TUCOWS INC /PA/ - 10-K Annual Report

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý

As of June 30, 2004, 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 $25.3 million. For purposes of this calculation only, the registrant has defined affiliates as consisting solely of all directors, executive officers, beneficial owners of more than ten percent of the common stock of the registrant, and any of their affiliates. In making such calculation, registrant is not making a determination of the affiliate or non-affiliate status of any holders of shares of Common Stock.

The number of shares of the registrant's Common Stock outstanding as of the close of business on March 22, 2005 was 67,294,315 (excludes 1,069,644 shares being held in escrow in connection with a recent acquisition).

Certain portions of the definitive Proxy Statement of Tucows Inc. to be used in connection with its 2005 Annual Meeting of Shareholders (the "Proxy Statement"), to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, 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, 2004

TABLE OF CONTENTS

		Page
PART I
Item 1	Business	2
Item 2	Properties	29
Item 3	Legal Proceedings	29
Item 4	Submission of Matters to a Vote of Security Holders	29
PART II
Item 5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6	Selected Financial Data	30
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8	Financial Statements and Supplementary Data	50
Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	50
Item 9A	Controls and Procedures	50
Item 9B	Other Information	50
PART III
Item 10	Directors and Executive Officers of the Registrant	51
Item 11	Executive Compensation	51
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	51
Item 13	Certain Relationships and Related Transactions	51
Item 14	Principal Accountant Fees and Services	51
PART IV
Item 15	Exhibits and Financial Statement Schedules	52

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. The forward-looking statements contained in this report include statements regarding, among other things, the number of new, renewed and transferred-in domain names, the competition Tucows expects to encounter as its business develops and competes in a broad range of Internet services, the effectiveness of Tucows' intellectual property protection, including its ability to license proprietary rights to network partners and to register additional trademarks and service marks, Tucows' belief that the market for domain name registration will trend upward gradually, Tucows' belief that it is more likely than not that net deferred assets will be realized and Tucows' belief that, by increasing the number of applications and services it offers, it will be able to generate higher revenues. 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. This list of factors that may affect Tucows' future performance and financial and competitive position and also the accuracy of forward-looking statements is illustrative, but it is by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. 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 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

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.

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:

Tucows refers to businesses that provide these applications and services as Service Providers. These businesses often operate as:

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.

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.

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

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.

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:

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

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:

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

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:

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

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.

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 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.

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' 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:

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.

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.

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:

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.

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.

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.

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

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.

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.

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.

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

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.

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.

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.

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.

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

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:

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.

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

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.

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.

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:

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:

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.

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

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:

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:

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.

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.

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.

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.

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.

The following table sets forth specific information regarding Tucows' executive officers as of March 23, 2005.

Name	Age	Position(s)
Elliot Noss	42	President and Chief Executive Officer
Michael Cooperman	53	Chief Financial Officer
David Woroch	42	Vice President, Sales

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.

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.

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.

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

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.

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 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

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.

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.

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.

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:

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.

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.

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' 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.

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:

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:

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:

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:

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 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

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:

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:

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.

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 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.

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.

Tucows owns no real property. Tucows' principal administrative, engineering, marketing and sales office totals approximately 26,937 square feet and is located in Toronto, Ontario under a lease that expires on December 31, 2011. Tucows also maintains offices of approximately 5,000 square feet in Flint, Michigan, and approximately 4,000 square feet in Starkville, Mississippi.

Substantially all of Tucows' computer and communications hardware is located at its facilities or at server hosting facilities in Toronto, Ontario.

Tucows is involved in various investigations, claims and lawsuits arising in the normal conduct of its business, none of which, in its opinion will harm its business. Tucows cannot assure that it will prevail in any litigation. Regardless of the outcome, any litigation may require Tucows to incur significant litigation expense and may result in significant diversion of management attention.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Tucows' common stock trades on the OTC bulletin board maintained by Nasdaq under the symbol "TCOW." The following table sets forth the range of high and low sales prices for Tucows common stock for the periods indicated.

Year	Fiscal Quarter Ended	High	Low
2003	March 31, 2003	0.32	0.20
	June 30, 2003	0.35	0.23
	September 30, 2003	0.40	0.26
	December 31, 2003	0.55	0.27
2004	March 31, 2004	0.76	0.41
	June 30, 2004	0.86	0.54
	September 30, 2004	0.63	0.45
	December 31, 2004	0.79	0.47

As of March 22, 2005, Tucows had 285 shareholders of record, which excludes shareholders whose shares are held in nominee or "street" name by brokers.

Tucows has not declared or paid any cash dividends on its common stock and does not intend to do so in the foreseeable future.

The following table sets forth selected consolidated financial data of Tucows for the periods indicated. The financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements and related notes of Tucows appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data set forth below for the fiscal years ended December 31, 2004, 2003 and 2002 and the consolidated balance sheet data as of December 31, 2004 and 2003 are derived from Tucows' consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data set forth below for the fiscal years ended December 31, 2001 and 2000 and the consolidated balance sheet data as of December 31, 2002, 2001 and 2000 are derived from the audited consolidated financial statements that are not included in this Annual Report on Form 10-K, but have been previously filed with the SEC.

The historical data is only a summary, and you should read it with Tucows' Management's Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion of Tucows' financial condition and results of operations should be read with Tucows' consolidated financial statements and notes included elsewhere herein.

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

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.

Tucows generates net revenues primarily through the provision of domain name registration and ancillary services. Other revenue sources include advertising and other revenue such as 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 generated net revenues from subscription fees associated with its search and

reference services, Electric Library and Encyclopedia.com, until it sold the assets associated with such services in August 2002.

Tucows generates revenues from the provision of Internet services on both a wholesale and retail basis. To date, the majority of net revenues have been derived from the sale of services provided as an accredited domain name registrar. Tucows currently offers registration services for the generic top level domains, or gTLDs, .com, .net, .org, .info, .name and ..biz and the country code domains .ca, .cc, .ch, .cn, .de, .fr, .nl, .uk, .tv and .us.

Tucows receives revenues for each domain name or ancillary service registered through its system by Service Providers.

With respect to the sale of domain name registrations, Tucows earns registration fees in connection with each new, renewed and transferred-in registration and from providing provisioning services to Service Providers and registrars on a monthly basis. Domain name registrations are generally purchased for terms of one to ten years. Payments for the full term of all services are received at the time of activation of service ("billed revenue") and where appropriate are recorded as deferred revenue and are recognized as earned ratably over the term of provision of service. This accounting treatment reasonably approximates a recognition pattern that corresponds with the provision of the services during the quarters and the year.

Ancillary services currently consist of digital certificates, billing services, billing, provisioning and customer care software solutions, email services, managed DNS, blogware and website building tools which are used by Tucows' Service Providers to create bundles of Internet services for their end-users. Tucows earns fees when an ancillary service is activated. Ancillary services are generally purchased for terms of one month to three years. Payments for the full term of all services are received at the time of activation of service and where appropriate are recorded as deferred revenue and are recognized as earned ratably over the term of provision of service. This accounting treatment reasonably approximates a recognition pattern that corresponds with the provision of the services during the quarters and the year.

On a retail basis, Tucows offers Internet services directly to end-users through its Domain Direct division. These services include domain name registration, email, blogware, hosting and web site creation. Depending on the service offered, Domain Direct receives standard fees for its services that are published on its web site. In addition, Domain Direct offers referral commissions based on a percentage of net registration revenues to participants in its affiliate program.

Tucows also generates advertising and other revenue through its online libraries of shareware, freeware and online services presented 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 Tucows' software libraries and to purchase promotional placement of their software in the library categories as well as purchase other promotional services on a cost per click or flat rate basis. Software developers are able to promote their software through advertising services including keyword search placements, banners, promotional placements, expedited reviews and premium data services. Revenue is also generated from companies who contract with Tucows to provide them with co-branded content. Advertising and other revenue is recognized ratably over the period in which it is presented. Tucows has in the past also entered into barter transactions, which are a component of advertising revenues. Barter transactions are the exchange of advertising space on Tucows' web site for reciprocal space or traffic on other web sites. Revenues and expenses are

recognized from advertising barter transactions when the value of the advertising surrendered is determinable based on Tucows' historical practice of receiving cash for similar advertising. Tucows did not undertake any barter transactions during the year ended December 31, 2004 or 2003, and recognized barter revenue of approximately $51,000 for the year ended December 31, 2002.

The following is a discussion of Tucows' critical accounting policies and methods. Critical accounting policies are defined as those that are both important to the portrayal of Tucows' financial condition and results and are reflective of significant judgments and uncertainties made by management that may result in materially different results under different assumptions and conditions. Note 2 of the notes to the consolidated financial statements includes a more complete summary of the significant accounting policies and methods used in the preparation of Tucows' consolidated financial statements.

The preparation of financial statements in conformity with generally accepted accounting principles requires Tucows to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Tucows evaluates the application of these estimates, including those related to the recoverability of investments, product development costs, revenue recognition and deferred revenue, and accounting for income taxes. Tucows bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts could differ significantly from these estimates.

With respect to the sale of domain name registrations, Tucows earns registration fees in connection with each new, renewed and transferred-in registration and from providing provisioning services to Service Providers and registrars on a monthly basis. Domain name registrations are generally purchased for terms of one to ten years. Payments for the full term of all services are received at the time of activation of service and where appropriate are recorded as deferred revenue and are recognized as earned ratably over the term of provision of service. This accounting treatment reasonably approximates a recognition pattern that corresponds with the provision of the services during the quarters and the year.

Tucows also generates advertising and other revenue through its online libraries of shareware, freeware and online services presented at its web site, www.tucows.com. Advertising and other revenue is recognized ratably over the period in which it is presented. To the extent that minimum guaranteed impressions are not met, Tucows defers recognition of the corresponding revenues until the guaranteed impressions are achieved.

Changes to contractual relationships in the future could impact the amounts and timing of revenue recognition.

In those cases where payment is not received at the time of sale, additional conditions for recognition of revenue are that the collection of sales proceeds is reasonably assured and Tucows has no further performance obligations. Tucows records expected refunds, rebates and credit card charge-backs as a reduction of revenues at the time of the sale based on historical experiences and current expectations. Should these expectations not be met, adjustments will be required in future years.

Tucows establishes reserves for possible uncollectible accounts receivable and other contingent liabilities which may arise in the normal course of business. Historically, credit losses have been within Tucows' expectations and the reserves Tucows has established have been appropriate. However, Tucows has, on occasion, experienced issues which have led to accounts receivable not being fully collected. Should these issues occur more frequently, additional reserves may be required.

Tucows accounts for the costs of computer software developed or obtained for internal use in accordance with American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, as more fully described in Note 2 to the audited financial statements of Tucows. Tucows' policy on capitalizing internally developed software costs determines the timing of its recognition of certain development costs. In addition, this policy determines whether the cost is classified as development expense or depreciation of property and equipment. Management reassesses these judgments on an ongoing basis. Changes in management's assessment could impact the recognition of development costs in Tucows' accounts.

