Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

----

 

**FORM 10-Q**

 
| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2009**

 

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom            to            **

 

**Commission file number 1-32600**

 

**TUCOWS INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Pennsylvania**                | ** ** | **23-2707366**      |
|---------------------------------|------------|---------------------|
| (State or Other Jurisdiction of |       | (I.R.S. Employer    |
| Incorporation or Organization)  |       | Identification No.) |

 

**96 Mowat Avenue,**

**Toronto, Ontario M6K 3M1, Canada**

(Address of Principal Executive Offices) (Zip Code)

 

**(416) 535-0123**

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T §232.405 of this chapter during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post suchfiles).   Yes o  No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                         |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act):  Yes o  No x

 

As of August 14, 2009,there were 67,865,496 outstanding shares of common stock, no par value, of theregistrant.

 

 

 

----

Table ofContents

 

**TUCOWS INC.**

**Form 10-Q Quarterly Report**

**INDEX**

 
| ** **  | **PART I  FINANCIAL INFORMATION**                                                                                       | ** ** |
|-------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **  | ** **                                                                                                                   | ** ** |
| Item 1.     | Consolidated Financial  Statements                                                                                           | 3          |
|        |                                                                                                                         |       |
|        | Consolidated  Balance Sheets as of June 30, 2009 (unaudited) and  December 31, 2008                           | 3          |
|        | Consolidated  Statements of Operations (unaudited) for the three and six months ended  June 30, 2009 and 2008 | 4          |
|        | Consolidated  Statements of Cash Flows (unaudited) for the three and six months ended  June 30, 2009 and 2008 | 5          |
|        |                                                                                                                         |       |
|        | Notes to Consolidated Financial Statements (unaudited)                                                                       | 6          |
|        |                                                                                                                         |       |
| Item 2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  | 19         |
|        |                                                                                                                         |       |
| Item 3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                                  | 34         |
|        |                                                                                                                         |       |
| Item 4T.    | Controls and  Procedures                                                                                                     | 35         |
|        |                                                                                                                         |       |
| ** **  | **PART II  OTHER INFORMATION**                                                                                          |       |
| ** **  | ** **                                                                                                                   | ** ** |
| Item 1.     | Legal Proceedings                                                                                                            | 36         |
|        |                                                                                                                         |       |
| Item 1A.    | Risk Factors                                                                                                                 | 36         |
|        |                                                                                                                         |       |
| Item 6.     | Exhibits                                                                                                                     | 37         |
|        |                                                                                                                         |       |
| Signatures. |                                                                                                                         | 38         |

 

2

----

Table of Contents

 

**PART I.**

**FINANCIAL INFORMATION**

 

**Item 1.Consolidated Financial Statements**

 

**Tucows Inc.**

**Consolidated Balance Sheets**

**(Dollar amounts in U.S. dollars)**

** **
| ** **                                                                                                                                                                                                 | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                 | ** ** | **2009**          | ** **  | **2008**              | ** ** |
| ** **                                                                                                                                                                                                 | ** ** | **(unaudited)**   | ** **  | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                 |       |              |        |                  |       |
|                                                                                                                                                                                                       |       |              |        |                  |       |
| Current  assets:                                                                                                                                                                                           |       |              |        |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                 |       | $                 | 7,423,056   |                  | $          | 5,427,467 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $125,000 as of  June 30, 2009 and $125,000 as of December 31, 2008                                                               |       | 3,464,428         |        | 3,200,362             |       |
| Prepaid  expenses and deposits                                                                                                                                                                             |       | 3,163,266         |        | 2,274,043             |       |
| Derivative  instrument assets (note 6)                                                                                                                                                                     |       | 49,245            |        | —                |       |
| Prepaid  domain name registry and ancillary services fees, current portion                                                                                                                                 |       | 31,494,579        |        | 29,212,610            |       |
| Deferred  tax asset, current portion                                                                                                                                                                       |       | 590,000           |        | 590,000               |       |
| Total  current assets                                                                                                                                                                                      |       | 46,184,574        |        | 40,704,482            |       |
|                                                                                                                                                                                                       |       |              |        |                  |       |
| Prepaid  domain name registry and ancillary services fees, long-term portion                                                                                                                               |       | 12,195,903        |        | 11,855,971            |       |
| Property  and equipment                                                                                                                                                                                    |       | 2,354,702         |        | 3,072,958             |       |
| Deferred  financing charges                                                                                                                                                                                |       | 58,400            |        | 78,500                |       |
| Deferred  tax asset, long-term portion                                                                                                                                                                     |       | 2,410,000         |        | 2,410,000             |       |
| Intangible  assets (note 4)                                                                                                                                                                                |       | 19,431,471        |        | 20,206,996            |       |
| Goodwill                                                                                                                                                                                                   |       | 17,990,807        |        | 17,990,807            |       |
| Investment                                                                                                                                                                                                 |       | 100,000           |        | 200,000               |       |
| Total  assets                                                                                                                                                                                              |       | $                 | 100,725,857 |                  | $          | 96,519,714 |   |
|                                                                                                                                                                                                       |       |              |        |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                              |       |              |        |                  |       |
|                                                                                                                                                                                                       |       |              |        |                  |       |
| Current  liabilities:                                                                                                                                                                                      |       |              |        |                  |       |
| Accounts  payable                                                                                                                                                                                          |       | $                 | 2,257,992   |                  | $          | 1,633,830 |   |
| Accrued  liabilities                                                                                                                                                                                       |       | 2,003,789         |        | 2,000,146             |       |
| Customer  deposits                                                                                                                                                                                         |       | 3,171,708         |        | 3,319,241             |       |
| Derivative  instrument liabilities (note 6)                                                                                                                                                                |       | —            |        | 1,974,919             |       |
| Loan  payable, current portion (note 5)                                                                                                                                                                    |       | 3,114,242         |        | 2,624,242             |       |
| Deferred  revenue, current portion                                                                                                                                                                         |       | 40,508,091        |        | 37,985,821            |       |
| Accreditation  fees payable, current portion                                                                                                                                                               |       | 553,447           |        | 510,548               |       |
| Income  taxes payable (note 7)                                                                                                                                                                             |       | 835,398           |        | —                |       |
| Total  current liabilities                                                                                                                                                                                 |       | 52,444,667        |        | 50,048,747            |       |
|                                                                                                                                                                                                       |       |              |        |                  |       |
| Deferred  revenue, long-term portion                                                                                                                                                                       |       | 16,392,525        |        | 16,201,804            |       |
| Accreditation  fees payable, long-term portion                                                                                                                                                             |       | 188,780           |        | 187,374               |       |
| Loan  payable, long-term portion (note 5)                                                                                                                                                                  |       | 1,063,004         |        | 3,235,125             |       |
| Deferred  tax liability, long-term portion                                                                                                                                                                 |       | 5,396,000         |        | 5,396,000             |       |
|                                                                                                                                                                                                       |       |              |        |                  |       |
| Stockholders’  equity (note 11)                                                                                                                                                                       |       |              |        |                  |       |
|                                                                                                                                                                                                       |       |              |        |                  |       |
| Preferred  stock - no par value, 1,250,000 shares authorized; none issued and  outstanding                                                                                                                 |       | —            |        | —                |       |
| Common  stock - no par value, 250,000,000 shares authorized; 68,969,320 shares issued  and outstanding as of June 30, 2009 and 73,073,782 shares issued and  outstanding as of December 31, 2008 |       | 14,408,078        |        | 15,198,358            |       |
| Additional  paid-in capital                                                                                                                                                                                |       | 47,851,137        |        | 48,714,676            |       |
| Deficit                                                                                                                                                                                                    |       | (37,018,334       | )           | (42,462,370           | )          |
| Total  stockholders’ equity                                                                                                                                                                           |       | 25,240,881        |        | 21,450,664            |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                           |       | $                 | 100,725,857 |                  | $          | 96,519,714 |   |

 

See accompanying notes to unaudited consolidated financial statements

 

Subsequent events (note14).

 

3

----

Table ofContents

 

**Tucows Inc.**

**Consolidated Statements of Operations**

**(Dollar amounts in U.S. dollars)**

**(unaudited)**

 
| ** **                                                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                           | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                           | ** ** | **(unaudited)**                      | ** ** | **(unaudited)**                    | ** ** |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Net revenues                                                         |       | $                                    | 20,022,119 |                               | $          | 20,450,329 |   | $ | 40,113,543 |   | $ | 39,161,536 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Cost of revenues:                                                    |       |                                 |       |                               |       |   |   |   |   |
| Cost of revenues (*)                                                 |       | 14,386,048                           |       | 13,663,097                         |       | 28,171,446 |   | 26,813,029 |   |
| Depreciation of property and equipment                               |       | 488,680                              |       | 816,260                            |       | 941,389 |   | 1,642,097 |   |
| Amortization of intangible assets                                    |       | 29,199                               |       | 31,941                             |       | 58,398 |   | 105,398 |   |
| Total cost of revenues                                               |       | 14,903,927                           |       | 14,511,298                         |       | 29,171,233 |   | 28,560,524 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Gross profit                                                         |       | 5,118,192                            |       | 5,939,031                          |       | 10,942,310 |   | 10,601,012 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Expenses:                                                            |       |                                 |       |                               |       |   |   |   |   |
| Sales and marketing (*)                                              |       | 1,339,167                            |       | 1,730,736                          |       | 2,692,343 |   | 3,426,868 |   |
| Technical operations and development (*)                             |       | 1,175,355                            |       | 1,573,741                          |       | 2,279,494 |   | 3,139,595 |   |
| General and administrative (*)                                       |       | 1,592,325                            |       | 1,551,858                          |       | 3,462,221 |   | 3,091,290 |   |
| Depreciation of property and equipment                               |       | 79,227                               |       | 58,861                             |       | 165,632 |   | 119,931 |   |
| Amortization of intangible assets                                    |       | 360,540                              |       | 376,954                            |       | 721,080 |   | 762,115 |   |
| (Gain) / loss in fair value of forward exchange  contracts           |       | (1,938,821                           | )          | (225,640                           | )          | (2,024,164 | ) | 29,793 |   |
| Total expenses                                                       |       | 2,607,793                            |       | 5,066,510                          |       | 7,296,606 |   | 10,569,592 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Income from operations                                               |       | 2,510,399                            |       | 872,521                            |       | 3,645,704 |   | 31,420 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Other income (expenses):                                             |       |                                 |       |                               |       |   |   |   |   |
| Interest income (expense), net                                       |       | (62,334                              | )          | (166,421                           | )          | (125,796 | ) | (376,405 | ) |
| Other income                                                         |       | 2,613,204                            |       | 1,532,765                          |       | 2,613,204 |   | 1,532,765 |   |
| Total other income (expenses)                                        |       | 2,550,870                            |       | 1,366,344                          |       | 2,487,408 |   | 1,156,360 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Income before provision for income taxes                             |       | 5,061,269                            |       | 2,238,865                          |       | 6,133,112 |   | 1,187,780 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Income tax expense (note 7)                                          |       | 581,651                              |       | 30,000                             |       | 689,076 |   | 61,134 |   |
| Net income for the period                                            |       | $                                    | 4,479,618  |                               | $          | 2,208,865 |   | $ | 5,444,036 |   | $ | 1,126,646 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Basic earnings per common share (note 8)                             |       | $                                    | 0.07       |                               | $          | 0.03 |   | $ | 0.08 |   | $ | 0.02 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Shares used in computing basic earnings per common  share (note 8)   |       | 68,923,313                           |       | 73,899,695                         |       | 70,778,950 |   | 73,894,119 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Diluted earnings per common share (note 8)                           |       | $                                    | 0.07       |                               | $          | 0.03 |   | $ | 0.08 |   | $ | 0.01 |   |
|                                                                 |       |                                 |       |                               |       |   |   |   |   |
| Shares used in computing diluted earnings per  common share (note 8) |       | 69,092,946                           |       | 75,348,108                         |       | 70,785,712 |   | 75,439,926 |   |

 

----

(*) Stock-based compensation has been included inexpenses as follows:
| Cost of revenues                     |   | $ | 3,367  |   | $ | 4,800  |   | $ | 8,367  |   | $ | 9,100  |   |
|--------------------------------------|--------|---|--------|--------|---|--------|--------|---|--------|--------|---|--------|--------|
| Sales and marketing                  |   | $ | 15,057 |   | $ | 13,000 |   | $ | 29,957 |   | $ | 31,300 |   |
| Technical operations and development |   | $ | 11,121 |   | $ | 8,000  |   | $ | 21,721 |   | $ | 28,700 |   |
| General and administrative           |   | $ | 53,193 |   | $ | 47,200 |   | $ | 71,893 |   | $ | 76,100 |   |

 

See accompanyingnotes to unaudited consolidated financial statements

 

4

----

Table ofContents

 

**Tucows Inc.**

**Consolidated Statements of Cash Flows**

**(Dollar amounts in U.S. dollars)**

**(unaudited)**

 
| ** **                                                              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                              | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                              | ** ** | **(unaudited)**                      | ** ** | **(unaudited)**                    | ** ** |
| Cash  provided by (used in):                                            |       |                                 |       |                               |       |
| Operating activities:                                                   |       |                                 |       |                               |       |   |   |   |   |
| Net income for the period                                               |       | $                                    | 4,479,618  |                               | $          | 2,208,865 |   | $ | 5,444,036 |   | $ | 1,126,646 |   |
| Items not involving cash:                                               |       |                                 |       |                               |       |   |   |   |   |
| Depreciation of property and equipment                                  |       | 567,907                              |       | 875,121                            |       | 1,107,021 |   | 1,762,028 |   |
| Amortization of deferred financing charges                              |       | 9,700                                |       | 12,700                             |       | 20,100 |   | 26,200 |   |
| Amortization of intangible assets                                       |       | 389,739                              |       | 408,895                            |       | 779,478 |   | 867,513 |   |
| Gain on disposal of investment in Afilias                               |       | (2,010,395                           | )          | —                             |       | (2,010,395 | ) | — |   |
| Gain on sale of customer relationships                                  |       | —                               |       | (1,121,065                         | )          | — |   | (1,121,065 | ) |
| Disposal of domain names                                                |       | 974                                  |       | —                             |       | 1,947 |   | — |   |
| Unrealized  (gain)/loss in the fair value of forward exchange contracts |       | (1,938,821                           | )          | (225,640                           | )          | (2,024,164 | ) | 29,793 |   |
| Stock-based compensation                                                |       | 82,738                               |       | 73,000                             |       | 131,938 |   | 145,200 |   |
| Change in non-cash operating working capital:                           |       |                                 |       |                               |       |   |   |   |   |
| Accounts receivable                                                     |       | 252,927                              |       | 350,043                            |       | (264,066 | ) | 283,923 |   |
| Prepaid expenses and deposits                                           |       | (310,655                             | )          | (244,926                           | )          | (889,223 | ) | (105,237 | ) |
| Prepaid fees for domain name registry and ancillary  services fees      |       | (496,502                             | )          | (1,176,196                         | )          | (2,621,901 | ) | (3,706,797 | ) |
| Accounts payable                                                        |       | 561,228                              |       | 682,896                            |       | 380,407 |   | 249,069 |   |
| Accrued liabilities                                                     |       | (125,130                             | )          | (159,226                           | )          | 3,643 |   | (691,064 | ) |
| Customer deposits                                                       |       | 161,969                              |       | 119,589                            |       | (147,533 | ) | 18,999 |   |
| Deferred revenue                                                        |       | 249,615                              |       | 798,720                            |       | 2,712,991 |   | 3,777,654 |   |
| Accreditation fees payable                                              |       | (34,302                              | )          | (22,696                            | )          | 44,305 |   | 34,120 |   |
| Income taxes payable                                                    |       | 750,216                              |       | —                             |       | 835,398 |   | — |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Net cash provided by operating activities                               |       | 2,590,826                            |       | 2,580,080                          |       | 3,503,982 |   | 2,696,982 |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Financing activities:                                                   |       |                                 |       |                               |       |   |   |   |   |
| Proceeds received on exercise of stock options                          |       | 25,422                               |       | 9,450                              |       | 25,422 |   | 9,450 |   |
| Repurchase of common stock                                              |       | —                               |       | —                             |       | (1,811,179 | ) | — |   |
| Repayment of promissory note and loan payable                           |       | (1,203,560                           | )          | (7,478,560                         | )          | (1,682,121 | ) | (7,957,120 | ) |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Net cash used in financing activities                                   |       | (1,178,138                           | )          | (7,469,110                         | )          | (3,467,878 | ) | (7,947,670 | ) |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Investing activities:                                                   |       |                                 |       |                               |       |   |   |   |   |
| Cost of domain names acquired                                           |       | —                               |       | (2,524                             | )          | (5,900 | ) | (8,944 | ) |
| Additions to property and equipment                                     |       | (102,770                             | )          | (1,084,209                         | )          | (145,010 | ) | (1,295,740 | ) |
| Sale of customer relationships                                          |       |                                 |       | 1,421,730                          |       | — |   | 1,421,730 |   |
| Proceeds on disposal of investment in Afilias                           |       | 2,110,395                            |       | —                             |       | 2,110,395 |   | — |   |
| Decrease in cash held in escrow                                         |       | —                               |       | (5,366                             | )          | — |   | (12,765 | ) |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Net cash provided by investing activities                               |       | 2,007,625                            |       | 329,631                            |       | 1,959,485 |   | 104,281 |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                        |       | 3,420,313                            |       | (4,559,399                         | )          | 1,995,589 |   | (5,146,407 | ) |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Cash and cash equivalents, beginning of period                          |       | 4,002,743                            |       | 7,506,468                          |       | 5,427,467 |   | 8,093,476 |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Cash and cash equivalents, end of period                                |       | $                                    | 7,423,056  |                               | $          | 2,947,069 |   | $ | 7,423,056 |   | $ | 2,947,069 |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Supplemental cash flow information:                                     |       |                                 |       |                               |       |   |   |   |   |
| Interest paid                                                           |       | $                                    | 62,508     |                               | $          | 192,900 |   | $ | 128,029 |   | $ | 452,237 |   |
|                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Supplementary disclosure of non-cash investing  activity:               |       |                                 |       |                               |       |   |   |   |   |
| Property and equipment acquired during the period  not yet paid for     |       | $                                    | 250,734    |                               | $          | 663,767 |   | $ | 250,734 |   | $ | 663,767 |   |

 

See accompanying notes to unaudited consolidated financial statements

 

5

----

Table of Contents

 

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.ORGANIZATION OF THE COMPANY:**

 

Tucows Inc., a Pennsylvania corporation (referred to throughout this report as the “Company”,“Tucows”, “we”, “us” or through similar expressions), together with ourconsolidated subsidiaries, is a global distributor of Internet services,including domain name registration, security and identity products throughdigital certificates and email through its distribution network of InternetService Providers, web hosting companies and other providers of Internetservices to end-users.

