucows may be required to reduce the prices it charges for its core domain name registration business. The VeriSign registry charges registrars who use its shared registration system $6 for each registration, which most users, including Tucows, pass on to their customers. Some of Tucows' competitors offer registration services at a price level minimally above the $6 VeriSign registry fee and less than the basic $10 fee charged by Tucows for each domain name registered in the .com, .net and .org registry. During the years 2000 and 2001, other competitors, including VeriSign, reduced their pricing for domain name registrations both for short-term promotions and on a permanent basis. Some of Tucows' competitors have also offered domain name registrations free in a bundle of other products, deriving their revenues from other products and services. Although Tucows offers discounts and rebates based on volume or participation in other programs Tucows offers, Tucows does not presently intend to reduce its prices. If Tucows should reduce prices in order to remain competitive, Tucows' revenues may decline.

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

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

18

        In 2001, the registry recorded approximately: 3.1 million new registrations during the first quarter, 2.8 million new registrations during the second quarter, 2.6 million new registrations during the third quarter and 2.3 million new registrations during the fourth quarter as the market for new domain names began to absorb the slow-down in the growth and expansion of the Internet.

        The renewal and transfer of existing domain registrations as a proportion of the total domains market has increased and is expected to increase further in 2002. The registry reported approximately: 2.7 million renewals and transfers during the first quarter of 2001, 3 million renewals and transfers in the second quarter, 2.6 million renewals and transfers in the third quarter and 2.8 million renewals and transfers during the fourth quarter.

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

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

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

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

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

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

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

If Tucows' MSPs do not choose to sell the recently introduced generic top-level domains Tucows' business may not grow, and its revenue from that business may decline.

        In the fourth quarter of 2000, ICANN announced that the introduction of new generic top-level domains was scheduled for the first or second quarter of 2001. .info was launched to the public on September 12, 2001 and .biz on November 7, 2001. Although demand for .info has been below expectations, it is too early to determine the long-term success of these two new top level domains. If Tucows' MSP's do not elect to sell the new top level domains or if their customers do not respond positively to the new generic top level domains, Tucows may not be able to develop its domain name registration business as planned.

19

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

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

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

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

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

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

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

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

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

        A limited number of MSPs account for a substantial portion of Tucows' transaction volume and revenues. In particular, one MSP, Intercosmos Media Group, Inc., accounted for approximately 13% of Tucows' net revenues for the year ended December 31, 2001. Tucows does not expect any customer to account for more than 10% of net revenues in 2002. If Tucows loses and is unable to replace any major customers, Tucows' revenues will decline.

Tucows is a minority shareholder in the Afilias consortium that is responsible for the .info top-level domain. The venture may cause Tucows to incur additional capital and operating expenses to establish and develop these products and services.

        Afilias, Limited, a consortium of 18 ICANN-accredited registrars, including Tucows, is responsible for the .info domain name.

        Afilias is a new venture with a limited operating history. Its success is not guaranteed. The demand for the new registry is unknown and profits cannot be predicted. If there is no demand, or if actual

20

demand is lower than anticipated, for .info or for any of the new generic top-level domains, or if the returns on Tucows' capital expenditures are lower than expected or take longer to materialize than expected, Tucows' net revenues may decline.

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

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

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

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

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

Tucows relies on subscriptions for its revenue from the Electric Library site. If Tucows does not acquire new subscribers and retain existing subscribers or the cost of acquiring or retaining subscribers increases, Tucows' revenue from this site will decline and its ability to achieve profitability will be impaired.

        Tucows obtains most of its subscription-based revenue from the fee-based Electric Library site.

        The following factors affect Tucows' net revenue from Electric Library:

•

Tucows pays fees to third party websites and services to obtain new subscribers to Electric Library. Tucows may be required to make payments even if the agreements don't result in revenues from new subscribers sufficient to cover Tucows' costs. One or more of these agreements may not be renewed, which could reduce Tucows' revenue from new subscribers.