Tucows' business acquisitions typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that Tucows may incur. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect Tucows' consolidated financial statements. In addition to annual evaluation of the carrying value of goodwill, Tucows reviews its identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that Tucows considers important that could trigger an impairment review include the following:

When Tucows determines that the carrying value of intangibles, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, Tucows measures any impairment based on a projected discounted cash flow model using a discount rate determined by management to be commensurate with the risk inherent in Tucows' current business model. Management will base its estimates in preparing the discounted cash flows on historical experience and on various other assumptions, including current market trends and developments, ongoing customer developments and general economic factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Tucows accounts for income taxes under the liability method in accordance with FASB 109. Under the liability method, Tucows recognizes deferred tax assets or liabilities for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of Tucows' assets and liabilities. Tucows records a valuation allowance to reduce the net deferred tax assets when it

is more likely than not that the benefit from the deferred tax assets will not be realized. In assessing the need for a valuation allowance, historical and future levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies are considered. In the event that it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would be recorded. This adjustment would increase income in the period such determination was made. Likewise, should it be determined that all or part of a recorded net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination would be made.

On a periodic basis Tucows evaluates the probability that its deferred tax asset balance will be recovered to assess its realizability. To the extent Tucows believes it is more likely than not that some portion of its deferred tax assets will not be realized, Tucows will increase the valuation allowance against the deferred tax assets. Realization of Tucows' deferred tax assets is dependent primarily upon future taxable income. Tucows' judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.

Results of operations for the year ended December 31, 2004 compared to December 31, 2003

	2004		2003
Net revenues	$	44,717,155		$	37,194,747
Increase over prior year	$	7,522,408
Increase—percentage		20	%

Total net revenues for the year ended December 31, 2004 increased to $44.7 million from $37.2 million for the year ended December 31, 2003.

During the year ended December 31, 2004, no customer accounted for more than 10% of billed revenue, and two customers accounted for 19% of accounts receivable at December 31, 2004. Subsequent to the fiscal year end, these amounts were fully collected.

Net revenues from domain name and ancillary services for the year ended December 31, 2004 increased by $6.4 million, or 18.2%, to $41.5 million from $35.1 million for the year ended December 31, 2003, primarily as a result of increased volumes from new and existing customers, as well as the additional revenue earned as a result of the April 2004 acquisition of Boardtown Corporation.

During the year ended December 31, 2004, the number of domain names processed by Tucows increased by approximately 770,000 to approximately 3.9 million new, renewed and transferred-in domain name registrations, compared to the year ended December 31, 2003. This increase was due primarily to Tucows continuing to compete 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 competitive, which would adversely impact its revenues and profitability. The renewal rate for domain name registrations increased to approximately 65% for the year ended December 31, 2004 compared to approximately 60% for the year ended December 31, 2003.

While Tucows anticipates the number of new, renewed and transferred-in domain name registrations will incrementally increase, the volatility in the market could affect the growth of domain names under Tucows' management. During the year ended December 31, 2004, the total number of domain names under Tucows' management increased by approximately 600,000 to approximately 4.4 million.

Deferred revenue from domain name registrations and ancillary services at December 31, 2004 increased to approximately $33.2 million from approximately $28.6 million at December 31, 2003. During the year, one of Tucows' Service Providers become an accredited registrar and transferred the names under Tucows' tag to its own tag. The impact of the transfer of these names, which included a large number of multiple year registrations, is that Tucows has no future obligations in connection with these names. As a result, Tucows recognized all the deferred revenue previously recorded relating to these names of approximately $1.1 million as revenue during the year. During 2005, Tucows expects more of its high volume Service Providers will not want to incur the costs and complexities of building their own in-house systems, and will explore if they can derive more value from Tucows' service bureau model by becoming accredited registrars and moving onto Tucows' OpenHRS platform. Tucows will thus continue to earn a monthly provisioning fee, as these customers will continue to use the Tucows' OpenHRS platform.

Advertising and other revenue for the year ended December 31, 2004 increased by approximately $1.2 million, or 57%, to approximately $3.2 million compared to approximately $2.0 million for the year ended December 31, 2003. The increase was predominantly the result of growth in syndicated advertising revenue.

Cost of revenues includes the costs associated with providing domain name registration and ancillary services, advertising and other revenue and network costs.

Cost of revenues for domain name registrations represents the amortization of registry fees on a basis consistent with the recognition of revenues from Tucows' customers, namely ratably over the term of provision of the service. Registry fees, the primary component of cost of revenues, are paid in full when the domain name is registered, and are recorded as prepaid domain name registry fees. Costs of revenues for ancillary services consist of fees paid to third-party service providers and are recognized ratably over the periods in which the services are provided. Tucows has minimal direct cost of revenues associated with its advertising and other revenues. Therefore, the gross profit margin on advertising revenue is approximately 100% and, accordingly, any increase or decrease in advertising and other revenue represents an increase or a reduction of Tucows gross profit of the same amount. Network costs include personnel and related expenses, including bandwidth and co-location expenses to support the supply of products and services. Bandwidth and co-location expenses are composed primarily of communication and provisioning costs related to the management and support of Tucows' network.

	2004		2003
Cost of revenues	$	27,566,066		$	22,990,227
Increase over prior year	$	4,575,839
Increase—percentage		20	%

Cost of revenues for the year ended December 31, 2004 increased by approximately $4.6 million, or 20%, to $27.6 million from $23.0 million for the year ended December 31, 2003. The increase was primarily the result of higher costs of approximately $4.1 million attributable to higher volumes of domain name registrations, and to a smaller extent as a result of the change in nature of the ICANN

accreditation fee. Effective November 1, 2004, ICANN's members voted to change the basis whereby registrars pay their variable accreditation fee to a transaction based fee of $0.25 per domain year registered. As this fee is now being charged as a transaction fee, Tucows is no longer expensing this fee to sales and marketing, but is allocating it to cost of goods sold and is recognizing it ratably over the term of provision of the service. In addition, cost of goods increased as a result of increased volumes of digital certificates and other ancillary services costs. Tucows anticipates that cost of revenues will continue to increase in absolute dollars primarily as a result of continued growth in domain name registration and ancillary services.

Registry fees, the primary component of cost of revenues, are paid in full when the domain name is registered, and are recorded as prepaid domain name registry fees and are recognized ratably over the term of provision of the service. In addition, ancillary service costs and ICANN accreditation transaction fees are paid either monthly or quarterly and if they have service periods longer than one month are also recognized ratably over the term of provision of the service. Prepaid domain name registration and ancillary services fees at December 31, 2004 increased to approximately $22.1 million from approximately $18.3 million at December 31, 2003. During the year, one of Tucows' Service Providers become an accredited registrar and transferred the names under Tucows' tag to its own tag. The impact of the transfer of these names, which included a large number of multiple year registrations, is that Tucows has no future obligations in connection with these names. As a result, Tucows recognized all the prepaid cost of revenues previously recorded relating to these names of approximately $800,000 as cost of revenue during the year. During 2005, Tucows expects more of its high volume Service Providers to begin exploring if they can derive more value from Tucows' service bureau model by becoming accredited registrars and moving onto Tucows' OpenHRS platform. If this happens, it is likely to have a negative effect on Tucows' growth in prepaid domain name and ancillary service fees as, on a relative basis, Tucows will be earning more of its revenue on a monthly basis

Cost of revenues of digital content distribution services includes the costs of network operations. These costs decreased by approximately $73,000 to approximately $1.2 million, primarily as a result in decreased bandwidth costs. This decrease in bandwidth costs was offset in part by an increase in people costs primarily as a result of increased hours of operation and incentive compensation for senior managers paid under the 2004 at risk incentive compensation plan. The cost of network operations is comprised primarily of communication costs, equipment maintenance, and employee and related costs directly associated with the management and maintenance of the network. Tucows expects communication costs to increase as its network expands geographically and network activity increases.

Sales and marketing expenses consist primarily of personnel costs. These costs include commissions and related expenses of Tucows' sales, product management, public relations, call center, support and marketing personnel. Other sales and marketing expenses include customer acquisition costs, advertising and other promotional costs.

	2004			2003
Sales and marketing	$	5,067,841		$	3,850,081
Increase over prior year	$	1,217,760
Increase—percentage		32	%
Percentage of revenues		11	%		10	%

Sales and marketing expenses during the year ended December 31, 2004 increased by approximately $1.2 million, or 32%, to approximately $5.1 million compared to approximately $3.9 million during the year ended December 31, 2003.

The increase was primarily the result of increased people costs, including contractors, of approximately $1.1 million, related to ongoing initiatives to improve customer service and expand Tucows' sales reach. In addition, Tucows' senior managers and executive officers have a significant portion of their total compensation at risk through its incentive compensation plan. As Tucows exceeded the performance thresholds established by the compensation committee for the at risk portion of the fiscal 2004 incentive compensation plan, included in the increase in personnel costs is an amount of approximately $198,000 for senior managers and executive officers under this plan. Also included in the increase in sales and marketing expenses is an increase of approximately $107,000 primarily related to travel incurred as a result of efforts to extend Tucows sales reach and increased ICANN fees of approximately $125,000, reflecting the larger levy imposed on Tucows as a result of increases in the ICANN budget and the increased number of domain names Tucows has under management.

The increase was partly offset by a decrease in stock-based compensation of approximately $93,000 for the year ended December 31, 2004. This decrease resulted from the stock-based compensation being fully expensed by the end of March 2004.

Tucows believes that sales and marketing expenses will continue to increase, in absolute dollars, as it adjusts its marketing programs and sales strategies to meet future opportunities in the market place.

Technical operations and development expenses consist primarily of personnel costs and related expenses required to support the development of new or enhanced service offerings and the maintenance and upgrading of existing infrastructure. This includes expenses incurred in the research, design and development of technology that Tucows uses to register domain names and to supply ancillary services, as well as expenses to distribute its digital content services. Editorial costs relating to the rating and review of the software content libraries are included in technical operations and development. In accordance with the American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, costs incurred during the application development stage only are capitalized and primarily include personnel costs for employees directly related to the development project. All other costs incurred are expensed as incurred.

	2004			2003
Technical operations and development expenses	$	4,549,368		$	3,935,061
Increase over prior year	$	614,307
Increase—percentage		16	%
Percentage of revenues		10	%		11	%

Technical operations and development expenses for the year ended December 31, 2004 increased approximately $614,000, or 16%, to approximately $4.5 million from approximately $3.9 million for the year ended December 31, 2003.

The increase was primarily the result of people related costs including contract and outside service costs, which increased by approximately $506,000. Included in this increase in personnel costs was an amount of approximately $101,000 that was paid to senior managers and executive officers in 2004 under Tucows' fiscal 2004 at risk incentive compensation plan. In addition, the increase in technical operations and development expenses includes an increase of approximately $70,000, representing stock-based compensation incurred as a result of a change to the terms of the options granted to a former officer of Tucows.