 

Wewere incorporated under the laws of the Commonwealth of Pennsylvania in November 1992under the name Infonautics, Inc. In August 2001, we completed ouracquisition of Tucows Inc., a Delaware corporation, and we changed our namefrom Infonautics, Inc. to Tucows Inc. Our principal executive office islocated in Toronto, Ontario and we have offices in the United Kingdom and theUnited States.

 

**2. BASISOF PRESENTATION:**

 

The accompanyingunaudited interim consolidated balance sheets, and the related consolidatedstatements of operations and cash flows reflect all adjustments, consisting ofnormal recurring adjustments, that are, in the opinion of management, necessaryfor a fair presentation of the financial position of Tucows and itssubsidiaries as at June 30, 2009 and the results of operations andcash flows for the interim periods ended June 30, 2009 and 2008. Theresults of operations presented in this Quarterly Report on Form 10-Q arenot necessarily indicative of the results of operations that may be expectedfor future periods.

 

The accompanyingunaudited interim consolidated financial statements have been prepared byTucows in accordance with the rules and regulations of the Securities andExchange Commission (the “SEC”). Certain information and footnote disclosurenormally included in the Company’s annual audited consolidated financialstatements and accompanying notes have been condensed or omitted. These interimconsolidated financial statements and accompanying notes follow the sameaccounting policies and methods of application used in the annual financialstatements and should be read in conjunction with the Company’s auditedconsolidated financial statements and notes thereto for the year ended December 31, 2008included in Tucows’ 2008 Annual Report on Form 10-K filed with the SEC on March 27, 2009.

 

There have been nomaterial changes to our significant accounting policies during the six monthsended June 30, 2009 as compared to the significant accountingpolicies described in our Annual Report on Form 10-K for the fiscal yearended December 31, 2008.

 

Subsequent events

 

TheCompany recognizes the effects of events or transactions that occur after thebalance sheet date but before financial statements are issued (“subsequentevents”) if there is evidence that conditions related to the subsequent eventexisted at the date of the balance sheet date, including the impact of suchevents on management’s estimates and assumptions used in preparing thefinancial statements. Other significant subsequent events that are notrecognized in the financial statements, if any, are disclosed to the notes tothe unaudited interim consolidated financial statements. Subsequent events havebeen evaluated through August 14, 2009, the date of the issuance ofthese unaudited interim consolidated financial statements.

 

**3. NEW ACCOUNTING POLICIES:**

 

*Recent Accounting Pronouncements Adopted*

 

InDecember 2007, FASB issued SFAS 141R, Business Combinations. Thestatement will require all business acquisitions to be measured at fair value,the existing definition of a business would be expanded, pre-acquisitioncontingencies would be measured at fair value, most acquisition-related costswould be recognized as expenses as incurred as well as other changes. Thestatement is effective for business combinations for which the acquisition dateis on or after the beginning of the first annual period beginning on or after December 15,2008. The Companyadopted SFAS No. 141R on January 1, 2009, and the adoption had noimpact on the Company’s financial statements or disclosures.

 

InDecember 2007, FASB issued SFAS 160, Non-controlling Interests inFinancial Statements. The statement will improve the relevance, comparabilityand transparency of the financial information that a reporting Company providesin its 

 

6

----

Table ofContents

 

financialstatements by establishing new accounting and reporting standards. Thestatement is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008. The Company adopted SFAS No. 160 on January 1,2009, and the adoption had no impact on the Company’s financial statements ordisclosures.

 

InMarch 2008, FASB issued SFAS 161, Disclosures about DerivativeInstruments and Hedging Activities. This statement enhances disclosuresregarding an entity’s derivative and hedging activities. This statement iseffective for the financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. The Company adopted SFAS No. 161 on January 1,2009, and the adoption had no impact on the Company’s financial statements ordisclosures.

 

InMay 2008, FASB issued SFAS 163, Accounting for Financial GuaranteeInsurance Contracts. This statement is geared towards removing inconsistenciesin the recognition and measurement of claim liabilities. The statement iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. The Company adopted SFAS No. 163 on January 1,2009, and the adoption had no impact on the Company’s financial statements ordisclosures.

 

In April 2009,the FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (APB)28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP SFASNo107-1 and APB Opinion 28-1”) which amends SFAS No 107 and APB Opinion No. 28,Interim Financial Reporting, to require disclosures about fair value offinancial instruments in interim and annual reporting periods. FSP SFAF No. 107-1and APB Opinion No. 28-1 is effective for interim reporting periods endingafter June 15, 2009 and was adopted by the Company. The disclosuresrequired by FSP 107-1 and APB 28-1 are presented in Note 5 “Loan payable.”

 

In May 2009,FASB issued SFAS 165, Subsequent Events. This statement establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. SFAS 165 also clarifies the types of subsequent events a Companyshall, or shall not, recognize in the financial statements. The statement iseffective for financial statement periods ending after June 15, 2009. TheCompany adopted SFAS 165 on June 30, 2009 and the adoption did not resultin significant changes in our recognition or disclosure of subsequent events inthe financial statements. However, it does require us to disclose the datethrough which we have evaluated subsequent events and the basis for that date.Our evaluation of subsequent events is disclosed in Note 2 “Basis ofPresentation.”

 

In June 2009we adopted FASB Staff Position (“FSP”) 157-4, “Determining Fair Value When theVolume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”)addresses measuring fair value for situations in which there has been asignificant decrease in trading activity for an asset or liability. Statementof Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS157”), defines fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction (that is, not aforced liquidation or distressed sale) between market participants at themeasurement date under current market conditions. FSP 157-4 provides additionalguidance on determining when the volume and level of activity for the asset orliability has significantly decreased. FSP 157-4 also includes guidance onidentifying circumstances when a transaction may not be considered orderly.Under this guidance, a transaction price that is not associated with an orderlytransaction is given little, if any, weight when estimating fair value. Whenthe reporting Company concludes there has been a significant decrease in thevolume and level of activity for the asset or liability, further analysis ofthe information from that market is needed and significant adjustments to therelated prices may be necessary to estimate fair value in accordance with SFAS157. Our adoption of FSP 157-4 in the second quarter of 2009 did not have amaterial impact on our interim consolidated financial statements.

 

*Recent Accounting Pronouncements NotYet Adopted*

 

In June 2008, the SEC announced that it has approved a one-yearextension of the compliance date for smaller public companies to meet the Section 404(b) auditorattestation requirement of the Sarbanes-Oxley Act. As a result, the Companywill now be required to provide the attestation reports in their annual reportsfor the fiscal years ending on or after December 31, 2009.

 

In June 2009, the FASB issued Statement of Financial AccountingStandards No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS167”), which amends the consolidation guidance for a variable interest entity (“VIE”).SFAS 167 redefines the approach used to determine the “primary beneficiary” (orconsolidator) of a VIE, which will be determined using a prescribed qualitativeassessment and must be performed on an ongoing basis. Under the new standard,the primary beneficiary of a VIE will be the enterprise that has both: (1) thepower to direct the activities of a VIE that most 

 

7

----

Table ofContents

 

significantlyimpact the VIE’s economic performance and (2) the obligation to absorblosses of the VIE that could potentially be significant to the VIE or the rightto receive benefits from the VIE that could potentially be significant to theVIE. SFAS 167 also requires separate presentation of the assets and liabilitiesof a consolidated VIE on the face of the balance sheet if specific criterionare met. SFAS 167 is effective as of the beginning of the first fiscal yearbeginning after November 15, 2009, which will be our fiscal year beginningJanuary 1, 2010. We are currently evaluating the impact the adoption ofthis new standard may have on our consolidated financial statements.

 

On July 1, 2009, the FASB launched the FASB Accounting StandardsCodification (the “FASB Codification”) as the single source of authoritativeU.S. GAAP, superseding all then-existing authoritative accounting and reportingstandards, except for rules and interpretive releases of the SEC underauthority of federal securities laws, which are sources of authoritative GAAPfor SEC registrants. The FASB Codification reorganizes the authoritativeliterature comprising U.S. GAAP into a topical format that eliminates thecurrent GAAP hierarchy. The Codification is effective for interim and annualfinancial statement periods ending after September 15, 2009, which meansthat we will begin to use the FASB Codification in the third quarter of 2009.The FASB Codification is not intended to change U.S. GAAP. However, since itcompletely supersedes existing standards, it will affect the way we referenceauthoritative accounting pronouncements in our future financial statements.

 

**4****.****INTANGIBLE ASSETS****:**

 

Intangibleassets consist of acquired technology, brand, customer relationships,non-competition agreements, surname domain names and our portfolio of domainnames. As reflected in the table below, these balances are being amortized on astraight-line basis over the life of the intangible assets, with the exceptionof the surname and portfolio domain names that have been determined to have anindefinite life.

 

A summary of acquiredintangible assets for the three months ended June 30, 2009 is asfollows:

** **
| ** **                           | ** ** | **Technology**                 | ** ** | **Brand**        | ** ** | **Customer  relationships**    | ** ** | **Surname domain  names** | ** ** | **Direct navigation  domain names** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| **Amortization period**         | ** ** | **2 - 7 years** | ** ** | **7 years** | ** ** | **4 - 7 years** | ** ** | **indefinite life**       | ** ** | **indefinite life**                      | ** ** | **Total**  | ** ** |
|                                 |       |                           |       |             |       |                           |       |                           |       |                                          |       |       |       |
| Net  book value, March 31, 2009 |       | $                              | 412,525    |             | $          | 812,100                        |       | $                              | 4,364,720  |                                          | $          | 12,135,329 |       | $ | 2,097,510 |   | $ | 19,822,184 |   |
| Sale  of domain names                |       | —                         |       | —           |       | —                         |       | (974                           | )          | —                                        |       | (974       | )          |
| Amortization  expense                |       | (29,199                        | )          | (41,760          | )          | (318,780                       | )          | —                         |       | —                                        |       | (389,739   | )          |
| Net  book value, June 30, 2009  |       | $                              | 383,326    |             | $          | 770,340                        |       | $                              | 4,045,940  |                                          | $          | 12,134,355 |       | $ | 2,097,510 |   | $ | 19,431,471 |   |

 

A summary of acquired intangible assets for the six months ended June 30, 2009is as follows:

** **
| ** **                              | ** ** | **Technology**                 | ** ** | **Brand**        | ** ** | **Customer  relationships**    | ** ** | **Surname domain  names** | ** ** | **Direct navigation  domain names** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|------------------|------------|--------------------------------|------------|--------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| **Amortization period**            | ** ** | **2 - 7 years** | ** ** | **7 years** | ** ** | **4 - 7 years** | ** ** | **indefinite life**       | ** ** | **indefinite life**                      | ** ** | **Total**  | ** ** |
|                                    |       |                           |       |             |       |                           |       |                           |       |                                          |       |       |       |
| Net book value,  December 31, 2008 |       | $                              | 441,724    |             | $          | 853,860                        |       | $                              | 4,683,500  |                                          | $          | 12,131,502 |       | $ | 2,096,410 |   | $ | 20,206,996 |   |
| Purchase of  domain names               |       | —                         |       | —           |       | —                         |       | 4,800                          |       | 1,100                                         |       | 5,900      |       |
| Sale of domain  names                   |       | —                         |       | —           |       | —                         |       | (1,947                         | )          | —                                        |       | (1,947     | )          |
| Amortization  expense                   |       | (58,398                        | )          | (83,520          | )          | (637,560                       | )          | —                         |       | —                                        |       | (779,478   | )          |
| Net book value,  June 30, 2009     |       | $                              | 383,326    |             | $          | 770,340                        |       | $                              | 4,045,940  |                                          | $          | 12,134,355 |       | $ | 2,097,510 |   | $ | 19,431,471 |   |

 

8

----

Table of Contents

 

**5. LOAN PAYABLE:**

 

TheCompany entered into a non-revolving, reducing credit facility in the amount of$9.6 million with a Canadian chartered bank to finance the purchase ofInnerwise, Inc. in July 2007. As of June 30, 2009, the Companycontinued to comply with all covenants of the credit facility, and effective February 23,2009, the Company agreed to amend the interest rate payable from the bank’s USBase rate plus 0.50% per annum to the bank’s US Base rate plus 1.50% per annum.The principal and accrued interest on the loan is payable monthly over the termof the loan, which is five years. Tucows may prepay this loan in full orin part without any premium or penalty. The credit facility provides that wemaintain certain financial and operating covenants which include, among otherprovisions, maintaining specific leverage and coverage ratios during the termof the loan. Certain covenants under the credit facility may limit the amountof our capital expenditures. The credit facility is collateralized by a firstlien on, and pledge of, the majority of the combined Company’s present andfuture property and assets (subject to certain exclusions).

 

Pursuant to the terms of the facility, the Company is required to makean annual cash sweep payment based on excess cash flow as defined in the creditfacility agreement, as well as equal monthly capital repayments ofapproximately $160,000. Based on the assessment of the audited results for its2008 fiscal year, the Company made a cash sweep payment for Fiscal 2008amounting to $0.7 million which amount was paid on May 1, 2009. Forits 2007 fiscal year, the cash sweep payment was $1.0 million, which waspaid in May 2008. The Company currently estimates that the cash sweeppayment for Fiscal 2009 year, payable during the three months ending June 30,2010 will amount to approximately $1.2 million. Accordingly, this amounthas now been classified as a current liability at June 30, 2009.

 

Principalloan repayments are as follows:

 
| Current portion (including an estimate for a cash sweep payment in  connection with Fiscal 2009 amounting to $1.2 million, payable during  the three months ending June 30, 2010): |   |      |      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|
| July 2009 — June 2010                                                                                                                                                         |   | $         | 3,114,242 |   |
| Long-term portion:                                                                                                                                                                           |   |      |      |
| July 2010 — January 2011                                                                                                                                                      |   | 1,063,004 |      |
|                                                                                                                                                                                         |   |      |      |
| Total Loan Payable                                                                                                                                                                           |   | $         | 4,177,246 |   |

 

Interest rates that are currently available to the Company for issuanceof loans payable with similar terms and remaining maturities are used toestimate the fair value of the Company’s loan payable. The estimated fair valueof the Company’s loan payable at June 30, 2009 was $ 5,148,518,compared to a carrying amount of $4,177,246 at June 30, 2009.