•

Tucows may choose to limit spending on subscriber acquisition, which will likely result in fewer new subscribers.



•

Tucows' customers may not renew their subscriptions after their subscription period has ended.



•

Tucows may reduce the selling price of Electric Library in response to increased competition or loss of customers.



•

If Tucows' subscriber acquisition, retention and renewal rates or pricing decreases significantly, its net revenues from Electric Library will decline.

21

The competition Tucows faces from other providers of electronic information is intense, and Tucows may not be able to compete effectively or successfully attract and retain customers.

        Competition in Tucows' business of providing electronic information is intense. Some of Tucows' competitors, such as Yahoo!, America Online, About.com, Britannica.com, and Northern Light, have greater resources and name recognition than Tucows. Many of these competitors have substantially greater experience and larger customer bases than Tucows. Tucows' competitors may succeed in:

•

responding more quickly to new or emerging technologies;



•

responding more rapidly to changes in customer requirements;



•

devoting greater resources to the development, promotion and sale of their products or services than Tucows; and



•

establishing relationships with affiliates, advertisers, content providers, and others who have not entered into agreements with Tucows.

        Tucows' competitors may also succeed in developing services and products that are superior to those of Tucows and also may prove more successful in marketing their products or services to the same customers to which Tucows intends to market its products or services. Because of this competition, Tucows may not be successful in attracting and retaining customers which would cause revenues to decline.

Tucows holds a minority interest in bigchalk.com. If this venture fails Tucows will take a significant writedown.

        Tucows holds an 11% interest in bigchalk.com inc., which provides educational Internet services to teachers, students, parents and school administrators in the K-12 educational and public library markets. bigchalk.com is a private company for which there is no public market and over which Tucows is unable to exercise significant influence. Due to the inherent risk associated with an investment in a private company, and in light of the current stock market conditions, Tucows may never realize any return on this investment. If bigchalk.com is not successful, Tucows could incur charges related to write-downs or write-off of this investment.

Tucows depends on bigchalk.com and other third parties for published content, technology and technology services. Loss of these services could restrict Tucows' ability to do business and could result in reduced revenue.

        Tucows relies on bigchalk.com for published content and technology and technology services. bigchalk.com is Tucows' preferred provider of published content for Electric Library. The loss of the bigchalk.com content license could require Tucows to change Electric Library and any other site using the content licensed from bigchalk.com. These changes may cause interruptions in Tucows' business and could cause it to incur substantial costs to replace any lost content.

        Tucows also depends on licenses of additional content on a cost-effective basis from sources other than bigchalk.com. If Tucows is unable to maintain its existing relationships with its existing freeware and shareware providers and/or license content at a reasonable cost, its ability to deliver its sites could be impaired which could cause it to lose customers or fail to attract new customers.

        bigchalk.com also licenses the Electric Library site and related software, technology, and systems to Tucows. The license is royalty free and perpetual, but bigchalk.com has a right to terminate the license on a change of control of Tucows. The loss of this license could hurt Tucows' business and cause its revenues to decline.

22

        Tucows also depends on bigchalk.com to provide technical and data center support and services for Electric Library for individual end users. This agreement expires on December 15, 2002 and may be renewed by the mutual written agreement of the parties. The loss of this agreement could force Tucows to provide technical and data center support and services itself, or hire a third party to provide those services. This could cause Tucows' business to suffer interruptions and require it to incur substantial costs.

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

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

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

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

•

user privacy;



•

children;



•

copyrights and other intellectual property rights and infringement;



•

domain names;



•

pricing;



•

content regulation;



•

defamation;



•

taxation; and



•

the characteristics and quality of products and services.

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

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

        Tucows' sales are subject to risks arising from adverse changes in domestic and global economic conditions and fluctuations in consumer confidence and spending. As a result, Tucows' sales may decline as a result of factors beyond its control, such as war and terrorism. Although the North

23

American markets s