These increases were offset by costs, primarily comprising a decrease in bandwidth and travel expenses of approximately $35,000 and by a decrease of approximately $73,000 in the level of expenditure for capitalized research and development, which decreased as a result of the maturing of Tucows' product offerings to approximately $338,000 for the year ended December 31, 2004 from approximately $411,000 for the year ended December 31, 2003.

Tucows expects technical operations and development expenses to increase slightly, in absolute dollars, going forward as its business continues to grow and as it further develops its applications and services.

General and administrative expenses consist primarily of compensation and related costs for managerial and administrative personnel, fees for professional services, public listing expenses, rent and other general corporate expenses.

	2004			2003
General and administrative	$	4,107,981		$	3,998,073
Increase over prior year	$	109,908
Increase—percentage		3	%
Percentage of revenues		9	%		11	%

General and administrative expenses for the year ended December 31, 2004 increased by approximately $110,000, or 3%, to $4.1 million from $4.0 million for the year ended December 31, 2003.

The increase resulted from an increase in people related costs, including contract and outside service costs of approximately $435,000. Included in this increase in people costs was an amount of approximately $353,000 that was paid to senior managers and executive officers in 2004 under Tucows' at risk incentive compensation plan. In addition, there was an increase in credit card processing, bad debts, Directors and Officers liability insurance, investor and public relations expenses and miscellaneous fees of approximately $191,000. Tucows also recorded a lower foreign exchange gain of approximately $432,000 for the year ended December 31, 2004 compared to approximately $1.1 million for the year ended December 31, 2003. The gain from foreign exchange arose primarily as a result of the effect of the foreign exchange forward contracts that Tucows entered into to mitigate the impact of exchange rate fluctuations on its Canadian dollar exposure. Tucows entered into these forward exchange contracts as part of its policy to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. As a substantial portion of its fixed expenses continue to be incurred in Canadian dollars, Tucows' financial results will remain subject to fluctuations in the foreign exchange on translation of its Canadian dollar results into US dollars, its functional currency. Therefore, Tucows will continue to regularly assess if it should enter into additional forward exchange contracts to offset the risk associated with the effects of Canadian dollar to US dollar transaction exposures. Tucows does not use forward contracts for trading or speculative purposes.

These increases were offset in part by a decrease in professional fees of approximately $942,000, predominantly as a result of incurring costs for advice obtained in connection with the evaluation of strategic alternatives and the protection of Tucows' intellectual property in the year ended December 31, 2003. In addition, facility costs, public listing, stock based compensation and other miscellaneous expenses during the year ended December 31, 2004 decreased by approximately $193,000 compared to the year ended December 31, 2003.

Tucows expects general and administrative expenses to continue to increase, in absolute dollars, going forward, as its business continues to grow and the impact of a higher Canadian dollar, more fully described in the risk factors above, is recognized.

Property and equipment is depreciated on a straight-line basis over the estimated useful life of the assets.

	2004			2003
Depreciation of property and equipment	$	1,118,734		$	1,489,570
Decrease over prior year	$	(370,836	)
Decrease—percentage		(25	)%
Percentage of revenues		3	%		4	%

The decrease in depreciation was primarily due to certain of Tucows' older computer software being fully depreciated.

Amortization of intangible assets consists of amounts relating to the purchase of Boardtown Corporation in April 2004. The intangible assets include technology, brand customer relationship and non-competition agreements entered into with the former owners. Intangible assets are amortized on a straight line basis over their expected lives, being 7 years, with the exception of the non-competition agreements which are being amortized on a straight line basis over three years.

		2004		2003
Amortization of intangible assets		$	157,760		$	—

		2004		2003
Other income (expenses), net		$	200,501		$	1,131,703

Other income includes net interest income of approximately $201,000 and approximately $132,000 for the years ended December 31, 2004 and 2003, respectively.

In connection with the sale of its back-end registry management services assets in March 2002, Tucows was entitled to earn contingent consideration of up to $1.0 million, based on each name registered or renewed in the .org registry. During the year ended December 31, 2003, Tucows earned and received the full $1.0 million of contingent consideration.

In preparing its financial statements, Tucows makes estimates of its current tax obligations and temporary differences resulting from timing differences for reporting items for financial statement and tax purposes. Tucows recognizes deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized as income or expense in the period that includes the

enactment date. Valuation allowances based on management's judgment are established when appropriate to reduce the carrying value of deferred tax assets to the amounts expected to be realized.

		2004		2003
Income taxes (recovery)		$	(3,150,432	)	$	—

Tucows operates in various tax jurisdictions, and accordingly, Tucows' income is subject to varying rates of tax. Losses incurred in one jurisdiction cannot be used to offset income taxes payable in another. Tucows' ability to use these income tax losses and future income tax deductions is dependant upon its operations in the tax jurisdictions in which such losses or deductions arise.

As of December 31, 2004, Tucows had recognized deferred tax assets, net of valuation allowances, of $3.0 million (December 31, 2003—Nil). The principal components of Tucows' gross deferred tax asset of $18.9 million primarily consist of accumulated operating loss carry forwards of $5.9 million, deferred revenue previously included in income for tax purposes of $3.6 million and amortization not yet recognized for tax purposes on acquired intangible assets purchased on the Tucows Interactive transaction of $9.5 million. Based on Tucows' assessment of factors such as historical levels of income, expectations and risks associated with estimates of future taxable income, the character of the income tax assets and ongoing tax planning strategies, Tucows assessed that a valuation allowance of $15.9 million was required at December 31, 2004 (December 31, 2003—$19.3 million). Tucows will continue to assess the realizability of the future assets based on actual and forecasted operating results. Once the available evidence, in the opinion of management, make it more likely than not that additional realization will occur, a reduction in the valuation allowance will be recorded and the carrying value of the deferred tax assets will be increased, resulting in a non-cash credit to earnings.

Tucows is entitled to certain Canadian investment tax credits ("ITC") for qualifying research and development activities performed in Canada. During 2004, Tucows recorded a tax recovery in the amount of approximately $150,000, representing the actual ITC payment received from the Canadian authorities with respect to research and development undertaken in 2000.

Results of operations for the year ended December 31, 2003 compared to December 31, 2002

	2003		2002
Net revenues	$	37,194,747		$	37,046,375
Increase over prior year	$	148,372
Increase—percentage		0	%

Total net revenues for the year ended December 31, 2003 increased to $37.2 million from $37.0 million for the year ended December 31, 2002.

During the year ended December 31, 2003, no customer accounted for more than 10% of billed revenue, and one customer accounted for 19% of accounts receivable at December 31, 2003. Subsequent to the fiscal year end, this amount was fully collected.

Net revenues from domain name and ancillary services for the year ended December 31, 2003 increased by $2.7 million, or 8.3%, to $35.1 million from $32.4 million for the year ended December 31, 2002 (after removing the effect of net revenue of approximately $0.5 million from back-end registry management services provided to the.info registry that was disposed of in March 2002).

During the year ended December 31, 2003, the number of domain names processed by Tucows increased by approximately 330,000 to approximately 3.2 million new, renewed and transferred-in

domain name registrations, compared to the year ended December 31, 2002. This increase was primarily the result of increased volumes from new and existing customers. The renewal rate for domain name registrations increased to 60% for the year ended December 31, 2003 compared to 55% for the year ended December 31, 2002.

During the year ended December 31, 2003, the total number of domain names under Tucows management increased by approximately 400,000 to approximately 3.8 million.

Deferred revenue from domain name registrations and ancillary services at December 31, 2003 increased to $28.6 million from $24.4 million at December 31, 2002.

Advertising and other revenue for the year ended December 31, 2003 increased by approximately $300,000, or 18%, to $2.0 million compared to $1.7 million for the year ended December 31, 2002. The increase was predominantly the result of growth in revenue from Tucows' Author Resource Center.

The increase in revenues for the year ended December 31, 2003 was partially offset by a reduction in subscription fee revenue of approximately $2.4 million, resulting from the sale of Tucows' search and reference services, Electric Library and Encyclopedia.com in August 2002.

Cost of revenues includes the costs associated with providing domain name registration and ancillary services, advertising and other revenue. Tucows has no direct cost of revenues relating to its advertising revenues. Cost of revenues for domain name registrations consist of registry fees and network costs. Network costs include personnel and related expenses, including bandwidth and co-location expenses to support the supply of products and services. Bandwidth and co-location expenses are composed primarily of communication and provisioning costs related to the management and support of Tucows' network.

	2003		2002
Cost of revenues	$	22,990,227		$	23,107,871
Decrease over prior year	$	(117,644	)
Decrease—percentage		(1	)%

Cost of revenues for the year ended December 31, 2003 decreased by approximately $118,000, or 1%, to $23.0 million from $23.1 million for the year ended December 31, 2002. The decrease was primarily the result of lower costs of approximately $1.9 million attributable to Electric Library subscription services and back-end registry services no longer being incurred during fiscal 2003, as these assets were disposed of during 2002. The decrease was offset by the increase in cost of revenues from increased volumes of domain names registered and digital certificates sold during the year.

Registry fees, the primary component of cost of revenues, are paid in full when the domain name is registered, and are recorded as prepaid domain name registry fees. These fees are recognized ratably over the term of the registration on a basis consistent with the recognition of revenues from Tucows' customers.

Cost of revenues of digital content distribution services includes the costs of network operations. The cost of network operations is comprised primarily of communication costs, equipment maintenance, and employee and related costs directly associated with the management and maintenance of the network.

Until the sale of its back-end registry management services business to Afilias in March 2002, Tucows was responsible for the payment of certain agreements with third party suppliers for services and technical support, including web hosting required to operate the.info registry. Under these agreements, Tucows was committed to monthly payments ranging from approximately $97,000 to approximately $335,000. This accounted for approximately $962,000 in payments from January 1, 2002 to March 2002, after which these contractual obligations were assumed by Afilias as part of the sale.

In August 2002, Tucows sold all the assets and certain liabilities associated with its search and reference services, Electric Library and Encyclopedia.com, to Alacritude. The principal element of cost associated with the delivery of these services prior to the sale was the royalty and license fees on end-user revenues paid to bigchalk.com. This amounted to approximately $972,000 in payments for the year ended December 31, 2002. Bigchalk.com was the sole provider of content, hardware, software, and related costs to deliver the Electric Library products.

	2003			2002
Sales and marketing	$	3,850,081		$	3,770,913
Increase over prior year	$	79,168
Increase—percentage		2	%
Percentage of revenues		10	%		10	%

Sales and marketing expenses during the year ended December 31, 2003 increased by approximately $79,000, or 2%, to $3.9 million compared to $3.8 million during the year ended December 31, 2002. The increase was the result of increased costs of approximately $528,000 related to ongoing initiatives to improve customer service and expand Tucows sales reach, people costs, including contractors, as well as reduced costs of approximately $290,000 primarily related to media advertising and other promotional activities, and approximately $335,000 in sales and marketing costs, incurred in 2002, attributable to Electric Library subscription services and back-end registry services that were sold during 2002. The decrease was offset by an increase in fees to ICANN of approximately $176,000, reflecting the larger levy imposed on Tucows as a result of increases in the ICANN budget.