 

**6.********DERIVATIVEINSTRUMENT ASSETS / LIABILITIES****:**

 

On September 29, 2008, the Company entered into a series of forwardplus contracts to hedge a portion of the Company’s expected Canadian dollarrequirements. These contracts, collectively, have a notional value ofUS$9 million, whereby US$500,000 is converted into Canadian dollars on asemi-monthly basis through September 2009. On each currency optiontransaction expiry date, being the end of each semi-monthly period through tomaturity in September 2009, provided that the limit rate (US$1.00: Cdn$1.09) has not been reached during such period, the Company will sell US$500,000and buy Canadian dollars at the then current exchange rate or at the base rateof US$1.00: Cdn$ 1.02, whichever is more beneficial. Should the limit rate bereached during the semi-monthly period before the expiration date of eachcontract, then the contract will be fixed at the base rate of US$1.00: Cdn$1.02for delivery on its value dates.

 

On October 10, 2008, the Company entered into a series of foreignexchange forward contracts designed to meet estimated Canadian dollar needs forits 2009 fiscal year. These contracts, collectively, have a notional value ofUS$12 million, whereby US$500,000 is converted into Canadian dollars on asemi-monthly basis from January 2009 to December 2009 at foreignexchange rates varying from US$1.00: Cdn$1.1560 to US$1.00: Cdn$1.1670.

 

On March 30, 2009, the Company entered into a series of foreignexchange forward contracts to begin to hedge a portion of its 2010 fiscal yearexpected Canadian dollar requirements. These contracts, collectively, have anotional value of US$6 million, whereby US$500,000 is converted intoCanadian dollars on a semi-monthly basis from January 2010 to June 2010at a foreign exchange rate of US$1.00: Cdn$1.2442.

 

9

----

Table ofContents

 

On April 1, 2009, the Company entered into a series of foreignexchange forward contracts designed to meet estimated Canadian dollar needs forits 2009 fiscal year. These contracts, collectively, have a notional value ofUS$3 million, whereby US$500,000 is converted into Canadian dollars on asemi-monthly basis from July 2009 to September 2009 at a foreignexchange rate of US$1.00: Cdn$1.2447.

 

On June 8, 2009, the Company entered into a series of foreignexchange forward contracts to begin to hedge a portion of its 2010 fiscal yearexpected Canadian dollar requirements. These contracts, collectively, have anotional value of US$4.497 million, whereby:

 

·                  US$133,000 is converted intoCanadian dollars on a semi-monthly basis from January 2010 to May 2010;

 

·                  US$400,000 is converted intoCanadian dollars on a semi-monthly basis from May 2010 to June 2010;and

 

·                  US$500,000 is converted intoCanadian dollars on a semi-monthly basis from October 2010 to December 2010.

 

All of these amounts are converted at a foreignexchange rate of US$1.00: Cdn$1.1072.

 

On June 15, 2009, the Company entered into a series of foreignexchange forward contracts to begin to hedge a portion of its 2010 fiscal yearexpected Canadian dollar requirements. These contracts, collectively, have anotional value of US$720,000, whereby US$80,000 is converted into Canadiandollars on a semi-monthly basis from January 2010 to May 2010 at aforeign exchange rate of US$1.00: Cdn$1.1252.

 

The Company does not apply hedge accounting, and therefore, for thethree months ended June 30, 2009, the Company recorded a gain of$1.9 million in the fair value of forward contracts in its consolidatedstatements of operations. For the three months ended June 30, 2008,the Company recorded a gain on forward contracts of $225,640. For the sixmonths ended June 30, 2009, the Company recorded a gain of$2.0 million in the fair value of forward contracts in its consolidatedstatements of operations. For the six months ended June 30, 2008, theCompany recorded a loss on forward contracts of $29,793. As of June 30, 2009,the Company has outstanding forward exchange contracts with a notional value of$23.2 million.

 

**7. INCOME TAXES**

 

For the six months ended June 30, 2009,the Company recorded a current tax expense of $689,000 on income before incometaxes of $6.1 million using an estimated effective tax rate for its 2009fiscal year that accounts for the utilization of remaining net operating losscarry forwards and alternative minimum tax credits available to the Company.Included in the income tax expense is a recovery of $174,000 for investment taxcredits earned during the three months ended June 30, 2009.Comparatively, for the six months ended June 30, 2008, the Companyrecorded a current tax expense of $61,000 on income before income taxes of$1.2 million primarily related to our estimate for federalalternative minimum tax obligations for our 2008 fiscal year and Pennsylvaniastate franchise tax related to prior years.

 

As of December 31,2008, the Company recorded a valuation allowance of $10.8 million and a netdeferred tax asset of $3.0 million. The net deferred tax asset has beenallocated on a pro rata basis between current and non-current deferred taxassets, resulting in current deferred tax assets of $0.6 million andnon-current deferred tax assets of $2.4 million as at December 31, 2008.No significant changes have occurred during the six month period ended June 30, 2009.

 

The Companyanalyzes the carrying value of its deferred tax asset on a regular basis. Indetermining future taxable income, assumptions are made to forecast federal,state and international operating income, the reversal of temporary timingdifferences, and the implementation of any feasible and prudent tax planningstrategies. The assumptions require significant judgment regarding theforecasts of future taxable income, and are consistent with forecasts used tomanage the business. During the six months ended June 30, 2009, therewas no reversal of the valuation allowance. The valuation allowance will bemaintained until sufficient evidence exists to support a reversal of, ordecrease in, the valuation allowance.

 

The Companyfollows the provisions of Financial Accounting Standards Board (FASB”)Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes- an interpretation of FASB Statement No. 109* (“FIN48”), in accounting for income tax exposures. The application of this interpretation requires a two-step accountingprocess that separates recognition of uncertain tax benefits from measurementthereof.

 

The Company hadapproximately $301,000 of gross unrecognized tax benefit as of December 31,2008 and $209,000 of gross unrecognized tax benefit as of June 30, 2009,which if recognized, would favorably affect its income tax rate in futureperiods.  The unrecognized tax benefitrelates to non-recognition of refundable research and development tax creditsin Canada earned during its 2008 fiscal year and certain state tax exposuresfrom prior periods. During the six months 

 

10

----

Table ofContents

 

ended June 30, 2009,the Company’s unrecognized tax benefits decreased by $205,000 as a result ofthe settlement of the Company’s 2006 and 2007 Canadian research and developmenttax credit claims. The Company increased its unrecognized tax benefits by$113,000 related to its 2008 research and development tax credit claim. TheCompany expects its 2009 research and development tax credit claim to beinsignificant.

 

The Companyrecognizes accrued interest and penalties to unrecognized tax benefit as a taxexpense. The Company has not accrued any interest or penalties as of December 31,2008 and June 30, 2009. The Company believes it is reasonablypossible that $209,000 of the unrecognized tax benefit will decrease in thenext twelve months as it is anticipated that the Canadian tax authorities willconclude its review of the Company’s 2008 research and development claim forthe credits, and that the state tax matters will also be settled, within thatperiod.

 

**8. BASICAND DILUTED EARNINGS (LOSS) PER COMMON SHARE:**

 

Basic earnings per common share has been calculated by dividing netincome for the period by the weighted average number of common sharesoutstanding during each period. Diluted earnings per share has been calculatedby dividing net income for the period by the weighted average number of commonshares and potentially dilutive common shares outstanding during the period. Incomputing diluted earnings per share, the treasury stock method is used todetermine the number of shares assumed to be purchased from the conversion ofcommon shares equivalents or the proceeds of option exercises.

 

The following table is a summary of the basic and diluted earnings percommon share:

 
| ** **                                                    | ** ** | **Three months ended  June 30, 2009** | ** ** | **Three months ended  June 30, 2008** | ** ** | **Six months   ended  June 30, 2009** | ** ** | **Six months   ended  June 30, 2008** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| Numerator for basic and diluted earnings per  common share:   |       |                                       |       |                                       |       |                                       |       |                                       |       |
| Income for the period                                         |       | $                                          | 4,479,618  |                                       | $          | 2,208,865                                  |       | $                                          | 5,444,036  |   | $ | 1,126,646 |   |
| Denominator for basic and diluted earnings per  common share: |       |                                       |       |                                       |       |                                       |       |                                       |       |
| Basic weighted average number of common shares  outstanding   |       | 68,923,313                                 |       | 73,899,695                                 |       | 70,778,950                                 |       | 73,894,119                                 |       |
| Effect of outstanding stock options                           |       | 169,633                                    |       | 1,448,413                                  |       | 6,762                                      |       | 1,545,807                                  |       |
| Diluted weighted average number of shares  outstanding        |       | 69,092,946                                 |       | 75,348,108                                 |       | 70,785,712                                 |       | 75,439,926                                 |       |
| Basic earnings per common share                               |       | $                                          | 0.07       |                                       | $          | 0.03                                       |       | $                                          | 0.08       |   | $ | 0.02 |   |
| Diluted earnings per common share                             |       | $                                          | 0.07       |                                       | $          | 0.03                                       |       | $                                          | 0.08       |   | $ | 0.01 |   |

 

Options to purchase 3,851,243 common shares thatwere outstanding as of the three months ended June 30, 2009 were notincluded in the computation of diluted income per common share because all suchoptions had an exercise price greater than the average market price of thecommon shares (during the three months ended June 30, 2008, options topurchase 3,195,766 shares of common stock were outstanding).

 

Options to purchase 6,661,992 common shares thatwere outstanding as of the six months ended June 30, 2009 were notincluded in the computation of diluted income per common share because all suchoptions had an exercise price greater than the average market price of thecommon shares (during the six months ended June 30, 2008, options topurchase 1,878,736 shares of common stock were outstanding).

 

OnMarch 23, 2009, 4,185,769 common shares were repurchased andcancelled under the terms of a modified Dutch Auction Tender Offer. Thisreduction in the number of shares outstanding has been included in thecomputation of earnings per share and diluted earnings per share for the threeand six months ended June 30, 2009 (see note 11).

 

OnJuly 14, 2009, subsequent to the quarter end, the Company repurchasedand cancelled 1,103,824 common shares under the terms of a second modifiedDutch Auction Tender Offer (see note 14).

 

11

----

Table of Contents

 

**9. SUPPLEMENTAL INFORMATION:**

 

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

 
| ** **              | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| OpenSRS  :              |       |                                |       |                               |       |   |   |   |   |
| Domain  Services        |       | $                                   | 14,737,932 |                               | $          | 13,269,453 |   | $ | 28,939,954 |   | $ | 26,140,902 |   |
| Email  Services         |       | 873,855                             |       | 1,551,541                          |       | 1,995,790 |   | 3,126,250 |   |
| Other  Services         |       | 1,091,988                           |       | 1,136,701                          |       | 2,186,448 |   | 2,235,383 |   |
| Total  OpenSRS Services |       | 16,703,775                          |       | 15,957,695                         |       | 33,122,192 |   | 31,502,535 |   |
|                    |       |                                |       |                               |       |   |   |   |   |
| YummyNames              |       | 1,455,557                           |       | 1,872,642                          |       | 3,320,590 |   | 2,777,926 |   |
| Hover                   |       | 1,258,828                           |       | 2,046,055                          |       | 2,559,413 |   | 3,686,690 |   |
| Butterscotch            |       | 603,959                             |       | 573,937                            |       | 1,111,348 |   | 1,194,385 |   |
|                    |       | $                                   | 20,022,119 |                               | $          | 20,450,329 |   | $ | 40,113,543 |   | $ | 39,161,536 |   |

 

No customer accounted for more than 10% of revenue forthe three or six months ended June 30, 2009 or the three or sixmonths ended June 30, 2008. Significant management judgment isrequired at the time of recording of revenue to assess whether the collectionof the resulting receivables is reasonably assured. On an ongoing basis, weassess the ability of our customers to make required payments. Based on thisassessment, we expect the carrying amount of our outstanding receivables, netof allowance for doubtful accounts, to be fully collected.

 

As of June 30, 2009, no customer accountedfor more than 10% of accounts receivable. As of June 30, 2008, twocustomers accounted for more than 21% of accounts receivable.

 

(b)                                The following is a summary of the Company’scost of revenues from each significant revenue stream:

** **
| ** **                                    | ** ** | **Three  months ended June 30** | ** **       | **Six  months ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2009**                             | ** **       | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| OpenSRS:                                      | ** ** | ** **                           | ** **       | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domain  Services                              |       | $                                    | 11,943,841       |                                | $          | 10,505,174 |   | $ | 23,298,602 |   | $ | 20,440,713 |   |
| Email  Services                               |       | 153,228                              |             | (24,278                             | )          | 333,146 |   | 83,000 |   |
| Other  Services                               |       | 411,287                              |             | 415,683                             |       | 800,139 |   | 823,077 |   |
| Total  OpenSRS Services                       |       | 12,508,356                           |             | 10,896,579                          |       | 24,431,887 |   | 21,346,790 |   |
|                                          |       |                                 |             |                                |       |   |   |   |   |
| YummyNames                                    |       | 250,529                              |             | 181,143                             |       | 436,084 |   | 359,450 |   |
| Hover                                         |       | 475,369                              |             | 576,809                             |       | 988,579 |   | 1,143,595 |   |
| Butterscotch                                  |       | 1,110                                |             | 5,725                               |       | 7,850 |   | 10,625 |   |
| Network,  other costs                         |       | 1,150,684                            |             | 2,002,841                           |       | 2,307,046 |   | 3,952,569 |   |
| Network,  depreciation and amortization costs |       | 517,879                              |             | 848,201                             |       | 999,787 |   | 1,747,495 |   |
|                                          |       | $                                    |  14,903,927 |                                | $          | 14,511,298 |   | $ | 29,171,233 |   | $ | 28,560,524 |   |

 

(c)           Thefollowing is a summary of the Company’s property and equipment by geographicregion:

 
| ** **     | ** ** | **June 30, 2009** | ** **      | **December 31, 2008** | ** ** |
|----------------|------------|-----------------------------|-----------------|---------------------------------|------------|
|           |       |                        |            |                            |       |
| Canada         |       | $                           | 1,712,749       |                            | $          | 2,292,358 |   |
| United States  |       | 630,134                     |            | 752,274                         |       |
| United Kingdom |       | 11,819                      |            | 28,326                          |       |
|           |       | $                           |  2,354,702 |                            | $          | 3,072,958 |   |

 

**10.COMMITMENTS AND CONTINGENCIES:**

 

The Company is involved in various legal claims and lawsuits inconnection with its ordinary business operations. The Company intends tovigorously defend these claims. While the final outcome with respect to anyactions or claims outstanding or pending as of June 30, 2009 cannot bepredicted with certainty, it is the opinion of management that their resolutionwill not have a material adverse effect on the Company’s financial position.

 

12

----

Table of Contents

 

**11. STOCKHOLDERS’ EQUITY:**

 

The following unaudited table summarizes stockholders’equity transactions for the period ended June 30, 2009:

 
| ** **                           | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional** | ** ** | ** **             | ** ** | **Total**  | ** **  |
|--------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|------------------------|------------|------------|-------------|
| ** **                           | ** ** | **Common stock** | ** ** | **paid in** | ** ** | ** **     | ** ** | **stockholders’** | ** ** |
| ** **                           | ** ** | **Number**            | ** ** | **Amount**       | ** ** | **capital**    | ** ** | **Deficit**            | ** ** | **equity** | ** **  |
|                                 |       |                  |       |             |       |           |       |                   |       |       |        |
| Balances,  December 31, 2008    |       | 73,073,782            |       | $                | 15,198,358 |           | $          | 48,714,676             |       | $          | (42,462,370 | ) | $ | 21,450,664 |   |
| Repurchase and  retirement of shares |       | (4,185,690            | )          | (837,138         | )          | (974,041       | )          | —                 |       | (1,811,179 | )           |
| Stock-based  compensation            |       | —                |       | —           |       | 49,200         |       | —                 |       | 49,200     |        |
| Net income for  the period           |       | —                |       | —           |       | —         |       | 964,418                |       | 964,418    |        |
| Balances,  March 31, 2009       |       | 68,888,092            |       | 14,361,220       |       | 47,789,835     |       | (41,497,952            | )          | 20,653,103 |        |
|                                 |       |                  |       |             |       |           |       |                   |       |       |        |
| Stock-based  compensation            |       | —                |       | —           |       | 82,508         |       | —                 |       | 82,508     |        |
| Exercise of  stock options           |       | 68,707                |       | 46,858           |       | (21,436        | )          | —                 |       | 25,422     |        |
| Repurchase and  retirement of shares |       | (79                   | )          | —           |       | —         |       | —                 |       | —     |        |
| Issuance of  restricted stock        |       | 12,600                |       | —           |       | 230            |       | —                 |       | 230        |        |
| Net income for  the period           |       | —                |       | —           |       | —         |       | 4,479,618              |       | 4,479,618  |        |
| Balances,  June 30, 2009        |       | 68,969,320            |       | $                | 14,408,078 |           | $          | 47,851,137             |       | $          | (37,018,334 | ) | $ | 25,240,881 |   |

 

The following unaudited table summarizes stockholders’equity transactions for the period ended June 30, 2008:

 
| ** **                       | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional** | ** ** | ** **             | ** ** | **Total**  | ** **  |
|----------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|------------------------|------------|------------|-------------|
| ** **                       | ** ** | **Common stock** | ** ** | **paid in** | ** ** | ** **     | ** ** | **stockholders’** | ** ** |
| ** **                       | ** ** | **Number**            | ** ** | **Amount**       | ** ** | **capital**    | ** ** | **Deficit**            | ** ** | **equity** | ** **  |
|                             |       |                  |       |             |       |           |       |                   |       |       |        |
| Balances, December 31, 2007 |       | 73,888,542            |       | $                | 15,350,915 |           | $          | 48,537,313             |       | $          | (44,537,179 | ) | $ | 19,351,049 |   |
| Stock-based compensation         |       | —                |       | —           |       | 72,200         |       | —                 |       | 72,200     |        |
| Net loss for the period          |       | —                |       | —           |       | —         |       | (1,082,219             | )          | (1,082,219 | )           |
| Balances, March 31, 2008    |       | 73,888,542            |       | 15,350,915       |       | 48,609,513     |       | (45,619,398            | )          | 18,341,030 |        |
|                             |       |                  |       |             |       |           |       |                   |       |       |        |
| Stock-based compensation         |       | —                |       | —           |       | 73,000         |       | —                 |       | 73,000     |        |
| Exercise of stock options        |       | 35,000                |       | 17,395           |       | (7,945         | )          | —                 |       | 9,450      |        |
| Net income for the period        |       | —                |       | —           |       | —         |       | 2,208,865              |       | 2,208,865  |        |
| Balances,  June 30, 2008    |       | 73,923,542            |       | $                | 15,368,310 |           | $          | 48,674,568             |       | $          | (43,410,533 | ) | $ | 20,632,345 |   |

 

OnMarch 23, 2009 the Company announced that it successfully concluded a modified“Dutch Auction Tender Offer” that was previously announced on February 12,2009. Under the terms of the offer, the Company repurchased an aggregate of4,185,769 shares of its common stock at a purchase price of $0.41 per share,for a total of $1,716,132, excluding transaction costs of $95,046. The purchaseprice was funded from available cash. Of the 4,185,769 shares purchased,4,000,000 were shares the Company offered to purchase in the offer and 185,769where shares purchased pursuant to the Company’s right to purchase up to anadditional 2% of the shares outstanding immediately prior to the commencementof the tender offer. Due to over-subscription, the final proration factor forshares tendered at or below $0.41 per share was approximately 99.42%. For thispurpose, shares tendered at $0.41 per share included shares tendered by thosepersons who indicated, in their letter of transmittal, that they were willingto accept the price determined in the offer. All shares purchased in the tenderoffer received the same price. As a result of the completion of the tenderoffer, as of March 23, 2009, the Company had 68,888,092 shares issued andoutstanding, as all shares repurchased were immediately retired.

 

OnJuly 14, 2009, subsequent to the quarter end, the Company repurchasedand cancelled 1,103,824 common shares under the terms of a second modifiedDutch Auction Tender Offer (see note 14).

 

On May 6, 2008, the Company’s Board ofDirectors authorized the repurchase of up to $10 million of the Company’s commonstock at the Company’s discretion. The Company has repurchased 849,760 sharesunder this repurchase program. This repurchase program expired on May 11,2009.

 

13

----

Table of Contents

 

**12. SHARE-BASED PAYMENTS**

 

(a)                                  Stock options:

 

TheCompany’s 1996 Stock Option Plan (the “1996 Plan”) was established for thebenefit of the employees, officers, directors and certain consultants of the Company.The maximum number of common shares which may be set aside for issuance underthe 1996 Plan was 11,150,000 shares, provided that the Board of Directors ofthe Company has the right, from time to time, to increase such number subjectto the approval of the stockholders of the Company when required by law orregulatory authority. Generally, options issued under the Plan vest over afour-year period. The 1996 Plan expired on February 25, 2006; no optionswere issued from this plan after that date.

 

OnNovember 22, 2006, the Stockholders of the Company approved theimplementation of the Company’s 2006 Equity Compensation Plan (the “2006 Plan”),which serves as a successor to the 1996 Plan. The 2006 Plan has beenestablished for the benefit of the employees, officers, directors and certainconsultants of the Company. The 5,000,000 common shares that have been setaside for issuance under the 2006 Plan are to provide eligible persons with the opportunity toacquire a proprietary interest, or otherwise increase their proprietaryinterest, in Tucows Inc. Generally, options issued under the 2006 Plan vestover a four-year period and have a term not exceeding seven years.

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model, consistent with the provisions ofSFAS 123R and Staff Accounting Bulletin No. 107, “Share-based payment”(“SAB 107”). Because option-pricing models require the use of subjectiveassumptions, changes in these assumptions can materially affect the fair valueof the options. The assumptions presented in the table below represent theweighted average of the applicable assumption used to value stock options attheir grant date. The Company calculates expected volatility based on historicalvolatility of the Company’s common shares. The expected term, which representsthe period of time that options granted are expected to be outstanding, isestimated based on historical exercise experience. The Company evaluatedhistorical exercise behavior when determining the expected term assumptions.The risk-free rate assumed in valuing the options is based on the U.S. Treasuryyield curve in effect at the time of grant for the expected term of the option.The Company determines the expected dividend yield percentage by dividing theexpected annual dividend by the market price of our common shares at the dateof grant.

 

During the three months ended June 30, 2009, 25,000 stockoptions were granted as compared to 971,000 stock options granted during thethree months ended June 30, 2008.

 

During the six months ended June 30, 2009, 25,000 stockoptions were granted as compared to 1,071,000 stock options granted during thesix months ended June 30, 2008.

 

In addition, during the three months ended June 30, 2009,under the terms of the 2006 Plan, the Company issued 12,600 restricted sharesto eligible employees of the Company.

 

14

----

Table of Contents

 

Thefair value of stock options granted during the three and six months ended June 30,2009 and during the three and six months ended June 30, 2008 was estimatedusing the following assumptions:

 
| ** **                                                                                                                         | ** ** | **Three months ended June 30, 2009** | ** ** | **Three months ended June 30, 2008** | ** ** | **Six months   ended June 30, 2009** | ** ** | **Six months   ended June 30, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| Volatility                                                                                                                         |       | 78.8                                           | %          | 65.6                                           | %          | 78.8                                           | %          | 66.2                                           | %          |
| Risk-free interest rate                                                                                                            |       | 1.2                                            | %          | 3.0                                            | %          | 1.2                                            | %          | 3.0                                            | %          |
| Expected life (in years)                                                                                                           |       | 4.75                                           |       | 4.75                                           |       | 4.75                                           |       | 4.75                                           |       |
| Dividend yield                                                                                                                     |       | —                                         | %          | —                                         | %          | —                                         | %          | —                                         | %          |
| The weighted average grant date fair value for options issued, with  the exercise price equal to market value on the date of grant |       | $                                              | 0.18       |                                           | $          | 0.33                                           |       | $                                              | 0.18       |   | $ | 0.33 |   |
|                                                                                                                                    |            |                                                |            |                                                |            |                                                |            |                                                |            |  |  |  |  |

 

Details of stock optiontransactions for thethree months ended June 30, 2009 and 2008 are as follows:

 
| ** **                         | ** ** | **Three  months ended  June 30, 2009** | ** ** | **Three  months ended  June 30, 2008**      | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **Number of  shares**                       | ** ** | **Weighted  average  exercise price  per share** | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise price  per share** | ** ** |
| Outstanding, beginning of period   |       | 7,125,559                                   |       | $                                                | 0.56       |   | 5,035,643 |   | $ | 0.48 |   |
| Granted                            |       | 25,000                                      |       | 0.38                                             |       | — |   | — |   |
| Exercised                          |       | (68,707                                     | )          | 0.37                                             |       | (35,000 | ) | 0.27 |   |
| Forfeited                          |       | (12,594                                     | )          | 0.82                                             |       | (21,532 | ) | 0.64 |   |
| Expired                            |       | (40,000                                     | )          | 0.69                                             |       | (5,000 | ) | 0.27 |   |
| Outstanding, end of period         |       | 7,029,258                                   |       | $                                                | 0.56       |   | 4,974,111 |   | $ | 0.48 |   |
| Options exercisable, end of period |       | 5,875,789                                   |       | $                                                | 0.53       |   | 4,932,079 |   | $ | 0.48 |   |

 

Details of stock optiontransactions for thesix months ended June 30, 2009 and 2008 are as follows:

 
| ** **                         | ** ** | **Six months  ended  June 30, 2009** | ** ** | **Six months  ended  June 30, 2008**        | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **Number of  shares**                     | ** ** | **Weighted  average  exercise price  per share** | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise price  per share** | ** ** |
| Outstanding, beginning of period   |       | 7,282,777                                 |       | $                                                | 0.56       |   | 5,048,517 |   | $ | 0.48 |   |
| Granted                            |       | 25,000                                    |       | 0.38                                             |       | — |   | — |   |
| Exercised                          |       | (68,707                                   | )          | 0.37                                             |       | (35,000 | ) | 0.27 |   |
| Forfeited                          |       | (168,312                                  | )          | 0.55                                             |       | (34,406 | ) | 0.65 |   |
| Expired                            |       | (41,500                                   | )          | 0.80                                             |       | (5,000 | ) | 0.27 |   |
| Outstanding, end of period         |       | 7,029,258                                 |       | $                                                | 0.56       |   | 4,974,111 |   | $ | 0.48 |   |
| Options exercisable, end of period |       | 5,875,789                                 |       | $                                                | 0.53       |   | 4,932,079 |   | $ | 0.48 |   |

 

The stock options expire on various dates through 2016.

 

15

----

Table of Contents

 

Asof June 30, 2009, the exercise prices, weighted average remaining contractuallife of outstanding options and intrinsic values were as follows:

 
| ** **         | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **         | ** ** | ** **              | ** ** | ** **              | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **         | ** ** | ** **              | ** ** | **Weighted**            | ** ** | **average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **         | ** ** | ** **              | ** ** | **average**             | ** ** | **remaining** | ** ** | **Aggregate** | ** ** | ** ** | ** ** | **average** | ** ** | **Aggregate** | ** ** |
| ** **         | ** ** | **Number**              | ** ** | **exercise  price**     | ** ** | **contractual** | ** ** | **intrinsic** | ** ** | **Number** | ** ** | **exercise  price** | ** ** | **intrinsic** | ** ** |
| **Exercise price** | ** ** | **outstanding**         | ** ** | **per  share**          | ** ** | **life  (years)** | ** ** | **value** | ** ** | **exercisable** | ** ** | **per  share** | ** ** | **value** | ** ** |
| $0.31-$0.49        |       | 3,725,182               |       | $                       | 0.38       |   | 4.0 |   | $ | 196,954 |   | 3,725,144 |   | $ | 0.38 |   | $ | 196,951 |   |
| $0.52-$0.69        |       | 1,628,204               |       | $                       | 0.60       |   | 5.5 |   | — |   | 960,287 |   | $ | 0.59 |   | — |   |
| $0.80-$0.99        |       | 1,641,948               |       | $                       | 0.87       |   | 3.5 |   | — |   | 1,156,437 |   | $ | 0.88 |   | — |   |
| $1.02-$4.84        |       | 33,924                  |       | $                       | 2.62       |   | 1.3 |   | — |   | 33,921 |   | $ | 2.62 |   | — |   |
|               |       | 7,029,258               |       | $                       | 0.56       |   |   |   | $ | 196,954 |   | 5,875,789 |   | $ | 0.53 |   | $ | 196,951 |   |

 

Total unrecognized compensation cost relating to unvested stock optionsat June 30, 2009, prior to the consideration of expected forfeitures,was approximately $430,000 and is expected to be recognized over a weightedaverage period of 4.2 years.

 

The Company recorded stock-based compensation of $82,508 and $73,000for the three months ended June 30, 2009 and 2008, respectively. TheCompany recorded stock-based compensation of $131,708 and $145,200 for the sixmonths ended June 30, 2009 and 2008, respectively.

 

TheCompany has not capitalized any share-based compensation expense as part of thecost of an asset.

 

(b)                               Restricted stock awards:

 

During the three months ended June 30, 2009, under the termsof the 2006 Plan, the Company issued 12,600 restricted stock awards to eligibleemployees of the Company.

 

Restricted stock awards generally vest annually over a four yearperiod. Holders of restricted stock awards may not sell, assign, transfer,pledge or otherwise dispose of an unvested stock award. Unvested shares areheld in escrow by the Company until the Participant’s interest in such sharesvests.

 

Holders of restricted stock awards shall have full shareholder rightswith respect to any shares of Company stock issued to the participant under astock award, whether or not the participant’s interest in those shares isvested. Accordingly, the participant shall have the right to vote such sharesand to receive any regular cash dividends paid on such shares.

 

The fair value of restricted stock awards granted during the three andsix months ended June 30, 2009 was estimated using the closing share priceof the NYSE Amex Exchange on the date preceding the date that the restrictedstock awards were issued.

 

Details of restricted stockawards transactions forthe three months ended June 30, 2009 and 2008 are as follows:

 
| ** **                                         | ** ** | **Three  months ended  June 30, 2009** | ** ** | **Three  months ended  June 30, 2008**  | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                         | ** ** | **Number of  shares**                       | ** ** | **Weighted  average  fair value  per share** | ** ** | **Number of  shares** | ** ** | **Weighted  average  fair value  per share** | ** ** |
| Outstanding, beginning of period                   |       | —                                      |       | $                                            | —     |   | — |   | — |   |
| Granted                                            |       | 12,600                                      |       | 0.32                                         |       | — |   | — |   |
| Outstanding, end of period                         |       | 12,600                                      |       | $                                            | 0.32       |   | — |   | — |   |
| Restricted stock awards exercisable, end of period |       | —                                      |       | —                                       |       | — |   | — |   |

 

16

----

Table of Contents

 

Detailsof restricted stock awards transactions for the six months ended June 30, 2009 and2008 are as follows:

 
| ** **                                         | ** ** | **Six months  ended  June 30, 2009** | ** ** | **Six months  ended  June 30, 2008**    | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                         | ** ** | **Number of  shares**                     | ** ** | **Weighted  average  fair value  per share** | ** ** | **Number of  shares** | ** ** | **Weighted  average  fair value  per share** | ** ** |
| Outstanding, beginning of period                   |       | —                                    |       | $                                            | —     |   | — |   | — |   |
| Granted                                            |       | 12,600                                    |       | 0.32                                         |       | — |   | — |   |
| Outstanding, end of period                         |       | 12,600                                    |       | $                                            | 0.32       |   | — |   | — |   |
| Restricted stock awards exercisable, end of period |       | —                                    |       | —                                       |       | — |   | — |   |

 

Total unrecognized compensation cost relating to unvested restrictedstock awards at June 30, 2009, prior to the consideration of expectedforfeitures, was approximately $4,000 and is expected to be recognized over a weightedaverage period of 3.8 years.

 

The Company recorded stock-based compensation of $230 for the three andsix months ended June 30, 2009.

 

**13. FAIR VALUE MEASUREMENT**

 

SFAS No. 157, “Fair Value Measurements”establishes a valuation hierarchy for disclosure of the inputs to valuationused to measure fair value. This hierarchy prioritizes the inputs into threebroad levels. Level 1 inputs are quoted prices (unadjusted) in active marketsfor identical assets or liabilities. Level 2 inputs are quoted prices forsimilar assets and liabilities in active markets or inputs that are observablefor the asset or liability, either directly or indirectly through marketcorroboration, for substantially the full term of the financial instrument.Level 3 inputs are unobservable inputs based on the Company’s own assumptionsused to measure assets and liabilities at fair value. A financial asset orliability’s classification within the hierarchy is determined based on thelowest level input that is significant to the fair value measurement.