Technical operations and development expenses consist primarily of personnel costs and related expenses required to support the development of new or enhanced service offerings and the maintenance and upgrading of existing infrastructure. This includes expenses incurred in the research, design and development of technology that Tucows uses to register domain names (both at a registrar and, before the sale of the business of Liberty RMS, at a registry level) and to distribute its digital content services. Editorial costs relating to the rating and review of the software content libraries are included in the costs of product development. In accordance with the American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, costs incurred during the application development stage only are capitalized and primarily include personnel costs for employees directly related to the development project. All other costs incurred are expensed as incurred.

	2003			2002
Technical operations and development expenses	$	3,935,061		$	3,725,966
Increase over prior year	$	209,095
Increase—percentage		6	%
Percentage of revenues		11	%		10	%

Technical operations and development expenses for the year ended December 31, 2003 increased approximately $209,000, or 6%, to $3.9 million from $3.7 million for the year ended December 31, 2002. The increase was primarily the result of people related costs, including contract and outside service costs, which increased by approximately $567,000, and travel and other costs, which increased by approximately $21,000. These increases were offset by costs of approximately $500,000 no longer being incurred for the Electric Library subscription services assets that were sold in August 2002.

This increase was further achieved by a decrease of approximately $121,000 in the level of expenditure for capitalized research and development, which decreased from approximately $532,000 for the year ended December 31, 2002 to approximately $411,000 for the year ended December 31, 2003 as a result of the maturing of Tucows' product offerings.

	2003			2002
General and administrative	$	3,998,073		$	4,523,314
Decrease over prior year	$	(525,241	)
Decrease—percentage		(12	)%
Percentage of revenues		11	%		12	%

General and administrative expenses for the year ended December 31, 2003 decreased by approximately $525,000, or 12%, to $4.0 million from $4.5 million for the year ended December 31, 2002. The decrease was primarily the result of a larger gain on foreign exchange contracts in 2003 of approximately $1.4 million. The forward foreign exchange contracts were purchased in June 2002 and expired semi-monthly to December 2003. In addition, Tucows did not incur expenses of approximately $584,000 pertaining to its Electric Library subscription services and back-end registry services assets, including payroll costs, credit card processing fees and facilities costs, during the year ended December 31, 2003 as a result of the disposal of these assets during 2002. Finally, bad debts recovered and lower consulting and investor relations' expenditures reduced general and administrative expenses by approximately $120,000 in 2003 compared to the previous year.

These decreases were offset by increases in professional fees by approximately $916,000, including approximately $567,000 related to the evaluation of strategic alternatives, directors and officers' liability insurance by approximately $100,000 and increases in payroll, credit card processing fees and facilities costs of approximately $290,000. Finally, as a result of a refund of approximately $197,000 received for state taxes during the year ended December 31, 2002, net state tax expense increased by approximately $265,000.

Property and equipment is depreciated on a straight-line basis over the estimated useful life of the assets.

	2003			2002
Depreciation of property and equipment	$	1,489,570		$	2,675,836
Decrease over prior year	$	(1,186,266	)
Decrease—percentage		(44	)%
Percentage of revenues		4	%		7	%

The decrease in depreciation was primarily due to certain of Tucows older computer software being fully depreciated, as well as Electric Library subscription services and back-end registry services assets being disposed of during 2002.

Amortization of intangible assets consists of amounts relating to the non-competition agreements entered into with the former owners of the Tucows division of Tucows Interactive Limited, which were amortized on a straight-line basis over three years.

	2003			2002
Amortization of intangible assets	$	—		$	222,222
Decrease over prior year	$	(222,222	)
Decrease—percentage		(100	)%
Percentage of revenues		—	%		1	%

		2003		2002
Other income (expenses), net		$	1,131,703		$	2,846,578

In connection with the sale of its back-end registry management services assets in March 2002, Tucows was entitled to earn contingent consideration of up to $1.0 million, based on each name registered or renewed in the.org registry. During the year ended December 31, 2003, Tucows earned and received the full $1.0 million of contingent consideration.

During the year ended December 31, 2002, other income includes a gain of approximately $1.8 million that Tucows recorded in connection with the sale of all of the assets and certain liabilities associated with Tucows' search and reference services, Electric Library and Encyclopedia.com, in August 2002. It also includes a gain of approximately $2.0 million that Tucows recorded in connection with the disposition of its back-end registry services business to Afilias in March 2002.

These gains during 2002 were offset by Tucows' loss on sale of Eklektix of approximately $44,000 and the loss of approximately $1.0 million that Tucows recorded on the write down of its investment in bigchalk in June 2002. Until December 31, 2002, Tucows held an 11% interest in bigchalk.com, a privately held company. Tucows recorded a write down of its investment based on Tucows' review of the carrying value of this investment and its conclusion that an other than temporary decline in the value of the investment had occurred. The carrying value of this investment at December 31, 2002 was nil.

Other income includes net interest income of approximately $132,000 and approximately $102,000 for the years ended December 31, 2003 and 2002, respectively.

No provision for income taxes has been recorded for the years ending December 31, 2003 and 2002 as Tucows level of historical taxable income and net operating losses of approximately $15 million make it unlikely that Tucows will reach a taxable position in the near future.

At December 31, 2003, Tucows had a net future tax asset of $19.3 million, primarily consisting of accumulated operating loss carry forwards of $5.8 million, deferred revenue previously included in income for tax purposes of $3.0 million and amortization not yet recognized for tax purposes of $9.8 million. Tucows has provided a full valuation allowance for its net future tax assets as it believes that sufficient uncertainty exists regarding the realizability of the future tax assets. Tucows will continue to assess the realizability of the future assets based on actual and forecasted operating results. Once the available objective evidence creates sufficient certainty that Tucows believes, in accordance with the provisions of SFAS No. 109, that realization is reasonably assured, a reduction in the valuation allowance may be recorded and the carrying value of the future tax assets may be restored, resulting in a non-cash credit to earnings.

The following table summarizes selected unaudited quarterly financial data for the past eight quarters:

	Three months ended
	March 31, 2004		June 30, 2004		September 30, 2004		December 31, 2004
	(unaudited)
Net revenues	$	10,174,909	$	10,638,965	$	12,381,326	$	11,521,955
Gross profit		3,729,494		4,080,565		4,726,851		4,614,179
Income from operations		111,480		623,455		613,710		800,760
Net income for the period (note 1)		149,113		665,558		820,691		3,864,976
Basic and diluted income per share	$	—	$	0.01	$	0.01	$	0.06
Shares used in computing basic income per common share		64,690,887		65,991,867		66,800,369		66,817,250
Shares used in computing diluted income per common share		72,098,757		72,370,411		68,477,632		68,893,918

	March 31, 2003		June 30, 2003			September 30, 2003		December 31, 2003
	(unaudited)
Net revenues	$	8,996,914	$	9,167,299		$	9,315,760	$	9,714,774
Gross profit		3,420,271		3,484,577			3,507,952		3,791,720
Income (loss) from operations		618,221		(88,405	)		13,388		388,531
Net income for the period		880,283		577,919			179,386		425,850
Basic and diluted income per share	$	0.01	$	0.01		$	—	$	0.01
Shares used in computing basic income per common share		64,626,429		64,626,429			64,626,429		64,626,429
Shares used in computing diluted income per common share		64,626,429		64,674,737			64,726,663		70,858,586

At December 31, 2004, Tucows' principal source of liquidity was cash and cash equivalents of approximately $13.9 million compared to approximately $12.9 million at December 31, 2003, an increase of approximately $1.0 million.

Net cash provided by operating activities was approximately $4.7 million for the year ended December 31, 2004, compared to approximately $3.2 million for the year ended December 31, 2003. Net cash provided by operating activities for 2004 and 2003 resulted primarily from net income for those years and increases in deferred revenue (representing cash received in advance of provision of the services). These increases were partially offset by an increase in prepaid domain name registry fees.

Net cash used in investing activities was approximately $4.4 million for the year ended December 31, 2004. This was primarily as a result of the acquisition of Boardtown Corporation in April 2004, which accounted for $3.0 million. Under the Boardtown acquisition agreement, Tucows paid $2.0 million in cash and transferred $1.0 million into escrow, being contingent consideration that may become payable upon certain performance milestones being met. These milestones will be assessed for potential payment at various contractual dates between April 2005 and April 2007. In 2004, $1.0 million was used for the purchase of property and equipment, principally computers and related software, to meet Tucows' operational needs. In addition, Tucows had a net increase of $328,000 in restricted cash. $178,000 of this amount was as a result of an increase in margin security against forward exchange contracts intended to mitigate the risk of exchange rate fluctuations of a portion of Tucows' Canadian dollar exposure. The remaining $150,000 was used as security against letters of credit to support Tucows' obligations to a registry. These letters of credit expired in November 2004, and in January 2005, the $150,000 was released and became unrestricted because the security obligation was no longer required by the registry.

For the year ended December 31, 2003, net cash provided by investing activities was approximately $848,000, primarily as a result of the proceeds of approximately $1.0 million received as contingent consideration based on each name registered or renewed in the .org registry, as well as the release of approximately $805,000 of Tucows cash and cash equivalents that had been pledged as margin security against forward exchange contracts purchased in June 2002. These proceeds were partially offset by net cash used for the purchase of property and equipment of approximately $957,000 in 2003.

Net cash provided by financing activities was approximately $726,000 for the year ended December 31, 2004, representing proceeds received on the exercise of stock options during the year.

Based on Tucows' operations, Tucows believes that its cash flow from operations will be adequate to meet its anticipated requirements for working capital and capital expenditures for at least the next 12 months. Tucows may then need to, or before that time it may choose to, raise additional funds or

seek other financing arrangements to facilitate more rapid expansion, including significant increases in personnel and office facilities, to develop new or enhance existing products or services, to respond to competitive pressures, or to acquire or invest in complementary businesses, technologies, services or products.

If additional financing is required, Tucows may not be able to raise it on acceptable terms, or at all, and additional financing may be dilutive to existing investors. Tucows may also evaluate potential acquisitions of other businesses, products and technologies. To complete potential acquisitions, Tucows may issue additional securities or need additional equity or debt financing and any additional financing may be dilutive to existing investors. There are currently no material understandings, commitments or agreements about any acquisition of other businesses, products or technologies.

Tucows has not entered into any off balance sheet financial arrangements and has not established any special purpose entities as of December 31, 2004 nor has it guaranteed any debt or commitment of other entities. As such, Tucows is not materially exposed to any financing, liquidity, market or credit risk that could arise if Tucows had engaged in such relationships. A summary of Tucows' contractual obligations and commercial commitments as of December 31, 2004 is presented in the table below. Purchase obligations include amounts committed under legally enforceable contracts or purchase orders.