 

Thefollowing table provides a summary of the fair values of the Company’s assetsmeasured at fair value on a recurring basis:

 
| ** **              | ** ** | **June 30, 2009**                      | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **Fair Value Measurements Using** | ** ** | **Assets  at** | ** ** |
| ** **              | ** ** | **Level 1**                                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Fair  Value** | ** ** |
|                    |       |                                             |       |   |   |   |   |   |   |
| Forward  Plus Contracts |       | $                                                | —     |   | $ | 49,245 |   | $ | — |   | $ | 49,245 |   |
| Total  Assets           |       | $                                                | —     |   | $ | 49,245 |   | $ | — |   | $ | 49,245 |   |

 

**14. SUBSEQUENT EVENTS**

 

OnJuly 14, 2009 the Company announced that it successfully concluded asecond modified “Dutch Auction Tender Offer” that was previously announced on May 26,2009. Under the terms of the offer, the Company repurchased an aggregate of1,103,824 shares of its common stock at a purchase price of $0.45 per share,for a total of $496,721, excluding transaction costs of $56,936. The purchaseprice was funded from available cash. Of the 1,103,824 shares purchased,1,000,000 were shares the Company offered to purchase in the offer and 103,824where shares purchased pursuant to the Company’s right to purchase up to anadditional 2% of the shares outstanding immediately prior to the commencementof the tender offer. Due to over-subscription, the final proration factor forshares tendered at or below $0.45 per share was approximately 99.8%. For thispurpose, shares tendered at $0.45 per share included shares tendered by thosepersons who indicated, in their letter of transmittal, that they were willingto accept the price determined in the offer. All shares purchased in the tenderoffer received the same price. As a result of the completion of the tenderoffer, as of July 14, 2009, the Company had 67,852,896 shares issued andoutstanding, as all shares repurchased were immediately retired.

 

17

----

Table of Contents

 

**15. RECLASSIFICATION**

 

Certain of theprior periods’ comparative figures have been reclassified to conform with thepresentation adopted in the current period.

 

18

----

Table of Contents

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

ThisQuarterly Report on Form 10-Q contains, in addition to historicalinformation, forward-looking statements by us with regard to our expectationsas to financial results and other aspects of our business that involve risksand uncertainties and may constitute forward-looking statements within themeaning 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-lookingstatements. The forward-looking statements contained in this report includestatements regarding, among other things, the Company’s foreign currencyrequirements, specifically for the Canadian dollar; the estimated annual cashsweep payment due under the Company’s credit facility; the number of new,renewed and transferred-in domain names, the competition we expect to encounteras our business develops and competes in a broad range of Internet services,our valuations of certain deferred tax assets, our expectation to collect ouroutstanding receivables, net of our allowance for doubtful accounts; thepotential impact of current and pending claims on our business; our expectationregarding fluctuations in certain expense and cost categories; our belief thatthe market for domain name registration will trend upward gradually and may beaffected by market volatility; our belief that, by increasing the number ofapplications and services we offer, we will be able to generate higherrevenues; and our belief that the actions we have taken have positioned theCompany for long-term growth. These statements are based on management’scurrent expectations and are subject to a number of uncertainties and risksthat could cause actual results to differ materially from those described inthe forward-looking statements. Many factors affect our ability to achieve ourobjectives and to successfully develop and commercialize our servicesincluding:

 

·                  Our ability to continue to generate sufficient working capital to meetour operating requirements;

 

·                  Our ability to maintain a good working relationship with our vendorsand customers;

 

·                  The ability of vendors to continue to supply our needs;

 

·                  Actions by our competitors;

 

·                  Our ability to achieve gross profit margins at which we can beprofitable;

 

·                  Our ability to attract and retain qualified personnel in our business;

 

·                  Our ability to effectively manage our business;

 

·                  Our ability to obtain and maintain approvals from regulatoryauthorities on regulatory issues;

 

·                  Pending or new litigation; and

 

·                  Factors set forth under the caption “Item 1A Risk Factors” in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2008.

 

This list offactors that may affect our future performance and financial and competitiveposition and also the accuracy of forward-looking statements is illustrative,but it is by no means exhaustive. Accordingly, all forward-looking statementsshould be evaluated with the understanding of their inherent uncertainty. Allforward-looking statements included in this document are based on informationavailable to us as of the date of this document, and we assume no obligation toupdate these cautionary statements or any forward-looking statements. Thesestatements are not guarantees of future performance.

 

We qualify all theforward-looking statements contained in this Form 10-Q by the foregoingcautionary statements.

 

**OVERVIEW**

 

Our mission is to provide simple, useful services that help peopleunlock the power of the Internet. We accomplish this by reducing the complexityour customers experience as they acquire, deliver or use Internet services suchas domain name registration, email and other Internet services.

 

19

----

Table of Contents

 

Our primary distribution channel is a global network of more than 9,000resellers, in more than 100 countries who typically provide their customers,the end-users of the Internet, with a critical component for establishing andmaintaining an online presence. Our primary focus is serving the needs of this networkof resellers by providing superior services, easy-to-use interfaces, proactiveand attentive customer service, reseller-oriented technology and agile designand development processes. We seek to provide superior customer service to ourresellers by anticipating their business needs and technical requirements. Thisincludes providing easy-to-use interfaces that enable resellers to quickly andeasily integrate our services into their individual business processes, andoffering brandable end-user interfaces that emphasize simplicity and visualappeal.  We also provide “second tier”support to our resellers by email and phone in the event resellers experienceissues or problems with our services. In addition, our Network Operating Centerprovides proactive support to our resellers by monitoring all services andnetwork infrastructure to address deficiencies before customer services are impacted.

 

We believe thatthe underlying platforms for our services are one of the most****mature, reliable and functional reseller-orientedprovisioning and management platforms in our industry, and we continue torefine, evolve and improve these services for both resellers and end-users.

 

To assist us in forecasting growth and to help us monitor theeffectiveness of our operational strategies we categorize our revenue into the following services:

 

OpenSRS, ourwholesale service, manages over eight million domain names, millions ofmailboxes and tens of thousands of digital certificates through a network ofover 9,000 web hosts, ISPs, and other resellers around the world, includingPlatypus, our billing service, which provides ISPs with an industry-specific solutionfor billing, service provisioning and customer account management.

 

Hover, our retailservice, offers services similar to those of OpenSRS to consumers and smallbusinesses.

 

YummyNames, ourdomain portfolio service, manages tens of thousands of domain names, most ofwhich generate advertising revenue and many of which we offer for resale viaour reseller network and other channels. Included in the YummyNames domainportfolio are over 30,000 domains that allow over two-thirds of Americans topurchase a domain or email address based on their name.

 

Butterscotch, ourcontent service, operates two advertising-supported websites, butterscotch.comand tucows.com, that provide content to help consumers overcome the complexityof modern technology and the Internet, in the form of over 1,000 videos andover 46,000 software listings and articles. Additionally, Butterscotch providescustom video production services for technology manufacturers and Internetservices providers.

 

We periodicallyacquire companies or technology when we determine that the related products ortechnology are strategic or complementary to our current or future serviceofferings, as opportunities arise. For example:

 

·                  On July 25, 2007, weacquired Innerwise, Inc., a privately held, Internet Corporation forAssigned Names and Numbers (“ICANN”) -accredited registrar offering domainservices through a worldwide wholesale affiliate network.

 

·                  On June 19, 2006, weacquired Mailbank.com, Inc. (doing business as NetIdentity). We use theseassets to offer personalized Internet services directly to end-users throughHover, and to resellers through OpenSRS’ Personal Names Service, as well as togenerate income from the parked page of each domain address. To expand ourpresence in the email market, on January 3, 2006, we acquired all of theHosted Messaging assets of Critical Path, Inc.

 

Our business model is characterized by non-refundable, up-frontpayments, which lead to recurring revenue and positive operating cash flow. Weare an ICANN-accredited registrar and manage over eight million domains.

 

**NetRevenues**

 

We generate net revenues primarily through the provision of domainregistration services. Additional revenue is generated from the sale of domainnames, advertising and other Internet services.

 

20

----

Table of Contents

 

***OpenSRS***

 

We derive revenue from our reseller network by providing them withreseller services that comprise (a) domain services, (b) emailservices and (c) other services currently consisting of SSL certificates,blogware and website building tools that are used by our resellers to createbundles of Internet services for their end-users along with billing solutionsfor ISPs.

 

(a)                                  OpenSRS DomainService:

 

Historically, the domain services provided by OpenSRS Domain Servicehas been the largest portion of our business and encompasses all of ourservices as an accredited registrar related to the registration, renewal,transfer and management of domain names. In addition, this service fuels otherrevenue categories as it often is the initial service for which a customer willengage us, enabling us to follow on with other services, and allowing us to addto our domain portfolio by purchasing names registered through us upon theirexpiration. We also provide resellers with the ability to sell personal names.This service allows resellers the opportunity to sell email addresses based onour domain portfolio of surname domain names.

 

On August 7, 2007, in advance of the announced October 2007registry fee increases, we modified our pricing structure for domain names toprovide greater visibility into the various fees that make up the cost of adomain name, by breaking out the cost of the registry and ICANN fees separatelyfrom our management fee. The management fee provides our resellers with accessto our provisioning and management tools to enable them to register andadminister domain names and access to additional services like WHOIS privacyand DNS services, enhanced domain name suggestion tools and access to ourPremium Domain name services.

 

As of June 30, 2009, we offer registration services for the gTLDs..com, .net, .org, .info, .name, .biz, .tel, .mobi and .asia and for the countrycode top-level domains, or ccTLDs. at, .be, .ca, .cc, .ch, .cn, .de, .dk, .es,..eu, .fr, .it, .li, .me, .mx .nl, .tv, .uk, and .us.

 

With respect to the sale of domain registrations, we earn fees inconnection with each new, renewed and transferred-in registration and fromproviding provisioning services to resellers and registrars on a monthly basis.Domain registrations are generally purchased for terms of one to ten years,with a majority having a one-year term. Except for certain large customers withwhom we have negotiated alternative arrangements, payments for the full term ofservice, or billed revenue, is received at the time of activation of service.All fees received in connection with domain name registration are non-refundable,and where appropriate, are recorded as deferred revenue and recognized asearned ratably over the term of provision of service. This accounting treatmentreasonably approximates a recognition pattern that corresponds with theprovision of the services during the quarters and the year.

 

(b)                                 OpenSRS EmailService:

 

We derive revenue from our hosted email service through our globaldistribution network. Our email service is offered on a per account per monthbasis, and provides resellers with a reliable, scalable “white label” emailhosting solution that can be customized to their branding and business modelrequirements. The email service also includes spam and virus filtering on allaccounts. End-users can access the email service via a full-featured multi-languageAJAX-enabled web interface, a WAP mobile interface, or through traditionaldesktop email clients, such as Microsoft Outlook or Apple Mail, using IMAP orPOP/SMTP and 2GB of email storage.

 

We earn fees for email services when they are activated. Email servicesare generally purchased monthly and at month-end, are either deducted on apre-authorized basis from reseller’s deposit account, or are invoiced.

 

(c)                                  Other OpenSRSServices:

 

Other services currently consist of SSL certificates, blogware and websitebuilding tools that are used by our resellers to create bundles of Internetservices for their end-users, as well as the provision of billing, provisioningand customer care software solutions to Internet Service Providers through ourPlatypus billing software.

 

We earn fees from such services when a service is activated. Theseservices are generally purchased for terms of one month to three years.Platypus software is generally purchased for terms of one month to one year.Payments for services are for the full term of all services at the time ofactivation of service, are non-refundable and, where appropriate, are recordedas deferred revenue and recognized as earned ratably over the service term.This accounting treatment reasonably approximates a recognition pattern thatcorresponds with the provision of the services during the quarters and theyear.

 

21

----

Table of Contents

 

***YummyNames***

 

We derive revenue from our portfolio of domain names by displayingadvertising on the domains and by making them available for sale or lease. Inaddition we display advertising on “Parked Pages” within OpenSRS. Parked Pages aredomain names registered with us that do not yet contain an active website. Whena user types one of these domain names into a web browser, they are presentedwith dynamically generated links which are pay-per-click advertising. Everytime a user clicks on one of these links, it generates revenue for us throughour partnership with third-parties who provide syndicated pay-per-clickadvertising.

 

Portfolio names are sold through our premium domain name service,auctions or in negotiated sales. The size of our domain name portfolio variesover time, as we acquire and sell domains on a regular basis to maximize theoverall value and revenue generation potential of our portfolio. In evaluatingnames for sale, we consider the potential foregone revenue from pay-per-clickadvertising as well as other factors. The name will be offered for sale if,based on our evaluation, the name is deemed non-essential to our business, andmanagement believes that deriving proceeds from the sale is strategically morebeneficial to the Company.

 

Portfolio names that have been acquired from third-parties or throughacquisition are included as intangible assets with indefinite lives on ourconsolidated balance sheet.

 

In addition, we also offer the same services to our customers, allowingthem to make available names registered by them for monetization on a similarbasis. For customer names, we earn a referral fee for premium names or namessold or leased, and participate on a revenue share basis for names offeredthrough our pay-per-click advertising program.

 

We recognize revenue from these services, net of any fees payable toresellers or customers, immediately upon completion of the service, or in thecase of advertising revenue, on a monthly basis once the advertising has beenserved.

 

***Hover***

 

We generate revenues from the provisioning and management of Internetservices, on a retail basis, to consumers and small businesses through our *Hover.com* website. These services includedomain registration and other Internet services such as email and personalizedemail through our portfolio of surname-based domain names, as well as aneasy-to-use interface that allows users to connect domain names to websites andemail addresses through a unique DNS forwarding system. Depending on theservice offered, we typically receive fees for our services.

 

Our customers generally purchase services for terms of one to tenyears, with a majority of services purchased for a one-year term.  Certain services are also offered on amonthly basis. Payments for the full term of all services, or billed revenue,are received at the time of service activation and, where appropriate, arerecorded as deferred revenue and recognized as earned ratably over the term ofprovision of service. This accounting treatment reasonably approximates a recognitionpattern that corresponds with the provision of the services during quarterlyand annual periods.

 

***Butterscotch***

 

We also generate advertising and other revenue through two ad-supportcontent sites, *butterscotch.com andtucows.com*.

 

*Butterscotch.com* derives revenue from bannerand text advertising on the site, as well as video advertising and productplacement within the videos that make up the bulk of the site. In addition,revenue is earned through custom video production for technology manufacturersand Internet services customers.

 

Tucows.com advertising revenue is generated from third-partyadvertisers and from software developers who rely on us as a primary source ofdistribution. Software developers use our Author Resource Center to submit theirproducts for inclusion on our site and to purchase promotional placement oftheir software. Software developers may also purchase other promotionalservices on a cost-per-click or flat rate basis. Software developers are ableto promote their software through advertising services including keyword searchplacements, banners, promotional placements, expedited reviews and premium dataservices. Revenue is also generated from companies that contract with us toprovide them with co-branded content. Advertising and other revenue isrecognized ratably over the period in which it is presented.

 

Advertising and other revenue is recognized ratably over the period inwhich it is presented. To the extent that we do not meet the minimum number ofimpressions post-presentation that we guarantee to customers, we deferrecognition of the

 

22

----

Table of Contents

 

correspondingrevenues until the guaranteed impressions are achieved. Custom video productionrevenue is recognized on acceptance of the completed video by the customer.

 

**CriticalAccounting Policies**

** **

In preparing our consolidated financial statements, wemake assumptions, judgments and estimates that can have a significant impact onamounts reported in our consolidated financial statements. We base ourassumptions, judgments and estimates on historical experience and various otherfactors that we believe to be reasonable under the circumstances, the resultsof which form the basis for making estimates about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults could differ materially from these estimates under differentassumptions or conditions.

 

Other than the adoptionof SFAS No. 141R, SFAS No. 160, SFAS No. 161, SFAS No. 163,FSP 107-1 and APB 28-1, SFAS 165 and FSP 157-4 which are set forth in Note 3 tothe unaudited interim consolidated financial statements, during the six monthsended June 30, 2009, there have been no significant changes in ourcritical accounting policies as compared to the critical accounting policiesdisclosed in Management’s Discussion and Analysis of Financial Condition andResults of Operations included in our Annual Report on Form 10-K for thefiscal year ended December 31, 2008.