See additional discussion under Quantitative and Qualitative Disclosures about Market Risk in connection with the forward foreign exchange contracts entered into by Tucows in December 2004.

Tucows develops products in Canada and sells these products in North America and Europe. Tucows' sales are primarily made in U.S. dollars, while a major portion of expenses are incurred in Canadian dollars. Tucows' financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Tucows' interest income is sensitive to changes in the general level of Canadian and U.S. interest rates, particularly since the majority of its investments are in short-term instruments. Based on the nature of its short-term investments, Tucows has concluded that there is no material interest rate risk exposure at December 31, 2004.

Although Tucows has a functional currency of U.S. dollars, a substantial portion of its fixed expenses are incurred in Canadian dollars. 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. Accordingly, Tucows has entered into foreign exchange forward contracts to mitigate the exchange rate risk on portions of its Canadian dollar exposure. These contracts, entered into in December 2004, will be utilized over the three months ending March 31, 2005.

Such foreign exchange forward contracts have not been treated as hedges for accounting purposes as Tucows has not complied with the documentation requirements. Tucows has accounted for the fair

value of the derivative instruments within the consolidated balance sheet as a derivative financial asset or liability and the corresponding change in fair value is recorded in the consolidated statement of operations. Tucows has no other freestanding or embedded derivative instruments.

The impact of the fair value adjustment on unrealized foreign exchange forward contracts for the year ended December 31, 2004 was a net gain of approximately $89,000, and for the year ended December 31, 2003, the impact was a net loss of approximately $279,000, which is reflected on the consolidated statements of operations in general and administrative expenses. As of December 31, 2004, Tucows had outstanding foreign currency forward contracts totaling $4.5 million, with exchange rates varying from US$1.00 to Cdn$1.2310 to US$1.00 to Cdn$1.2311.

Tucows has performed a sensitivity analysis model for foreign exchange exposure over the year ended December 31, 2004. The analysis used a modeling technique that compares the U.S. dollar equivalent of all expenses incurred in Canadian dollars, at the actual exchange rate, to a hypothetical 10% adverse movement in the foreign currency exchange rates against the U.S. dollar, with all other variables held constant. Foreign currency exchange rates used were based on the market rates in effect during the year ended December 31, 2004. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a decrease in net income for the year ended December 31, 2004 of approximately $1.1 million. There can be no assurances that the above projected exchange rate decrease will materialize. Fluctuations of exchange rates are beyond the control of Tucows. Tucows will continue to monitor and assess the risk associated with these exposures and may at some point in the future take actions to hedge or mitigate these risks.

Tucows' consolidated financial statements and supplementary data required by this item are attached to this Annual Report on Form 10-K beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Tucows' management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness Tucows' disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, Tucows' chief executive officer and chief financial officer concluded that Tucows' disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by Tucows in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Tucows believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

No change in Tucows' internal control over financial reporting occurred during Tucows' most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Tucows' internal control over financial reporting.

The information required by this item concerning directors is incorporated by reference to Tucows' definitive proxy statement in connection with Tucows' 2005 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K (the "Proxy Statement") or an amendment to this Annual Report on Form 10-K/A. The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this item will be set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated by reference to the Proxy Statement or an amendment to this Annual Report on Form 10-K/A.

The information required by this item concerning executive officers is set for the in Part I, Item 1 of this Annual Report on Form 10-K.

The information required by this item is incorporated by reference to the Proxy Statement or an amendment to this Annual Report on Form 10-K/A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to the Proxy Statement or an amendment to this Annual Report on Form 10-K/A.

Exhibit No.		Description
3.1		Third Amended and Restated Articles of Incorporation of Tucows.(1)
3.2		Amended and Restated Bylaws of Tucows.(2)
10.1		Registration Rights Agreement, dated as of August 28, 2001, by and among Infonautics, Inc., Parman Holding Corp., Yossi Vardi, Redel Inc., Hapoalim Nechasim (Menayot) Ltd., Eurocom Communications Ltd., XDL U.S. Holdings Inc., FIBI Investment House Ltd., STI Ventures N.V. and Scorpio Communications Ltd.(3)
10.2*		Amended and Restated 1996 Equity Compensation Plan Agreement.(4)
10.3*		Employment Agreement dated January 22, 2003 between Tucows.com Co. and Elliot Noss.(5)
10.4*		Employment Agreement dated March 11, 2003 between Tucows.com Co. and Michael Cooperman.(5)
10.5*		Employment Agreement dated March 11, 2003 between Tucows.com Co. and Supriyo Sen.(5)
10.6*		Employment Agreement dated March 11, 2003 between Tucows.com Co. and Graham Morris
10.7		Lease between 707932 Ontario Limited and Tucows International Corporation, dated December 10, 1999.(6)
10.8*		Lease extension between 707932 Ontario Limited and Tucows Inc. and Tucows.com Co., dated September 4, 2004.
10.9*		Description of Tucows Fiscal 2004 At Risk Compensation Plan
21.1		Subsidiaries of Tucows Inc.
23.1		Consent of KPMG LLP.
31.1		Chief Executive Officer's Rule 13a-14(a)/15d-14(a) Certification.
31.2		Chief Financial Officer's Rule 13a-14(a)/15d-14(a) Certification.
32.1		Chief Executive Officer's Section 1350 Certification.
32.2		Chief Financial Officer's Section 1350 Certification.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons of behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ ELLIOT NOSS Elliot Noss	President, Chief Executive Officer (Principal Executive Officer) and Director	March 24, 2005
/s/ MICHAEL COOPERMAN Michael Cooperman	Chief Financial Officer (Principal Financial and Accounting Officer)	March 24, 2005
/s/ STANLEY STERN Stanley Stern	Director	March 24, 2005
/s/ EREZ GISSIN Erez Gissin	Director	March 24, 2005
/s/ ALAN LIPTON Alan Lipton	Director	March 24, 2005
/s/ LLOYD N. MORRISETT Lloyd N. Morrisett	Director	March 24, 2005

		Pages
Consolidated Financial Statements of Tucows Inc.		F-2
Report of Registered Independent Public Accounting Firm dated February 7, 2005		F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003		F-4
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002		F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 2004, 2003 and 2002		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002		F-7
Notes to Consolidated Financial Statements		F-8

Tucows Inc.
Consolidated Financial Statements
(Dollar amounts in U.S. dollars)
Years ended December 31, 2004, 2003 and 2002

We have audited the accompanying consolidated balance sheets of Tucows Inc as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tucows Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

Tucows Inc.

Consolidated Statements of Operations

(Dollar amounts in U.S. dollars)

Tucows Inc.

Consolidated Statements of Stockholders' Equity (Deficiency)

(Dollar amounts in U.S. dollars)

Tucows Inc.

Consolidated Statements of Cash Flows

(Dollar amounts in U.S. dollars)

Tucows Inc.

Notes to Consolidated Financial Statements

(Dollar amounts in U.S. dollars)

The Company is a global distributor of Internet services, including domain name registration, security and identity products through digital certificates and email, through its global Internet-based distribution network of Internet Service Providers, web hosting companies and other providers of Internet services to end-users.

These financial statements are stated in U.S. dollars, except where otherwise noted. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.

Investments over which the Company is unable to exercise significant influence, are recorded at cost and written down only when there is evidence that a decline in value that is other than temporary has occurred.

The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP necessarily requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to amounts recognized for or carrying values of revenues, bad debts, investments, goodwill, intangible assets, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances at the time they are made. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of the Company's control.

All highly liquid investments, with an original term to maturity of three months or less at the date of acquisition, are classified as cash equivalents.

Property and equipment are stated at cost, net of accumulated amortization. Amortization is provided on a straight-line basis so as to amortize the cost of depreciable assets over their estimated useful lives at the following rates:

Asset	Rate
Computer equipment	30	%
Computer software	100	%
Furniture and equipment	20	%
Leasehold improvements	Over term of lease

The Company reviews the carrying values of its property and equipment for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. If such assets are considered impaired, the amount of the impairment loss recognized is measured as the amount by which the carrying value of the asset exceeds the fair value of the asset, with fair value being determined based upon discounted cash flows or appraised values, depending on the nature of the asset.

Intangible assets, which represent technology, brand value, customer relationships and non-compete arrangements related to the acquisition of Boardtown Corporation in 2004, are being amortized on a straight-line basis over periods of three or seven years. The Company reviews the carrying values of its intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. If such assets are considered impaired, the amount of the impairment loss recognized is measured as the amount by which the carrying value for the asset exceeds the fair value of the asset, with fair value being determined based upon discounted cash flows or appraised values, depending on the nature of the asset.

Goodwill represents the excess of the purchase price over the fair values of net identifiable assets acquired. In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", the Company does not amortize goodwill but is required to evaluate goodwill annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Absent triggering factors during the year, the Company conducts its goodwill assessment in the fourth quarter to correspond with its measurement planning cycle. Impairment is tested at the reporting unit level by comparing the reporting unit's carrying amount to its fair value. The fair values of the reporting units are estimated using discounted cash flows based on historical experience and on various other assumptions, including current market trends and developments. To the extent a reporting

unit's carrying amount exceeds its fair value, an impairment of goodwill exists. Impairment is measured by comparing the fair value of goodwill, determined in a manner similar to a purchase price allocation, to its carrying value.

The Company's revenues are derived from domain name registration fees on both a wholesale and retail basis and ancillary services and advertising and other revenue. Amounts received in advance of meeting the revenue recognition criteria described below are recorded as deferred revenue.

The Company earns registration fees in connection with each new, renewed and transferred-in registration and from providing provisioning services to Service Providers and registrars on a monthly basis. Service has been provided in connection with registration fees once the Company has confirmed that the requested domain name has been appropriately recorded in the registry under contractual performance standards. Domain names are generally purchased for terms of one to ten years. Registration fees charged for domain name registration and provisioning services are recognized on a straight-line basis over the life of the contracted term. Registration fee revenues are net of any promotional rebates as the Company has a continuing obligation to provide services to customers throughout the registration period.

The Company also generates advertising and other revenue through its online libraries of shareware, freeware and online services presented on its website. Advertising and other revenues are recognized ratably over the period in which it is presented. To the extent that minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until the guaranteed impressions are achieved. The Company has also entered into barter arrangements with other Internet companies to place advertisements on each other's web sites. Revenue and expense from an advertising barter transaction is recognized only when the value of the advertising surrendered is determinable based on the Company's own historical practice of receiving cash for similar advertising. The Company recognized barter advertising of nil, nil and $51,342 during the years ended December 31, 2004, 2003 and 2002, respectively.

In those cases where payment is not received at the time of sale, additional conditions for recognition of revenue are that the collection of sales process is reasonably assured and the Company has no further performance obligations. The Company records costs that reflect expected refunds, rebates and credit card charge-backs as a reduction of revenues at the time of the sale based on historical experiences and current expectations.

The Company establishes reserves for possible uncollectible accounts receivable and other contingent liabilities which may arise in the normal course of business. Historically, credit losses have been within the Company's expectations and the reserves the Company has established have been appropriate. However, the Company has, on occasion, experienced issues which have led to accounts receivable not being fully collected. Should these issues occur more frequently, additional reserves may be required.

Deferred revenue primarily relates to the unearned portion of revenues received in advance related to the unexpired term of registration fees from domain name registrations and ancillary services, net of external commissions. Revenue received in advance of the provision of services from advertising and Sleuth search technology is deferred and recognized in the month that the services are provided.

Accreditation fees relate to the unpaid portion of accreditation fees paid to ICANN in connection with the registration of GTLD's.

Prepaid domain name registry and ancillary services fees represent amounts paid to registries, and country code domain name operators for updating and maintaining the registries, as well as to suppliers of ancillary services. Domain name registry and ancillary services fees are recognized on a straight-line basis over the life of the contracted registration term.

The Company's functional currency is the United States dollar. Monetary assets and liabilities of the Company and of its wholly owned subsidiaries that are denominated in foreign currencies are translated into United States dollars (which is considered to be the measurement currency) at the exchange rates prevailing at the balance sheet dates. Non-monetary assets and liabilities are translated at the historical exchange rates. Transactions included in operations are translated at the average rate for the year. Foreign exchange gains (losses) amounting to $343,506, $772,027, and $(80,480) have been recorded in operating expenses in the consolidated statement of operations during the years ended December 31, 2004, 2003 and 2002, respectively.

The Company follows Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS 133, as amended establishes accounting and reporting standards for derivative instruments and hedging activities. The Company has not complied with the documentation standards required for its forward foreign exchange contracts to be accounted for as hedges under SFAS 133 and has, therefore, accounted for such forward foreign exchange contracts at their fair value with a gain recorded in the consolidated statement of operations of $88,743 and, $279,174 for the years ended December 31, 2004 and 2003, respectively, and a loss recorded in the consolidated statement of operations of $260,289 for the year ended December 31, 2002, equal to the change in the fair value of such contracts. The fair value of the forward foreign exchange contracts is included in prepaid expenses in the consolidated balance sheet at December 31, 2004 and December 31, 2003.

Product development costs are expensed as incurred. The Company accounts for the costs of computer software developed or obtained for internal use in accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Under this SOP, costs that are incurred in the preliminary stage of software development are expensed as incurred. Costs incurred during the application and development stage are capitalized and generally include external direct costs of materials and services consumed in the development and payroll and payroll- related costs for employees who are directly associated with the development project. Costs incurred in the post implementation and operation stage are expensed as incurred. The Company capitalized $338,500, $411,200 and $532,200 during the years ended December 31, 2004, 2003 and 2002, respectively, of such costs relating to the development of internal use software. The capitalized costs of computer software developed for internal use are amortized on a straight-line basis over one year from the date the software is put into use.

Under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the year that includes the enactment date. A valuation allowance is recorded if it is not "more likely than not" that some portion of or all of a deferred tax asset will be realized.

The Company is entitled to earn investment tax credits ("ITCs"), which are credits related to specific qualifying expenditures as prescribed by Canadian Income Tax legislation. These ITCs relate primarily to research and development expenses. The ITCs are recognized once the Company has reasonable assurance that the amounts will be realized. ITCs recognized in the year ended December 31, 2004 have been recorded as a recovery of income taxes.

The Company has elected to follow the intrinsic-value-based method of accounting as prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and related interpretations, in accounting for its employee stock options. Under APB 25, deferred stock-based compensation is recorded at the option grant date in an amount equal to the difference between the market value of a common share and the exercise price of the option. Deferred stock-based compensation resulting from employee option grants is amortized over the vesting period of the individual options, generally four years, in accordance with the accelerated measurement method in Financial Accounting Standards Board Interpretation No. 28.

Stock options granted to consultants and other non-employees are accounted for using the fair value method under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"). Under this method, the fair value of options granted is recognized as services are performed and options are earned.

The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each year.

To determine the fair value of each option on the grant date in 2004, 2003 and 2002, the following assumptions were used for the Company's stock option plan: dividend yield of 0.0% for each year, volatility of 132.4%, 138.8%, and 157%, respectively, a weighted average risk free interest rate of 3.2%, 2.8% and 3.46%, respectively, and a weighted average expected life of options of four years for each year. The weighted average grant date fair value for options issued in 2004, 2003 and 2002, with the exercise price equal to market value on the date of grant, were $0.61, $0.37 and $0.47, respectively.

Basic income per common share has been calculated on the basis of income for the year divided by the weighted average number of common shares outstanding during each year. Diluted net income per share is the same as basic income per share. Diluted income per share gives effect to all dilutive potential common shares outstanding at the end of the year had been issued, converted or exercised at the later of the beginning of the year or their date of issuance. In computing diluted income per share, the treasury stock method is used to determine the number of shares assumed to be purchased from the conversion of common stock equivalents or the proceeds of exercises of options.

The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computation:

		Year ended December 31, 2004		Year ended December 31, 2003		Year ended December 31, 2002
Numerator for basic and diluted income per common share:
	Income for the year	$	5,500,338	$	2,063,438	$	1,866,831

Denominator for basic and diluted income per common share:
	Basic weighted average number of common shares outstanding		66,079,104		64,626,429		64,626,429
	Effect of stock options		1,972,475		99,500		—

	Diluted weighted average number of shares outstanding		68,051,579		64,725,929		64,626,429

Basic income per common share		$	0.08	$	0.03	$	0.03

Diluted income per common share		$	0.08	$	0.03	$	0.03

Options to purchase 864,310 shares of common stock were outstanding during 2004 (2003 : 8,554,754, 2002 : 7,660,257) but were not included in the computation of diluted income per common share because the options' exercise price was greater than the average market price of the common shares. The options which expire in years 2005 to 2014 were still outstanding at the end of 2004.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, accounts receivable and forward foreign exchange contracts. Cash equivalents consist of deposits with, or guaranteed by, major commercial banks, the maturities of which are three months or less form the date of purchase. With respect to accounts receivable, the Company performs periodic credit evaluations of the financial condition of its customers and typically does not require collateral from them. The counterparty to the forward foreign exchange contracts is a major commercial bank which management believes does not represent a significant credit risk. Management assesses the need for allowances for potential credit losses by considering the credit risk of specific customers, historical trends and other information. No customer accounted for more than 10% of revenue in 2004, 2003 or 2002. Two customers accounted for 27% of accounts receivable at December 31, 2004 and one customer accounted for 19% and 17% of accounts receivable at December 31, 2003 and 2002 respectively. All of these accounts receivable have been collected.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the relatively short periods to maturity of the instruments.

The Company follows Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement requires companies to classify items of their comprehensive income by their nature in the financial statements and display the accumulated balance of other comprehensive income separately from deficit and additional paid-in capital in the equity section of the balance sheet. There was no difference between net income and comprehensive income for the years ended December 31, 2004, 2003 and 2002.

The Company follows Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for reporting information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates in one business segment.

The Company's revenues are attributed to the country in which the contract originates, primarily Canada. Revenues from domain names issued from the Toronto, Canada location are attributed to Canada because it is impracticable to determine the country of the customer.

In December 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment," which requires companies to expense the fair value of employee stock options and other forms of share-based compensation. Accordingly, SFAS 123R eliminates the use of the intrinsic value method to account for share-based compensation transactions as provided under APB Opinion No. 25. Under SFAS 123R, Tucows is required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. Tucows currently uses the Black-Scholes option-pricing model to value options for pro-forma financial statement disclosure purposes in note 2 (n). The use of a different model to value options may result in a different fair value than the use of the Black-Scholes option-pricing model. Tucows is required to adopt SFAS 123R in the third quarter of fiscal 2005. Tucows is evaluating the requirements of SFAS 123R and anticipates that the adoption of FAS 123(R) will affect our results of operations to an extent similar to that as presented in our FAS 123 pro forma disclosure included in note 2 (n).

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). In December 2003, the FASB issued FIN 46R which superseded FIN 46 and contains numerous exemptions. FIN 46R applies to financial statements of public entities that have or potentially have interests in entities considered special

purpose entities for periods ended after December 15, 2003 and otherwise to interests in Variable Interest Entities, or VIEs for periods ending after March 15, 2004. VIEs are entities that have insufficient equity and/or their equity investors lack one or more specified essential characteristics of a controlling financial interest. FIN 46R provides specific guidance for determining when an entity is a VIE and who, if anyone, should consolidate the VIE. The adoption of FIN 46R did not have a material effect on the Company's consolidated financial statements.

On April 27, 2004, the Company finalized the acquisition of 100% of the outstanding capital stock of Boardtown Corporation ("Boardtown") for total purchase consideration of up to $4.0 million. The Company has paid $2.0 million of this consideration in cash and $274,540 by the issuance of 356,546 Tucows Inc. common shares. The remaining $1.75 million in consideration is being held in escrow contingent upon the achievement of certain performance milestones and to secure certain warranties, representations and covenants in the acquisition agreement. Of the remaining $1.75 million held in escrow, $750,000 is in the form of 1,069,644 Tucows Inc. common shares, which are not included in the determination of diluted earnings per common share, and $1.0 million is in cash. This additional contingent consideration will be recorded when the amount becomes fixed and determinable and will be reflected as additional goodwill at that time.

The total aggregate consideration paid at December 31, 2004 amounting to $2,321,782 is comprised of:

The fair value of assets acquired based on the consideration paid, is as follows:

Current assets (including cash of $27,732)				$	110,440
Property and equipment					52,861
Intangible assets including:
	Technology	$	540,000
	Brand		170,000
	Customer relationships		500,000
	Non-compete agreements		190,000		1,400,000

Goodwill					964,467
Current liabilities					(205,986	)

				$	2,321,782

The amount assigned to intangible assets is based upon an independent appraisal. Intangible assets, excluding goodwill, are being amortized over a period of seven years on a straight-line basis,

with the exception of the non-compete agreements which are being amortized over a period of three years on a straight-line basis.

The following unaudited supplemental pro-forma information is presented to illustrate the effects of the acquisition on the historical operating results for the years ended December 31, 2004 and 2003, as if the acquisition had occurred at the beginning of the respective periods.

	Year ended December 31, 2004		Year ended December 31, 2003
	(unaudited)		(unaudited)
Net revenues	$	45,122,156	$	38,722,077
Net income		5,520,199		2,224,488
Pro forma basic and diluted earnings per share	$	0.08	$	0.03

On March 25, 2002, the Company sold all of the outstanding shares of Liberty RMS, which was a wholly owned subsidiary, and certain technology required to provide registry services, to Afilias, Limited. Liberty RMS owned and operated the back-end registry services for the.info registry. Total consideration received consisted of cash proceeds of $977,000 and a receivable of $87,000. The Company has recorded a gain on the disposition of Liberty RMS of $1,955,443. The Company was also entitled to additional contingent consideration of up to $1 million primarily based on Afilias having been awarded the back end registry provider for the.org registry. The full amount has been earned and recognized as other income during the year ended December 31, 2003.