 

23

----

Table ofContents

 

**RESULTSOF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 ASCOMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2008**

 

The followingtable presents our net revenues, by revenue source:

** **
| ** **                             | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| OpenSRS  :                             | ** ** | ** **                          |       |                               |       |   |   |   |   |
| Domain  Services                       |       | $                                   | 14,737,932 |                               | $          | 13,269,453 |   | $ | 28,939,954 |   | $ | 26,140,902 |   |
| Email  Services                        |       | 873,855                             |       | 1,551,541                          |       | 1,995,790 |   | 3,126,250 |   |
| Other  Services                        |       | 1,091,988                           |       | 1,136,701                          |       | 2,186,448 |   | 2,235,383 |   |
| Total  OpenSRS Services                |       | 16,703,775                          |       | 15,957,695                         |       | 33,122,192 |   | 31,502,535 |   |
|                                   |       |                                |       |                               |       |   |   |   |   |
| YummyNames                             |       | 1,455,557                           |       | 1,872,642                          |       | 3,320,590 |   | 2,777,926 |   |
| Hover                                  |       | 1,258,828                           |       | 2,046,055                          |       | 2,559,413 |   | 3,686,690 |   |
| Butterscotch                           |       | 603,959                             |       | 573,937                            |       | 1,111,348 |   | 1,194,385 |   |
|                                   |       | $                                   | 20,022,119 |                               | $          | 20,450,329 |   | $ | 40,113,543 |   | $ | 39,161,536 |   |
| (Decrease)  increase over prior period |       | $                                   | (428,210   | )                                  |       |   | $ | 952,007 |   |   |   |
| (Decrease)  increase - percentage      |       | (2                                  | )%         |                               |       | 2 | % |   |   |

 

The followingtable presents our revenues, by revenue source, as a percentage of totalrevenues

 
| ** **             | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **             | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| OpenSRS :              |       |                                |       |                               |       |   |   |   |   |
| Domain Services        |       | 74                                  | %          | 65                                 | %          | 72 | % | 67 | % |
| Email Services         |       | 4                                   | %          | 8                                  | %          | 5 | % | 8 | % |
| Other Services         |       | 6                                   | %          | 5                                  | %          | 6 | % | 6 | % |
| Total OpenSRS Services |       | 84                                  | %          | 78                                 | %          | 83 | % | 81 | % |
|                   |       |                                |       |                               |       |   |   |   |   |
| YummyNames             |       | 7                                   | %          | 9                                  | %          | 8 | % | 7 | % |
| Hover                  |       | 6                                   | %          | 10                                 | %          | 6 | % | 9 | % |
| Butterscotch           |       | 3                                   | %          | 3                                  | %          | 3 | % | 3 | % |
|                   |       | 100                                 | %          | 100                                | %          | 100 | % | 100 | % |

 

Deferred revenuefrom domain name registrations and other services at June 30, 2009increased to $56.9 million from $54.4 million at June 30, 2008.

 

No customeraccounted for more than 10% of revenue during the three and six months ended June 30, 2009and at June 30, 2009, no customer accounted for more than 10% of accountsreceivable. Significant management judgment is required at the time ofrecording of revenue to assess whether the collection of the resultingreceivables is reasonably assured. On an ongoing basis we assess the ability ofour customers to make required payments. Based on this assessment, we expectthe carrying amount of our outstanding receivables, net of allowance fordoubtful accounts, to be fully collected.

 

***OpenSRS***

 

During the threemonths ended June 30, 2009, OpenSRS revenue increased by$0.7 million. This increase was primarily the result of an increase indomain services of $1.5 million, as discussed below, which was offset by adecrease in email services revenue of $0.7 million and a decrease in otherOpenSRS services revenue of $45,000 during the period.

 

During the sixmonths ended June 30, 2009, OpenSRS revenue increased by$1.6 million. This increase was primarily the result of an increase indomain services of $2.8 million, as discussed below, which was offset by adecrease in email services revenue of $1.1 million and a decrease in otherOpenSRS services revenue of $49,000 during the period.

 

As previously disclosed, the decrease in email service revenue is primarilyattributable to two factors:

 

(a)                                  our decision to eliminate certainenterprise customers acquired as part of the Hosted Messaging Business ofCritical Path, Inc. in January 2006 that were not part of ourstrategic focus and who were receiving pricing that was not competitive in themarketplaces, and

 

(b)                                 certain of ouremail customers, who are media portal companies and for whom email is only asmall component of their overall service offerings, have chosen to includetheir email services as part of larger supply contracts for competitive andcost-control reasons. Our original expectation was that these companies wouldhave completed their migrations by March 2009. One of these customers hasmodified its migration plans and is now only expected to migrate away from ourhosted email platform during the three months ending September 30, 2009.If our efforts to market our email service to new customers are not successfulin offsetting these customer losses, it is likely that the loss of thesecustomers will have a material impact on our results of operations for emailservices for the fiscal year ending December 31, 2009.

 

24

----

Table of Contents

 

Our ongoinginitiatives to improve our competitive position in the rapidly evolving andcompetitive internet services marketplace have contributed to the decline inour average selling price and have adversely impacted our revenue andprofitability in the short term. While we believe that the steps we have takenhave positioned the Company for longer term growth, we cannot be assured thatthe emerging trends will continue to result in increased volumes, which wouldadversely impact our revenues and profitability.

 

During the threemonths ended June 30, 2009, the total new, renewed and transferred-indomain name registrations that we processed increased by 0.1 million to1.6 million as compared to the three months ended June 30, 2008.This increase resulted primarily from our continuing to compete aggressively toattract new clients and retain existing customers.

 

During the sixmonths ended June 30, 2009, the total new, renewed and transferred-indomain name registrations that we processed increased by 0.2 million to3.4 million as compared to the six months ended June 30, 2008.This increase resulted primarily from continuing to aggressively compete toattract new clients and retain existing customers.

 

While we anticipate that the number of new, renewed and transferred-indomain name registrations will continue to incrementally increase, thevolatility in the market could affect the growth of domain names that wemanage. As of June 30, 2009, the total domain names under ourmanagement increased by 0.6 million to 8.0 million, as compared tothe total domain names under our management as of June 30, 2008. Inaddition, we provide provisioning services on a monthly basis to accreditedregistrars who use our technical systems to process domain registrations withtheir own accreditation. As of June 30, 2009, we managed an additional1.2 million domain names on behalf of other accredited registrars, ascompared to an additional 1.2 million managed for accredited registrars asof June 30, 2008.

 

***YummyNames***

 

Net revenues fromour YummyNames domain portfolio service for the three months ended June 30, 2009as compared to thethree months ended June 30, 2008 decreased by $0.4 million, or 22%, to$1.5 million.

 

This decrease primarily reflects the timing of $0.4 million inlarger portfolio sales of domain names, as well as a decrease in the deliveryof third-party advertisements on Parked Pages of $0.1 million as aresult of the impact of our domain name sales on our advertising revenue andthe general economic conditions resulting in a generally slower advertisingenvironment. These decreases were offset in part by an increase in auctionrevenue amounting to $0.1 million.

 

Net revenues fromYummyNames for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008increased by$0.5 million, or 19%, to $3.3 million.

 

This increase primarily reflects the timing of $0.8 million inlarger portfolio sales of domain names, as well as an increase in auctionrevenue amounting to $0.1 million. These increases were offset by adecrease in the delivery of third-party advertisements on parked pages of$0.3 million as a result of the impact of our domain name sales on ouradvertising revenue and a generally slower advertising environment resultingfrom general economic conditions.

 

***Hover***

 

Net revenues from Hover for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008 decreased by $0.8 million, or 38%,to $1.3 million.

 

Net revenues from Hover for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008 decreased by $1.1 million, or 31%,to $2.6 million.

 

This decrease primarily resulted from the impact of the sale of ourretail hosting assets during Fiscal 2008 on current period revenues. To alesser extent, our decisions to reclassify certain retail customers acquired inthe IYD acquisition that did not meet our definition of retail customers toOpenSRS and de-emphasize new customer acquisition while we transitioned ourretail customers from our Domain Direct, NetIdentity and It’s Your Domain (“IYD”)services to Hover also contributed to this decrease.

 

***Butterscotch***

 

Net revenues from Butterscotch for the three monthsended June 30, 2009 as compared to the three months ended June 30, 2008 remained relatively flat at$0.6 million.

 

25

----

Table of Contents

 

Net revenues from Butterscotch for the six monthsended June 30, 2009 as compared to the six months ended June 30, 2008 decreased by $0.1 million, or 7%,to $1.1 million. This decrease is primarily a result of the contraction inthe yields from our syndicated Google feeds, and decreased revenue from our Author ResourceCenter of$0.2 million, offset by an increase in advertising and video revenue of$0.1 million.

 

**COST OF REVENUES:**

** **

***OpenSRS***

 

(a)          OpenSRS Domain Service:

 

Cost of revenuesfor domain registrations represents the amortization of registry fees on abasis consistent with the recognition of revenues from our customers, namelyratably over the term of provision of the service. Registry fees, the primarycomponent of cost of revenues, are paid in full when the domain is registered,and are initially recorded as prepaid domain registry fees. This accountingtreatment reasonably approximates a recognition pattern that corresponds withthe provision of the services during the period.

 

(b)      OpenSRS Email Service:

 

Cost of revenues for email services are payable to third-partyproviders for licensing and royalty costs related to the provision of certaincomponents of our email services. Fees payable for these components areincluded in the cost of revenues in the month they are incurred.

 

(c)       Other OpenSRS Services:

 

Costs of revenuesfor other reseller services include fees paid to third-party service providers,primarily for SSL certificates and for printing services in connection withPlatypus. Fees payable for SSL certificates are amortized on a basis consistentwith the provision of service, generally one year, while monthly printing feesare included in cost of revenues in the month they are incurred.

 

***YummyNames***

 

Costs of revenuesfor our domain portfolio service represent the amortization of registry feesfor domains added to our portfolio over the renewal period, which is generallyone year, the value attributed under intangible assets to any domain name soldand any impairment charges that may arise from our assessment of our domainname intangible assets. As the total names in our portfolio continue to grow,this cost will become a more significant component of our cost of revenues.Payments for domain registrations are payable for the full term of service at thetime of activation of service and are recorded as prepaid domain registry feesand are expensed ratably over the renewal term.

 

***Hover***

 

Costs of revenuesfor our provision and management of Internet services on a retail basis includethe amortization of registry fees on a basis consistent with the recognition ofrevenues from our customers, namely ratably over the term of provision of theservice and includes the amortization of registry fees payable to renew thedomains in our surname portfolio. Registry fees, the primary component of costof revenues, are paid in full when the domain is registered, and are recordedas prepaid domain registry fees.

 

***Butterscotch***

 

Costs of revenuesfor our ad-supported content sites include the fees paid to third-party serviceproviders, primarily for digital certificates sold through our content sitesand content license fees.

 

***Network costs***

 

Network costsinclude personnel and related expenses, depreciation and amortization,communication costs, equipment maintenance, stock-based compensation andemployee and related costs directly associated with the management andmaintenance of our network. Communication costs include bandwidth, co-locationand provisioning costs we incur to support the supply of all our services.

 

26

----

Table of Contents

 

The followingtable presents our cost of revenues, by revenue source, for the periodspresented

 
| ** **                                    | ** ** | **Three months ended June 30** | ** **       | **Six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------------|------------------------------------|------------|
| ** **                                    | ** ** | **2009**                            | ** **       | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| OpenSRS :                                     | ** ** | ** **                          | ** **       | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domain Services                               |       | $                                   | 11,943,841       |                               | $          | 10,505,174 |   | $ | 23,298,602 |   | $ | 20,440,713 |   |
| Email Services                                |       | 153,228                             |             | (24,278                            | )          | 333,146 |   | 83,000 |   |
| Other Services                                |       | 411,287                             |             | 415,683                            |       | 800,139 |   | 823,077 |   |
| Total OpenSRS Services                        |       | 12,508,356                          |             | 10,896,579                         |       | 24,431,887 |   | 21,346,790 |   |
|                                          |       |                                |             |                               |       |   |   |   |   |
| YummyNames                                    |       | 250,529                             |             | 181,143                            |       | 436,084 |   | 359,450 |   |
| Hover                                         |       | 475,369                             |             | 576,809                            |       | 988,579 |   | 1,143,595 |   |
| Butterscotch                                  |       | 1,110                               |             | 5,725                              |       | 7,850 |   | 10,625 |   |
| Network, other costs                          |       | 1,150,684                           |             | 2,002,841                          |       | 2,307,046 |   | 3,952,569 |   |
| Network, depreciation  and amortization costs |       | 517,879                             |             | 848,201                            |       | 999,787 |   | 1,747,495 |   |
|                                          |       | $                                   |  14,903,927 |                               | $          | 14,511,298 |   | $ | 29,171,233 |   | $ | 28,560,524 |   |
| Increase over prior  period                   |       | $                                   | 392,629          |                               |       |   | $ | 610,709 |   |   |   |
| Increase - percentage                         |       | 3                                   | %                |                               |       | 2 | % |   |   |

 

The followingtable presents our cost of revenues, as a percentage of total cost of revenuesfor the periods presented:

** **
| ** **                                    | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                          | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| OpenSRS :                                     |       |                                |       |                               |       |   |   |   |   |
| Domain Services                               |       | 80                                  | %          | 72                                 | %          | 81 | % | 72 | % |
| Email Services                                |       | 1                                   | %          | 0                                  | %          | 1 | % | 0 | % |
| Other Services                                |       | 3                                   | %          | 3                                  | %          | 3 | % | 3 | % |
| Total OpenSRS Services                        |       | 84                                  | %          | 75                                 | %          | 85 | % | 75 | % |
|                                          |       |                                |       |                               |       |   |   |   |   |
| YummyNames                                    |       | 2                                   | %          | 1                                  | %          | 1 | % | 1 | % |
| Hover                                         |       | 3                                   | %          | 4                                  | %          | 3 | % | 4 | % |
| Butterscotch                                  |       | 0                                   | %          | 0                                  | %          | 0 | % | 0 | % |
| Network, other costs                          |       | 8                                   | %          | 14                                 | %          | 8 | % | 14 | % |
| Network, depreciation  and amortization costs |       | 3                                   | %          | 6                                  | %          | 3 | % | 6 | % |
|                                          |       | 100                                 | %          | 100                                | %          | 100 | % | 100 | % |

 

Prepaid domainregistration and other Internet services fees as of June 30, 2009increased by $3.8 million, or 9%, to $43.7 million from$39.9 million at June 30, 2008.

 

***OpenSRS***

 

Costs for OpenSRSfor the three months ended June 30, 2009 increased by $1.6 million, or 15%when compared to the three months ended June 30, 2008,while costs forOpenSRS for the six months ended June 30, 2009 increased by $3.1 million, or 15%when compared to the three months ended June 30, 2008. Higher domain registration volumes andincreases in registration fees paid to the registries that were implemented in October 2007and October 2008 accounted for $1.4 million of this increase for thethree months ended June 30, 2009 when compared to the three months ended June 30, 2008and $2.9 millionof this increase for the six months ended June 30, 2009 when compared to the six months ended June 30, 2008and. In addition,$0.2 million of the increase resulted from licensing and royalty costspayable to third-party service providers for email services.

 

***YummyNames***

 

Costs forYummyNames for the three and six months ended June 30, 2009 as compared to the three and six monthsended June 30, 2008 increased by $0.1 million, to $0.3 millionand $0.4 million, respectively, as the total names in our portfoliocontinued to increase.

 

***Hover***

 

Costs for Hoverfor the three and six months ended June 30, 2009 as compared to the three and six monthsended June 30, 2008 decreased by $0.1 million and $0.2 million,respectively, to $0.5 million and $1.0 million, respectively, andprimarily reflect the lower revenue experienced during the periods as well as the impact thatthe sale of our retail hosting assets during Fiscal 2008 has had on our retailgross margins.

 

27

----

Table of Contents

 

***Network costs***

 

Network costs beforedepreciation and amortization for the three months ended June 30, 2009decreased by $0.9 million, or 43%, to $1.2 million, primarily as aresult of lower bandwidth, support contract and workforce costs, eachattributable to the closure and relocation of certain of our co-locationfacilities during September 2008. Network depreciation and amortizationcosts for the three months ended June 30, 2009 decreased by $0.3million, or 39%, to $0.5 million, primarily as a result of certain of ourolder computer hardware being fully depreciated and not requiring replacement.

 

Network costs beforedepreciation and amortization for the six months ended June 30, 2009decreased by $1.6 million, or 42%, to $2.3 million, primarily as aresult of lower bandwidth, support contract and workforce costs, each attributableto the closure and relocation of certain of our co-location facilities during September 2008.Network depreciation and amortization costs for the six months ended June 30, 2009decreased by $0.7 million, or 43%, to $1.0 million, primarily as a resultof certain of our older computer hardware being fully depreciated and notrequiring replacement.

 

In addition, as asignificant portion of our expenses are incurred in Canadian dollars, theweakening of the Canadian dollar relative to the U.S. dollar, during the threeand six months ended June 30, 2009 when compared to the three and sixmonths ended June 30, 2008, has positively impacted network costs.

 

Amortization ofintangible assets consists of amounts arising in connection with theacquisition of technology from each of the Boardtown Corporation in April 2004,the Hosted Messaging Business of Critical Path, Inc. in January 2006,Mailbank.com Inc. in June 2006 and IYD in July 2007.

 

The technologypurchased in connection with the acquisition of Boardtown Corporation isamortized on a straight-line basis over seven years, and for IYD over threeyears, while the technology acquired in connection with each of theacquisitions of the Hosted Messaging Assets of Critical Path, Inc. and thein-house software of Mailbank.com Inc. was amortized on a straight-linebasis over two years.