On August 16, 2002, the Company sold all the assets and certain liabilities associated with its search and reference services, Electric Library and Encyclopedia.com, to Alacritude, LLC, an unrelated party. Total consideration received consisted of cash proceeds of $1,577,129 (including an intellectual property license fee of $100,000), net of liabilities assumed by Alacritude, LLC. This resulted in a gain on the disposition of these assets in the amount of $1,846,717.

		December 31, 2004		December 31, 2003
Computer equipment		$	3,516,997	$	3,140,227
Computer software			6,114,137		5,602,986
Furniture and equipment			885,112		785,706
Leasehold improvements			664,205		563,962

			11,180,451		10,092,881

Less:
	Accumulated amortization		10,033,214		8,914,481
	Write-down of property and equipment		130,000		130,000

			10,163,214		9,044,481

		$	1,017,237	$	1,048,400

Intangible assets consist of technology, brand, customer relationships and non-competition agreements, which were entered into with the former owners of Boardtown Corporation. These balances are being amortized on a straight-line basis over the term of the intangible assets, being seven years, except the non-competition agreements which are being amortized on a straight-line basis over three years.

Non-competition agreements were entered into with the former owners of the Tucows Division of Tucows Interactive Limited. These balances were being amortized on a straight-line basis over the term of the non-competition agreement, being three years and was fully amortized as of December 31, 2002.

The following table shows the estimated amortization expense for each of the next 5 years, assuming no further additions to acquired intangible assets are made:

The Company holds a 7% interest in Afilias, Limited ("Afilias"), a private company, which is a consortium of 18 domain name registrars.

Until December 31, 2002, the Company also held an 11% interest in bigchalk.com, Inc. ("bigchalk"), a private company. In 2002, the Company paid bigchalk content royalties and technical service fees for content provided to the Electric Library site which amounted to $971,586. During 2002, the Company recorded a write-down in the amount of $1,013,335 against the carrying value of its investment in bigchalk.

The Company's 1996 Stock Option Plan was established for the benefit of the employees, officers, directors and certain consultants of the Company. The maximum number of common stock which may be set aside for issuance under the Plan is 11,150,000 shares (2002 - 10,000,000), provided that the Board of Directors of the Company has the right, from time to time, to increase such number subject to the approval of the stockholders of the Company when required by law or regulatory authority. Generally, options issued under the Plan vest over a four-year period.

As of December 31, 2004, the exercise prices and weighted average remaining contractual life of outstanding options were as follows:

The Company recorded stock-based compensation amounting to $69,737 for the year ended December 31, 2004 as a result of modification of the terms of certain options granted to a former employee (nil for the years ended December 31, 2003 and 2002). Amortization of deferred stock-based compensation amounted to $20,593 for the year ended December 31, 2004, $162,704 for the year ended December 31, 2003 and $162,703 for the year ended December 31, 2002.

The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate of 35% to the income before provision for income taxes as a result of the following:

		Year ended December 31, 2004			Year ended December 31, 2003			Year ended December 31, 2002
Income for the year before provision for income taxes		$	2,349,906		$	2,063,438		$	1,866,831

Computed expected tax (expense) recovery		$	822,000		$	(722,000	)	$	(653,000	)
Reduction in income tax recovery resulting from:
	State income taxes		75,000			(62,000	)		(56,000	)
	Permanent differences		132,000			254,000			(198,000	)
	ITCs recovered		(150,432	)		—			—
	Other		(660,000	)		—			—
	Impact of change in income tax rates		—			—			(1,091,000	)
	Change in beginning of the year balance of the valuation allowance allocated to income tax expense		(3,369,000	)		530,000			1,998,000

		$	(3,150,432	)	$	—		$	—

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets as of December 31, 2004 and 2003 are presented below:

		December 31, 2004			December 31, 2003
Deferred tax assets:
	Net operating loss carried forward	$	5,883,000		$	5,844,000
	Deferred revenue		3,649,000			2,992,000
	Reserves		312,000			190,000
	Capital losses		45,000			385,000
	Amortization		9,025,000			9,872,000

	Total gross deferred tax assets		18,914,000			19,283,000
	Less valuation allowance		(15,914,000	)		(19,283,000	)

Net deferred tax assets		$	3,000,000		$	—

Deferred income tax asset, current portion		$	1,000,000		$	—
Deferred income tax asset, long-term portion			2,000,000			—

		$	3,000,000		$	—

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate

realization of deferred tax assets is dependent upon the generation of future taxable income during the years in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is appropriate to record a valuation allowance in the amount of $15.9 million at December 31, 2004 and a full valuation allowance at December 31, 2003.

As of December 31, 2004, the Company had approximately $15,482,000 of losses available to reduce future years' U.S. taxable income which expire on various dates between 2019 and 2021. In order to utilize tax assets, the company would have to earn taxable income of approximately $49.7 million.

(a) The Company has several non-cancelable lease and purchase obligations primarily for general office facilities and equipment that expire over the next five years. Future minimum payments under these agreements are as follows:

(b) In the normal course of operations, the Company is subject to various lawsuits and other claims. The Company believes that the outcome of any of the outstanding claims would not result in a material effect on the Company's financial position.

(c) To manage its exposure to foreign exchange rate fluctuations, the Company has entered into a series of forward foreign exchange contracts ("Contracts") whereby amounts of $550,000 and $1,750,000 are converted into Canadian dollars on a semi-monthly basis until the end of March 2005 at an foreign exchange rates varying from 1.2310 to 1.2311. The notional principal of the outstanding Contracts at December 31, 2004 is $4.5 million. As margin security against these Contracts, the Company has placed $225,000 into secured term deposits, which mature on a monthly basis in line with the Contracts and has been reflected as restricted cash on the balance sheet, together with margin security of $85,000 released in January 2005 and $150,000 securing letters of credit that expired in November 2004 that was released in January 2005.

(a) The following is a summary of the Company's revenue earned from each significant revenue stream:

	Year ended December 31, 2004		Year ended December 31, 2003		Year ended December 31, 2002
Advertising and other revenue	$	3,217,368	$	2,046,860	$	1,698,179
Domain name and ancillary services		41,499,787		35,147,887		32,944,811
Electric Library subscription		—		—		2,403,385

	$	44,717,155	$	37,194,747	$	37,046,375

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Pennsylvania (State or Other Jurisdiction of Incorporation or Organization)		23-2707366 (I.R.S. Employer Identification No.)
96 Mowat Avenue Toronto, Ontario, Canada (Address of Principal Executive Offices)		M6K 3M1 (Zip Code)

			Year ended December 31,
			2004			2003		2002			2001			2000
			(in thousands, except per share data)
Statement of Operations Data:
Net revenues			$	44,717		$	37,195	$	37,046		$	31,590		$	14,440
Cost of revenues				27,566			22,990		23,108			21,106			7,785

Gross profit				17,151			14,205		13,938			10,484			6,655
Operating expenses:
	Sales and marketing			5,068			3,850		3,771			6,380			11,121
	Technical operations and development			4,549			3,935		3,726			5,053			4,132
	General and administrative			4,108			3,998		4,523			4,013			4,704
	Depreciation of property and equipment			1,119			1,490		2,676			3,203			1,701
	Loss on write-off of property and equipment			—			—		—			130			—
	Amortization of intangible assets			158			—		222			3,657			11,617
	Write-down of intangible assets			—			—		—			1,325			11,325

				15,002			13,273		14,918			23,761			44,600

Income (loss) from operations				2,149			932		(980	)		(13,277	)		(37,945	)
Other income (expenses)
	Interest income, (expense), net			201			131		102			(136	)		215
	Gain on disposal of Electric Library subscription assets			—			—		1,847			—			—
	Gain on disposal of Liberty Registry Management Services Inc.			—			1,000		1,955			—			—
	Loss on disposal of Eklektix Inc.			—			—		(44	)		—			—
	Write down of investment in bigchalk.com			—			—		(1,013	)		—			—

		Total other income (expenses)		201			1,131		2,847			(136	)		215

Income (loss) before provision for
income taxes				2,350			2,063		1,867			(13,413	)		(37,730	)
Provision for (recovery of) income taxes				(3,150	)		—		—			—			—

Income (loss) for the year			$	5,500		$	2,063	$	1,867		$	(13,413	)	$	(37,730	)

Basic and diluted income (loss) per
common share			$	0.08		$	0.03	$	0.03		$	(0.24	)	$	(8.79	)
Shares used in computing basic
income (loss) per common share				66,079,104			64,626,429		64,626,429			56,152,735			4,291,500
Shares used in computing diluted
income (loss) per common share				68,051,579			64,725,929		64,626,429			56,152,735			4,291,500
Balance Sheet Data:
Cash and cash equivalents (including restricted cash)			$	14,375		$	13,045	$	9,782		$	4,814		$	2,170
Working capital (deficit)				4,033			2,202		(1,066	)		(6,947	)		(9,729	)
Total assets				47,304			35,336		28,853			25,589			22,526
Deferred revenue				33,251			28,589		24,361			22,714			15,808
Long-term obligations, net of current portion				—			—		—			52			—
Stockholders' equity (deficiency)				7,457			866		(1,360	)		(3,390	)		(1,697	)

			Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating Lease Obligations	$	2,134,000	$	206,000	$	651,000	$	616,000	$	661,000
Purchase Obligations		610,000		508,000		102,000		—		—

Total	$	2,744,000	$	714,000	$	753,000	$	616,000	$	661,000

		TUCOWS INC.
		BY:	/S/ ELLIOT NOSS
			Elliot Noss Name: Elliot Noss Title: Chief Executive Officer and President

			December 31, 2004			December 31, 2003
Assets
Current assets:
	Current assets:
	Cash and cash equivalents		$	13,914,988		$	12,912,811
	Restricted cash (note 10(c))			460,398			132,500
	Accounts receivable, net of allowance for doubtful accounts of $25,000 at December 31, 2004 and $30,000 at December 31, 2003			1,111,082			486,289
	Prepaid expenses and deposits			2,156,702			2,061,948
	Prepaid domain name registry and ancillary services fees, current portion			15,601,786			13,204,566
	Deferred tax asset, current portion (note 9)			1,000,000			—

		Total current assets		34,244,956			28,798,114
Prepaid domain name registry and ancillary services fees, long-term portion				6,471,916			5,136,194
Property and equipment (note 5)				1,017,237			1,048,400
Deferred tax asset, long-term portion (note 9)				2,000,000			—
Intangible assets (note 6)				1,242,240			—
Goodwill (note 3)				964,467			—
Investment (note 7)				353,737			353,737
Cash held in escrow (note 3)				1,009,650			—

Total assets			$	47,304,203		$	35,336,445

Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	1,483,543		$	1,632,294
	Accrued liabilities			2,688,738			2,088,235
	Customer deposits			2,247,262			2,160,601
	Deferred revenue, current portion			23,648,381			20,715,191
	Accreditation fees payable, current portion			144,483			—

		Total current liabilities		30,212,407			26,596,321
Deferred revenue, long-term portion				9,602,599			7,874,001
	Accreditation fees payable, long-term portion			31,816			—
Stockholders' equity (deficiency):
	Preferred stock—no par value, 1,250,000 shares authorized; none issued and outstanding			—			—
	Common stock—no par value, 250,000,000 shares authorized; 66,817,250 shares issued and outstanding at December 31, 2004 and 64,626,429 shares issued and outstanding at December 31, 2003			9,541,277			8,540,687
	Additional paid-in capital			50,061,866			49,992,129
	Deferred stock-based compensation			—			(20,593	)
	Deficit			(52,145,762	)		(57,646,100	)

		Total stockholders' equity		7,457,381			866,123

Total liabilities and stockholders' equity			$	47,304,203		$	35,336,445

			Year ended December 31, 2004			Year ended December 31, 2003		Year ended December 31, 2002
Net revenues (note 11)			$	44,717,155		$	37,194,747	$	37,046,375
Cost of revenues				27,566,066			22,990,227		23,107,871

Gross profit				17,151,089			14,204,520		13,938,504

Operating expenses:
	Sales and marketing (*)			5,067,841			3,850,081		3,770,913
	Technical operations and development (*)			4,549,368			3,935,061		3,725,966
	General and administrative (*)			4,107,981			3,998,073		4,523,314
	Depreciation of property and equipment			1,118,734			1,489,570		2,675,836
	Amortization of intangible assets			157,760			—		222,222

		Total operating expenses		15,001,684			13,272,785		14,918,251

Income (loss) from operations				2,149,405			931,735		(979,747	)
Other income (expenses)
	Interest income, net			200,501			131,703		102,057
	Gain on disposal of Electric Library subscription assets (note 4(b))			—			—		1,846,717
	Gain on disposal of Liberty Registry Management Services Inc. (note 4(a))			—			1,000,000		1,955,443
	Loss on disposal of Eklektix Inc.			—			—		(44,304	)
	Write down of investment in bigchalk.com (note 7)			—			—		(1,013,335	)

		Total other income (expenses)		200,501			1,131,703		2,846,578

Income before provision for income taxes				2,349,906			2,063,438		1,866,831
Provision for (recovery of) income taxes (note 9)				(3,150,432	)		—		—

Net income for the year			$	5,500,338		$	2,063,438	$	1,866,831

Basic and diluted income per share (note 2(o))			$	0.08		$	0.03	$	0.03

Shares used in computing basic income per common share (note 2(o))				66,079,104			64,626,429		64,626,429

Shares used in computing diluted income per common share (note 2(o))				68,051,579			64,725,929		64,626,429

Sales and marketing	$	16,834	$	109,926	$	109,926
Technical operations and development		69,737		—		—
General and administrative		3,759		52,778		52,777

		Common stock
		Common stock			Additional paid in capital		Deferred stock-based compensation						Total stockholders' equity (deficiency)
		Number	Amount		Additional paid in capital		Deferred stock-based compensation			Deficit			Total stockholders' equity (deficiency)
Balances, December 31, 2001		64,626,429	$	8,540,687	$	49,992,129	$	(346,000	)	$	(61,576,369	)	$	(3,389,553	)
	Amortization of deferred stock-based compensation	—		—		—		162,703			—			162,703
	Net income for the year	—		—		—		—			1,866,831			1,866,831

Balances, December 31, 2002		64,626,429		8,540,687		49,992,129		(183,297	)		(59,709,538	)		(1,360,019	)
	Amortization of deferred stock-based compensation	—		—		—		162,704			—			162,704
	Net income for the year	—		—		—		—			2,063,438			2,063,438

Balances, December 31, 2003		64,626,429		8,540,687		49,992,129		(20,593	)		(57,646,100	)		866,123
	Exercise of stock options	1,834,275		726,050		—		—			—			726,050
	Acquisition of Boardtown Corporation (note 3)	356,546		274,540		—		—			—			274,540
	Stock based compensation (note 8)	—		—		69,737		—			—			69,737
	Amortization of deferred stock-based compensation	—		—		—		20,593			—			20,593
	Net income for the year	—		—		—		—			5,500,338			5,500,338

Balances, December 31, 2004		66,817,250	$	9,541,277	$	50,061,866	$	—		$	(52,145,762	)	$	7,457,381

			Year ended December 31, 2004			Year ended December 31, 2003			Year ended December 31, 2002
Cash provided by (used in):
Operating activities:
	Net income for the year		$	5,500,338		$	2,063,438		$	1,866,831
	Items not involving cash:
		Depreciation of property and equipment		1,118,734			1,489,570			2,675,836
		Amortization of intangible assets		157,760			—			222,222
		Unrealized change in the fair value of forward contracts		(88,743	)		(279,174	)		260,289
		Write-down of investment in bigchalk.com, Inc.		—			—			1,013,335
		Stock-based compensation		69,737			—			—
		Amortization of deferred stock-based compensation		20,593			162,704			162,703
		Deferred income taxes		(3,000,000	)		—			—
		Gain on disposal of Electric Library subscription assets		—			—			(1,846,717	)
		Gain on disposal of Liberty Registry Management Services Inc.		—			(1,000,000	)		(1,955,443	)
		Loss on write-off of Eklektix Inc.		—			—			44,304
	Change in non-cash operating working capital:
		Accounts receivable		(546,762	)		(147,592	)		306,951
		Prepaid expenses and deposits		(1,333	)		(91,977	)		(80,273	)
		Prepaid domain name registry and ancillary services fees		(3,732,942	)		(3,495,233	)		(2,488,384	)
		Accounts payable		(148,751	)		26,664			(15,669	)
		Accrued liabilities		403,404			60,112			(479,898	)
		Customer deposits		77,772			202,944			20,915
		Deferred revenue		4,661,788			4,228,175			3,731,415
		Accreditation fees payable		176,299			—			—

	Cash provided by operating activities			4,667,894			3,219,631			3,438,417

Financing activities:
	Proceeds received on exercise of stock options			726,050			—			—
	Repayments of obligations under capital leases			—			—			(111,159	)

	Cash provided by financing activities			726,050			—			(111,159	)

Investing activities:
	Additions to property and equipment			(1,034,709	)		(956,649	)		(844,508	)
	Decrease (increase) in restricted cash—being margin security against forward exchange contracts (note 10(c))			(327,898	)		805,000			(937,500	)
	Net proceeds on disposal of Electric Library subscription assets			—			—			1,577,129
	Acquisition of Boardtown Corporation, net of cash acquired			(2,019,510	)		—			—
	Increase in cash held in escrow			(1,009,650	)		—			—
	Proceeds on disposal of Liberty Registry Management Services Inc., net of cash disposed			—			1,000,000			938,889
	Proceeds on disposal of Eklektix Inc., net of cash disposed			—			—			(30,628	)
	Cash provided by (used in) investing activities			(4,391,767	)		848,351			703,382

Increase in cash and cash equivalents				1,002,177			4,067,982			4,030,640
Cash and cash equivalents, beginning of year				12,912,811			8,844,829			4,814,189

Cash and cash equivalents, end of year			$	13,914,988		$	12,912,811		$	8,844,829

Supplemental cash flow information:
	Interest paid		$	166		$	383		$	25,013
Supplemental disclosure of non-cash investing and financing activities:
	Common stock issued on the acquisition of Boardtown Corporation		$	274,540		$	—		$	—

	Year ended December 31, 2004			Year ended December 31, 2003			Year ended December 31, 2002
Net income (loss), as reported	$	5,500,338		$	2,063,438		$	1,866,831
Add stock-based employee compensation expense included in reported net income, net of tax		90,330			162,704			162,703
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax		(413,151	)		(571,593	)		(481,014	)

Net income, pro forma	$	5,177,517		$	1,654,549		$	1,548,520

Income per common share, as reported	$	0.08		$	0.03		$	0.03
Income per common share, pro forma		0.08			0.03			0.02

	Technology			Brand			Customer relationships			Non-compete agreements			Total
Acquisition of Boardtown Corporation in 2004	$	540,000		$	170,000		$	500,000		$	190,000		$	1,400,000
Amortization expense		(51,320	)		(16,480	)		(47,800	)		(42,160	)		(157,760	)

Net book value, December 31, 2004	$	488,680		$	153,520		$	452,200		$	147,840		$	1,242,240

		Year ending December 31,
2005		$	236,160
2006			236,160
2007			193,920
2008			172,800
2009			172,800
Thereafter			230,400

	Total	$	1,242,240

	Year ended December 31, 2004				Year ended December 31, 2003				Year ended December 31, 2002
	Number of shares		Weighted average exercise price per share		Number of shares		Weighted average exercise price per share		Number of shares		Weighted average exercise price per share
Outstanding, beginning of year	8,665,755		$	0.69	7,660,258		$	1.12	7,313,412		$	1.35
Granted	1,479,250			0.61	6,315,235			0.37	1,445,363			0.47
Exercised	(1,834,275	)		0.40	—			—	—			—
Forfeited	(392,735	)		0.40	(5,309,738	)		0.93	(867,017	)		1.33
Expired	(420,409	)		5.58	—			—	(231,500	)		3.48

Outstanding, end of year	7,497,586		$	0.49	8,665,755		$	0.69	7,660,258		$	1.12

Options exercisable, end of year	5,211,809		$	0.48	6,826,444		$	0.78	5,594,549		$	1.27

	Options outstanding
	Options outstanding				Options exercisable
		Weighted average exercise price per share			Options exercisable
Exercise price	Number outstanding	Weighted average exercise price per share		Weighted average remaining contractual life (years)	Number exercisable	Weighted average exercise price per share
$0.26-$0.36	924,170	$	0.35	8.6	349,731	$	0.34
$0.37-$0.50	4,428,855	$	0.39	5.2	4,202,122	$	0.38
$0.52-$0.91	2,038,167	$	0.67	8.1	553,562	$	0.82
$1.87-$5.94	106,394	$	2.75	4.5	106,394	$	2.75

	7,497,586				5,211,809

2005	$	570,000
2006		400,000
2007		321,000
2008		302,000
2009		314,000
Thereafter		661,000

		Balance at beginning year		Charged to (recovered) costs and expenses			Write-offs during year		Provision reversed on disposition of Electric Library assets		Balance at end of year
Allowance for doubtful accounts
	2004	$	30,000	$	(5,000	)	$	—	$	—	$	25,000
	2003		229,938		(116,000	)		83,938		—		30,000
	2002		276,579		112,595			22,657		136,579		229,938
Valuation allowance for deferred tax asset:
	2004	$	19,283,000	$	(3,369,000	)	$	—	$	—	$	15,914,000
	2003		19,813,000		(530,000	)		—		—		19,283,000
	2002		21,811,000		(1,998,000	)		—		—		19,813,000