 

We expect networkcosts to decrease for the fiscal year ending December 31, 2009 as comparedto the 2008 fiscal year as we realize the benefits from completing theconsolidation of some of the multiple systems we support, thereby reducing ouroverall space and resource utilization at our data centers.

 

**SALES ANDMARKETING**

 

Sales andmarketing expenses consist primarily of personnel costs. These costs includecommissions and related expenses of our sales, product management, publicrelations, call center, support and marketing personnel. Other sales andmarketing expenses include customer acquisition costs, advertising and otherpromotional costs.

** **
| ** **                             | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales and marketing                    |       | $                                   | 1,339,167  |                               | $          | 1,730,736 |   | $ | 2,692,343 |   | $ | 3,426,868 |   |
| (Decrease)/increase  over prior period |       | $                                   | (391,569   | )                                  |       |   | $ | (734,525 | ) |   |   |
| (Decrease)/increase -  percentage      |       | (23                                 | )%         |                               |       | (21 | )% |   |   |
| Percentage of net  revenues            |       | 7                                   | %          | 8                                  | %          | 7 | % | 9 | % |
|                                        |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

Sales andmarketing expenses for the three months ended June 30, 2009 decreasedby $0.4 million, or 23%, to $1.3 million from $1.7 million forthe three months ended June 30, 2008. This decrease was primarily dueto lower workforce costs, that resulted from the restructuring we undertook in November 2008,and lower marketing, conference and travel expenses incurred during the period.

 

Sales andmarketing expenses for the six months ended June 30, 2009 decreasedby $0.7 million, or 21%, to $2.7 million from $3.4 million forthe six months ended June 30, 2008. This decrease was primarily dueto lower workforce costs that resulted from the restructuring we undertook in November 2008.This decrease was partially offset by an increase in marketing and travelrelated costs of $0.1 million for the six months ended June 30 2009,as compared to the six months ended June 30, 2008.

 

In addition, as asignificant portion of our expenses are incurred in Canadian dollars, theweakening of the Canadian dollar relative to the U.S. dollar, during the threeand six months ended June 30, 2009 when compared to the three and sixmonths ended June 30, 2008, has positively impacted sales and marketingexpenses.

 

We expect salesand marketing expenses will increase slightly, in absolute dollars, as weadjust our marketing programs and sales and customer support strategies to meetfuture opportunities in the marketplace.

 

28

----

Table of Contents

 

**TECHNICALOPERATIONS AND DEVELOPMENT**

 

Technicaloperations and development expenses consist primarily of personnel costs andrelated expenses required to support the development of new or enhanced serviceofferings and the maintenance and upgrading of existing infrastructure. Thisincludes expenses incurred in the research, design and development oftechnology that we use to register domain names, email, retail, domainportfolio and other Internet services, as well as to distribute our digitalcontent services. Editorial costs relating to the rating and review of thesoftware content libraries are included in the costs of product development. Inaccordance with the American Institute of Certified Public AccountantsStatement of Position 98-1, Accounting for the Costs of Computer SoftwareDeveloped or Obtained for internal use, costs incurred during the applicationdevelopment stage are capitalized and primarily include personnel costs for employeesdirectly related to the development project. All other costs are expensed asincurred.

** **
| ** **                            | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Technical operations  and development |       | $                                   | 1,150,199  |                               | $          | 1,573,741 |   | $ | 2,279,494 |   | $ | 3,139,595 |   |
| Decrease over prior  period           |       | $                                   | (423,542   | )                                  |       |   | $ | (860,101 | ) |   |   |
| Decrease - percentage                 |       | (27                                 | )%         |                               |       | (27 | )% |   |   |
| Percentage of net  revenues           |       | 6                                   | %          | 8                                  | %          | 6 | % | 8 | % |
|                                       |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

Technicaloperations and development expenses for the three months ended June 30, 2009decreased by $0.4 million, or 27%, to $1.2 million compared to$1.6 million during the three months ended June 30, 2008.

 

Technicaloperations and development expenses for the six months ended June 30, 2009decreased by $0.8 million, or 27%, to $2.3 million compared to$3.1 million during the six months ended June 30, 2008.

 

This decrease forthe three and six months ended June 30, 2009 resulted primarily froma decrease in workforce-related costs, including contract and outside servicecosts, that resulted from the restructuring we undertook in November 2008.

 

In addition, as asignificant portion of our expenses are incurred in Canadian dollars, theweakening of the Canadian dollar relative to the U.S. dollar, during the threeand six months ended June 30, 2009 when compared to the three and sixmonths ended June 30, 2008, has positively impacted technical operationsand development expenses.

 

We expecttechnical operations and development expenses to increase slightly, in absolutedollars, as our business continues to grow and as we further develop ourapplications and services.

 

**GENERALAND ADMINISTRATIVE**

 

General andadministrative expenses consist primarily of compensation and related costs formanagerial and administrative personnel, fees for professional services, publiclisting expenses, rent and other general corporate expenses.

** **
| ** **                  | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                  | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| General and  administrative |       | $                                   | 1,592,325  |                               | $          | 1,551,858 |   | $ | 3,462,221 |   | $ | 3,091,290 |   |
| Increase over prior  period |       | $                                   | 40,467     |                               |       |   | $ | 370,931 |   |   |   |
| Increase - percentage       |       | 3                                   | %          |                               |       | 12 | % |   |   |
| Percentage of net  revenues |       | 8                                   | %          | 8                                  | %          | 9 | % | 8 | % |
|                             |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

General andadministrative expenses for the three months ended June 30, 2009remained relatively flat at $1.6 million compared to the three monthsended June 30, 2008.

 

The slightincrease in general and administrative expenses primarily resulted fromrecording a foreign exchange loss of $0.3 million during the three monthsended June 30, 2009 as compared to a foreign exchange gain of $23,000during the three months ended June 30, 2008 and an increase inworkforce related costs of $0.1 million. The $0.3 million increase inforeign exchange was primarily due to the impact of translating our non-U.S.dollars to our functional currency of U.S. dollars, primarily the Canadiandollar which has significantly weakened relative to the U.S. dollar compared to the three months ended June 30, 2008.These increases were mostly offset by a decrease in net bank charges of$0.3 million as a result of our initiative introduced in January 2009that recovered payment processing fees and a reduction of professional fees,telephone and facility costs of $0.1 million during the three months endedJune 30, 2009, as compared to the three months ended June 30, 2008.

 

29

----

Table of Contents

 

General andadministrative expenses for the six months ended June 30, 2009increased by $0.4 million, or 12%, to $3.5 million as compared to$3.1 million for the six months ended June 30, 2008.

 

This increaseprimarily resulted from recording a foreign exchange loss of $1.1 millionduring the six months ended June 30, 2009 as compared to a foreignexchange gain of $0.1 million during the six months ended June 30, 2008.The $1.2 million increase was primarily due to the impact oftranslating our non-U.S. dollars to our functional currency of U.S. dollars,primarily the Canadian dollar, which has significantly weakened relative to theU.S. dollar comparedto the six months ended June 30, 2008. In addition, general andadministrative expenses increased by $0.1 million as a result ofadditional public listing, workforce related costs and donation expensesincurred during the period. This increase was partially offset by a decrease innet bank charges of $0.5 million as a result of our initiative introducedin January 2009 that recovered payment processing fees and a reduction ofprofessional fees, facility costs, telephone, investor and public relationscosts of $0.4 million during the six months ended June 30, 2009,as compared to the six months ended June 30, 2008.

 

In addition, as asignificant portion of our expenses are incurred in Canadian dollars, theweakening of the Canadian dollar relative to the U.S. dollar, during the threeand six months ended June 30, 2009 when compared to the three and sixmonths ended June 30, 2008, has positively impacted general andadministrative expenses.

 

**DEPRECIATIONOF PROPERTY AND EQUIPMENT**

 

Property andequipment is depreciated on a straight-line basis over the estimated usefullife of the assets.

 
| ** **                              | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Depreciation of  property and equipment |       | $                                   | 79,227     |                               | $          | 58,861 |   | $ | 165,632 |   | $ | 119,931 |   |
| Increase over prior  period             |       | $                                   | 20,366     |                               |       |   | $ | 45,701 |   |   |   |
| Increase - percentage                   |       | 35                                  | %          |                               |       | 38 | % |   |   |
|                                         |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

**AMORTIZATIONOF INTANGIBLE ASSETS**

** **
| ** **                         | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Amortization of  intangible assets |       | $                                   | 360,540    |                               | $          | 376,954 |   | $ | 721,080 |   | $ | 762,115 |   |
| Increase over prior  period        |       | $                                   | (16,414    | )                                  |       |   | $ | (41,035 | ) |   |   |
| Increase - percentage              |       | (4                                  | )%         |                               |       | (5 | )% |   |   |
|                                    |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

Amortization ofintangible assets consists of amounts arising in connection with the acquisitionof Boardtown in April 2004, the acquisition of the Hosted Messaging Assetsof Critical Path Inc. in January 2006, the acquisition ofMailbank.com Inc. in June 2006 and the acquisition of IYD in July 2007.

 

In connection withthe acquisition of Boardtown Corporation, the brand and customer relationshipspurchased are amortized on a straight-line basis over seven years, while thenon-competition agreements entered into with the former owners of BoardtownCorporation are amortized on a straight-line basis over three years.

 

Customerrelationships acquired in connection with the acquisition of the HostedMessaging Assets of Critical Path Inc. are amortized on a straight-linebasis over five years.

 

In connection withthe acquisition of Mailbank.com Inc., customer relationships purchased areamortized on a straight-line basis over five years.

 

In connection withthe acquisition of IYD, the brand and customer relationships purchased areamortized on a straight-line basis over seven years.

 

**(GAIN) LOSS IN FAIR VALUE OF FORWARD EXCHANGECONTRACTS**

 

Although our functional currency is the U.S. dollar, a major portion ofour fixed expenses are incurred in Canadian dollars. Our goal with regard toforeign currency exposure is, to the extent possible, to achieve operationalcost certainty and manage financial exposure to certain foreign exchangefluctuations to neutralize some of the impact of foreign currency exchangemovements. Accordingly, we enter into foreign exchange contracts to mitigatethe exchange rate risk on portions of our Canadian dollar exposure.

 

30

----

Table of Contents

 

As we do not comply with the documentation requirements for hedgeaccounting, we account for the fair value of the derivative instruments withinthe consolidated balance sheet as a derivative financial asset or liability andthe corresponding change in fair value is recorded in the consolidatedstatement of operations.

 
| ** **                                                | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| (Gain)/loss on change  in fair value of forward contracts |       | $                                   | (1,938,821 | )                                  | $          | (225,640 | ) | $ | (2,024,164 | ) | $ | 29,793 |   |
| Increase over prior  period                               |       | $                                   | (1,713,181 | )                                  |       |   | $ | (2,053,957 | ) |   |   |
|                                                           |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

We have entered into forward exchange contracts to meet a portion ofour future Canadian dollar requirements through December 2010. The impactof the fair value adjustment on unrealized foreign exchange on these contractsfor the three monthsended June 30, 2009 was a net gain of $1.9 million, ascompared to a net gain of $0.2 million for the three months ended June 30, 2008.This net gain in fair value of forward contracts results from a combination ofthe impact from the change in foreign exchange rates over time, as well as fromthe impact of the settlement of forward exchange contracts as they mature. The impact ofthe fair value adjustment on unrealized foreign exchange on these contracts forthe six months ended June 30, 2009 was a net gainof $2.0 million, as compared to a net loss of $30,000 for the six months ended June 30, 2008.

 

At June 30, 2009 we reflect a derivative instrument asset of$49,000 on our balance sheet as a result of the foreign exchange contracts wehave entered into.  Until theirrespective maturity dates, these contracts will fluctuate in value in line withmovements in the Canadian vs. U.S. dollar pair. As all of the remainingcontracts pertaining to Fiscal 2009 will have matured during the course ofFiscal 2009, a derivative instrument liability pertaining to fiscal 2009contracts of $0.4 million will reverse during Fiscal 2009 and will result inour recognizing an additional non-cash gain of this amount by December 31,2009. This gain will, however, be impacted by any additional contracts, withmaturity dates after June 30, 2009, that we may enter into andfluctuations in the value of our existing contracts that mature during Fiscal2009 and Fiscal 2010.

 

**OTHERINCOME AND EXPENSES**

** **
| ** **                    | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                    | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Other income  (expenses), net |       | $                                   | 2,550,870  |                               | $          | 1,366,344 |   | $ | 2,487,408 |   | $ | 1,156,360 |   |
|                               |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

Other income, net,increased by $1.2 million, or 87%, to $2.6 million as compared to$1.4 million during the three months ended June 30, 2008 and by$1.3 million, or 115%, to $2.5 million as compared to $1.2 million during thesix months ended June 30, 2008.

 

The net increase duringthe three and six months ended June 30, 2009 when compared to the threeand six months ended June 30, 2008 was primarily the result of thefollowing:

 

In April 2009 wereceived $2.1 million from Afilias Inc. (“Afilias”) to complete the secondclosing under the terms of a stock redemption agreement signed in November 2008whereby Tucows DE agreed to sell its investment in Afilias back to Afilias inthree stages for $7.5 million. This sale resulted in a gain of$2.0 million for the quarter. Persuant to the terms of the agreement, thethird and final payment, which is contingent on Afilias having sufficientdistributable reserves, of approximately $2.0 million, will close on or before December 31,2009.

 

In June 2009 wereceived an additional payment of $0.6 million in connection with Infonauticspatents that we assigned in 2002 to a third party who continues tocommercialize these patents. In connection with the assignment of thesepatents, we retained the right to share in certain revenue relating to any cashflow received by such third party. This revenue is comparable to the $0.2million we recognized in June 2008 in connection with these patents. Asthe costs of commercializing the patents are expected to increase in thefuture, we do not expect any future revenue received to be material.

 

Interest expense, net,decreased during the three and six months ended June 30, 2009 whencompared to the three and six months ended June 30, 2008 by $0.1 millionand $0.3 million, respectively, primarily as a result of the monthly capitalrepayments of $0.2 million and the annual cash sweep payment of$0.7 million we made in April 2009 pursuant to the terms of our Bankof Montreal credit facility.

 

As a result of the saleof certain shared hosting assets that were sold to Hostopia.com Inc., pursuantto the terms of a purchase and sale agreement signed with Tucows.com Co, awholly-owned subsidiary of the Company, on May 7, 2008 we

 

31

----

Table of Contents

 

recorded a profit on the sale of these customerrelationships of $1.1 million.

 

In June 2008, wereceived a dividend in the amount of $0.2 million from Afilias. Afiliashas not paid any dividends during the three and six months ended June 30,2009.

 

**INCOMETAXES**

 

The followingtable presents our provision for income taxes for the periods presented:

 
| ** **                  | ** ** | **Three months ended June 30** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                  | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Provision for income  taxes |       | $                                   | 581,651    |                               | $          | 30,000 |   | $ | 689,076 |   | $ | 61,134 |   |
|                             |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

For the threemonths ended June 30, 2009, we recorded a current tax expense of $0.6million on income before income taxes of $5.1 million using an estimatedeffective tax rate for our 2009 fiscal year that accounts for the utilizationof remaining net operating loss carry forwards and alternative minimum taxcredits available to us. Included in the income tax expense is a recovery of$174,000 for investment tax credits earned during the three months ended June 30, 2009.Comparatively, for the three months ended June 30 2008, we recorded anincome tax expense of $30,000 on income before income taxes of $2.2 million primarilyrelated to our estimate for federal alternative minimum tax obligations for our2008 fiscal year and Pennsylvania state franchise tax related to prior years.

 

For the six monthsended June 30, 2009, we recorded a current tax expense of $0.7 million onincome before income taxes of $6.1 million using an estimated effective taxrate for our 2009 fiscal year that accounts for the utilization of remainingnet operating loss carry forwards and alternative minimum tax credits availableto us. Included in the income tax expense is a recovery of $174,000 forinvestment tax credits earned during the three months ended June 30, 2009.Comparatively, for the six months ended June 30 2008, we recorded anincome tax expense of $0.1 million on income before income taxes of $1.2million primarily related to our estimate for federal alternative minimum taxobligations for our 2008 fiscal year and Pennsylvania state franchise taxrelated to prior years.

 

As of December 31,2008, we recorded a valuation allowance of $10.8 million and a net deferred taxasset of $3.0 million. The net deferred tax asset has been allocated on a prorata basis between current and non-current deferred tax assets, resulting incurrent deferred tax assets of $0.6 million and non-current deferred tax assetsof $2.4 million as at December 31, 2008. No significant changes haveoccurred during the six month period ended June 30, 2009.

 

We analyze thecarrying value of our deferred tax asset on a regular basis. In determiningfuture taxable income, assumptions are made to forecast federal, state andinternational operating income, the reversal of temporary timing differences,and the implementation of any feasible and prudent tax planning strategies. Theassumptions require significant judgment regarding the forecasts of futuretaxable income, and are consistent with forecasts used to manage the business.During the three months ended June 30, 2009, there was no reversal of thevaluation allowance. The valuation allowance will be maintained untilsufficient evidence exists to support a reversal of, or decrease in, thevaluation allowance.

 

We follow theprovisions of FIN 48 to account for income tax exposures. The application ofthis interpretation requires a two-step process that separates recognition ofuncertain tax benefits from measurement thereof.

 

We hadapproximately $301,000 of gross unrecognized tax benefit as of December 31,2008 and $209,000 as of June 30, 2009, which if recognized wouldfavorably affect its income tax rate in future periods. The unrecognized taxbenefit relates to non-recognition of refundable research and development taxcredits in Canada earned during its 2008 fiscal year and certain state taxexposures from prior periods. During the six months ended June 30, 2009,the Company’s unrecognized tax benefits decreased by $205,000 as a result ofthe settlement of the Company’s 2006 and 2007 Canadian research and developmenttax credit claims. The Company increased its unrecognized tax benefits by$113,000 related to its 2008 research and development tax credit claim. TheCompany expects its 2009 research and development tax credit claim to beinsignificant.

 

We recognizeaccrued interest and penalties to unrecognized tax benefit as a tax expense. Wehave not accrued any interest or penalties as of December 31, 2008 and June 30, 2009as these amounts are not considered material. We believe it is reasonably possible that $209,000 of the unrecognizedtax benefit will decrease in the next twelve months as it is anticipated thatthe Canadian tax authorities will conclude its review of the Company’s 2008research and development claim for the credits, and that the state tax matterswill also be settled, within that period.

 

32

----

Table of Contents

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

As of June 30, 2009,our principal sources of liquidity were cash flows generated from operationsand cash and cash equivalents of $7.4 million, as compared to$5.4 million at December 31, 2008. Fluctuations in foreign exchangerates had a material impact on the balances of our assets and liabilitiesyear-over-year as reported in our condensed consolidated balance sheets, whichimpacted amounts shown in our condensed consolidated statement of cash flows.

 

Net cash providedby operating activities for the six months ended June 30, 2009totaled $3.5 million, compared to $2.7 million for the six monthsended June 30, 2008. This increased contribution of $0.8 million wasprimarily attributable to an increase in our net income of $0.8 million, afterreducing net income by $3.7 million for non-cash items.

 

We used$3.5 million in financing activities during the six months ended June 30, 2009.We used $1.8 million to buy back 4.2 million shares pursuant to the terms of aDutch Auction Tender Offer during March 2009, and pursuant to theterms of our non-revolving, reducing credit facility, we made equal monthlycapital repayments of $1.0 million. Under this credit facility, based onour 2008 fiscal year operating results, we also made a cash sweep payment forFiscal 2009 of $0.7 million on May 1, 2009. We currently estimatethat the cash sweep payment for Fiscal 2009 year, payable during the threemonths ending June 30, 2010 will amount to approximately$1.2 million.

 

Investingactivities generated net cash of $2.0 million for the six months ended June 30,2009. This generation of cash is attributable to the $2.1 million we receivedon the second closing under the terms of the sale of our investment in Afiliasin May 2009. This increase in cash was offset by $0.1 million that we haveinvested during the six months ended June 30, 2009 to acquire additionalproperty and equipment.

 

On July 14, 2009 we announced that wesuccessfully concluded a second modified “Dutch Auction Tender Offer” that waspreviously announced on May 26, 2009. Under the terms of the offer, werepurchased an aggregate of 1,103,824 shares of its common stock at a purchaseprice of $0.45 per share, for a total of $496,721, excluding transaction costsof $56,936. The purchase price was funded from available cash. Of the 1,103,824shares purchased, 1,000,000 were shares that we offered to purchase in theoffer and 103,824 where shares purchased pursuant to our right to purchase upto an additional 2% of the shares outstanding immediately prior to thecommencement of the tender offer. Due to over-subscription, the final prorationfactor for shares tendered at or below $0.45 per share was approximately 99.8%.For this purpose, shares tendered at $0.45 per share included shares tenderedby those persons who indicated, in their letter of transmittal, that they werewilling to accept the price determined in the offer. All shares purchased inthe tender offer received the same price. As a result of the completion of thetender offer, as of July 14, 2009, we had 67,852,896 shares issued andoutstanding, as all shares repurchased were immediately retired.

 

Based on ouroperations, we believe that our cash flow from operations will be adequate tomeet our anticipated requirements for working capital, capital expenditures,loan repayments and our announced share buy back program for at least the next12 months.

 

We may choose toraise additional funds or seek other financing arrangements to facilitate morerapid expansion, develop new or enhance existing products or services, respondto competitive pressures or acquire or invest in complementary businesses,technologies, services or products.

 

If additionalfinancing is required, we may not be able to raise it on acceptable terms, orat all, and additional financing may be dilutive to existing investors. We mayalso evaluate potential acquisitions of other businesses, products andtechnologies. To complete potential acquisitions, we may issue additionalsecurities or need additional equity or debt financing and any additionalfinancing may be dilutive to existing investors. There are currently no materialunderstandings, commitments or agreements regarding the acquisition of otherbusinesses.

 

33

----

Table of Contents

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

We developproducts in Canada and sell these services in North America and Europe. Oursales are primarily made in U.S. dollars, while a major portion of expenses areincurred in Canadian dollars. Our financial results could be affected byfactors such as changes in foreign currency exchange rates or weak economicconditions in foreign markets. Our interest income is sensitive to changes inthe general level of Canadian and U.S. interest rates, particularly since themajority of our investments are in short-term instruments. Based on the natureof our short-term investments, we have concluded that there is no materialinterest rate risk exposure as of June 30, 2009. We are also subjectto market risk exposure related to changes in interest rates on ournon-revolving, reducing credit facility with The Bank of Montreal. Any changesin interest rates are not expected to be material. Fluctuations in interestrates are beyond our control. We will continue to monitor and assess the risksassociated with interest expense exposure and may take additional actions inthe future to mitigate these risks.

 

Although ourfunctional currency is the U.S. dollar, a substantial portion of our fixedexpenses are incurred in Canadian dollars. Our policy with respect to foreigncurrency exposure is to manage financial exposure to certain foreign exchangefluctuations with the objective of neutralizing some of the impact of foreigncurrency exchange movements. Accordingly, we have entered into foreign exchangeforward plus and window contracts to mitigate the exchange rate risk onportions of our Canadian dollar exposure. The contracts, entered into in September andOctober 2008 will be utilized over the period ending December 31,2009. The contracts, entered into in March, April and June 2009, willbe utilized over the period ending December 2010.

 

On September 29,2008, we entered into a series of forward plus contracts with a notional valueof US$9 million, whereby US$500,000 is converted into Canadian dollars ona semi-monthly basis through September 2009. These forward plus contractsare designed to hedge our expected Canadian dollar requirements over the statedperiod. On each expiry date, provided that the limit rate (US$1.00 : Cdn$1.09)has not been reached during the one month window before the expiration date ofeach contract, we will sell US$500,000 and buy Canadian dollars at the thencurrent exchange rate or at the base rate of US$1.00 : Cdn$1.02 whichever ismore beneficial to Tucows. Should the limit rate be reached during the onemonth window before the expiration date of each contract, then that contractswill be fixed at the base rate of US$1.00 : Cdn$1.02 for delivery on its valuedates.

 

On October 10, 2008, we entered intoanother series of foreign exchange forward contracts designed to meet itsestimated Canadian dollar needs for our 2009 fiscal year. These contracts,collectively, have a notional value of US$12 million, whereby $500,000will be converted into Canadian dollars on a semi-monthly basis from January 2009to December 2009, at foreign exchange rates varying from US$1.00:Cdn$1.1560 to US$1.00: Cdn$1.1670.

 

On March 30, 2009, we entered into aseries of foreign exchange forward contracts to begin to hedge a portion of our2010 fiscal year expected Canadian dollar requirements. These contracts,collectively, have a notional value of US$6 million, whereby US$500,000 isconverted into Canadian dollars on a semi-monthly basis from January 2010to June 2010 at a foreign exchange rate of US$1.00: Cdn$1.2442.

 

On April 1, 2009, we entered into a series of foreign exchangeforward contracts designed to meet estimated Canadian dollar needs for our 2010fiscal year. These contracts, collectively, have a notional value ofUS$3 million, whereby US$500,000 is converted into Canadian dollars on asemi-monthly basis from July 2010 to September 2010 at a foreignexchange rate of US$1.00: Cdn$1.2447.

 

On June 8, 2009, we entered into a series of foreign exchangeforward contracts to begin to hedge a portion of our 2010 fiscal year expectedCanadian dollar requirements. These contracts, collectively, have a notionalvalue of US$4.497 million, whereby:

 

·                  US$133,000 is converted intoCanadian dollars on a semi-monthly basis from January 2010 to May 2010;

 

·                  US$400,000 is converted intoCanadian dollars on a semi-monthly basis from May 2010 to June 2010;and

 

·                  US$500,000 is converted intoCanadian dollars on a semi-monthly basis from October 2010 to December 2010.

 

All of these amounts are converted at a foreignexchange rate of US$1.00: Cdn$1.1072.

 

On June 15, 2009, we entered into a series of foreign exchangeforward contracts to begin to hedge a portion of our 2010 fiscal year expectedCanadian dollar requirements. These contracts, collectively, have a notionalvalue of US$720,000, whereby US$80,000 is converted into Canadian dollars on asemi-monthly basis from January 2010 to May 2010 at a foreign exchangerate of US$1.00: Cdn$1.1252.

 

34

----

Table of Contents

 

As we do notcomply with the documentation requirements for hedge accounting, we account forthe fair value of the derivative instruments within the consolidated balancesheet as a derivative financial asset or liability and the corresponding changein fair value is recorded in our consolidated statement of operations. We haveno other freestanding or embedded derivative instruments.

 

The impact of thefair value adjustment on unrealized foreign exchange forward contracts for thethree months ended June 30, 2009 for the contracts in place at June 30, 2009was a net gain of approximately $1.9 million, and for the three monthsended June 30, 2008, the impact was a net gain of approximately$0.2 million, which is reflected in our consolidated statements ofoperations.

 

The impact of thefair value adjustment on unrealized foreign exchange forward contracts for thesix months ended June 30, 2009 for the contracts in place at June 30, 2009was a net gain of approximately $2.0 million, and for the six months endedJune 30, 2008, the impact was a net loss of approximately $30,000,which is reflected in our consolidated statements of operations.

 

As of June 30,2009, we had foreign currency forward contracts in the amount of$23.2 million outstanding.

 

We have performeda sensitivity analysis model for foreign exchange exposure over the threemonths ended June 30, 2009. The analysis used a modeling techniquethat compares the U.S. dollar equivalent of all expenses incurred in Canadiandollars, at the actual exchange rate, to a hypothetical 10% adverse movement inthe foreign currency exchange rates against the U.S. dollar, with all othervariables held constant. Foreign currency exchange rates used were based on themarket rates in effect during the three months ended June 30, 2009.The sensitivity analysis indicated that a hypothetical 10% adverse movement inforeign currency exchange rates would result in a decrease in net income forthe three months ended June 30, 2009 of approximately$0.4 million. There can be no assurances that the above projected exchangerate decrease will materialize. Fluctuations of exchange rates are beyond ourcontrol. We will continue to monitor and assess the risk associated with theseexposures and may take additional actions in the future to hedge or mitigatethese risks.

 

**Credit Risk**

 

Financial instruments that potentially subject us to concentrations ofcredit risk consist principally of cash equivalents, marketable securities,foreign exchange contracts and accounts receivable. Our cash, cash equivalentsand short-term investments are in high-quality securities placed with majorbanks and financial institutions whom we have evaluated as highly creditworthyand commercial paper. With respect to accounts receivable, we perform ongoingevaluations of our customers, generally granting uncollateralized credit termsto our customers, and maintaining an allowance for doubtful accounts based onhistorical experience and our expectation of future losses.

 

**Item 4.**           **Controls and Procedures**

 

(a)           Evaluation of Disclosure Controls and Procedures

 

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, our chief executive officer and chief financial officer concludedthat our disclosure controls and procedures as of the end of the period coveredby this report have been designed and are functioning effectively to providereasonable assurance that the information required to be disclosed by us inreports filed under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andis accumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure. We believe that a controls system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of the controlssystem are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a company havebeen detected.

 

(b)           Change in Internal Control over Financial Reporting

 

Nochange in our internal control over financial reporting occurred during ourmost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

35

----

Table of Contents

 

**PART II.OTHER INFORMATION**

 

**Item 1.**    **Legal Proceedings**

 

We areinvolved in various investigations, claims and lawsuits arising in the normalconduct of our business, none of which, in our opinion, will harm our business.We cannot assure that we will prevail in any litigation. Regardless of theoutcome, any litigation may require us to incur significant litigation expenseand may result in significant diversion of our attention.

 

**Item1A.  Risk factors**

 

Inaddition to the other information set forth in this Quarterly Report, youshould also carefully consider the risk factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2008, all of which could materially affect ourbusiness, financial condition or operating results and should be consideredbefore making an investment decision regarding our securities. The risksdescribed in our Annual Report on Form 10-K are not the only risks facing the Company.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may adversely affect our business,financial condition or operating results.

 

**Item 2.Unregistered Sale of Equity Securities and Use of Proceeds**

 

On February 12,2009, the Company announced a modified “Dutch Auction Tender Offer” torepurchase shares of its common stock. The purchase price under the offer wasfunded from available cash. Of the 4,185,690 shares purchased, 4,000,000 wereshares the Company offered to purchase in the offer and 185,690 were sharespurchased pursuant to the Company’s right to purchase up to an additional 2% ofthe shares outstanding immediately prior to the commencement of the tenderoffer. Due to over-subscription, the final proration factor for shares tenderedat or below $0.41 per share was approximately 99.42%. For this purpose, sharestendered at $0.41 per share included shares tendered by those persons whoindicated, in their letter of transmittal, that they were willing to accept theprice determined in the offer. All shares purchased in the tender offerreceived the same price. The tender offer was completed on March 23, 2009.

 

OnJuly 14, 2009 the Company announced that it successfully concluded asecond modified “Dutch Auction Tender Offer” that was previously announced on May 26,2009. Under the terms of the offer, the Company repurchased an aggregate of1,103,824 shares of its common stock at a purchase price of $0.45 per share,for a total of $496,720.80, excluding transaction costs of $56,936. Thepurchase price was funded from available cash. Of the 1,103,824 sharespurchased, 1,000,000 were shares the Company offered to purchase in the offerand 103,824 where shares purchased pursuant to the Company’s right to purchaseup to an additional 2% of the shares outstanding immediately prior to thecommencement of the tender offer. Due to over-subscription, the final prorationfactor for shares tendered at or below $0.45 per share was approximately 99.8%.For this purpose, shares tendered at $0.45 per share included shares tenderedby those persons who indicated, in their letter of transmittal, that they werewilling to accept the price determined in the offer. All shares purchased inthe tender offer received the same price. As a result of the completion of thetender offer, as of July 14, 2009, the Company had 67,852,896 sharesissued and outstanding, as all shares repurchased were immediately retired.

 

In the three andsix months ended June 30, 2009, no shares of common stock were repurchasedby the Company under the stock buyback program that was in effect from May 12, 2008through May 11, 2009.

 

36

----

Table of Contents

 

**Item 6.**    **Exhibits**

 

(a)  Exhibits.

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                            |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                 |
| 3.1              |       | Fourth  Amended and Restated Articles of Incorporation of Tucows Inc.  (Incorporated by reference to Exhibit 3.1 filed with Tucows’ current  report on Form 8-K, as filed with the SEC on November 29, 2007)                      |
| 3.2              |       | Second  Amended and Restated Bylaws of Tucows Inc. (Incorporated by reference to  Exhibit 3.2 filed with Tucows’ annual report on Form 10-K for the  year ended December 31, 2006, as filed with the SEC on March 29,  2007) |
| 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 †                                                                                                                                                                                     |

 

----

* Filed herewith.

† Furnished herewith.

 

37

----

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date:  August 14, 2009 |   | TUCOWS INC. |
|-----------------------------|--------|------------------|
|                        |   |             |   |
|                        |   | By:              | /s/  Elliot Noss |
|                        |   |             | Elliot  Noss |
|                        |   |             | President  and Chief Executive Officer |
|                        |   |             |   |
|                        |   | By:              | /s/  Michael Cooperman |
|                        |   |             | Michael  Cooperman Chief Financial Officer |
|                        |   |             | (Principal  Financial and Accounting Officer) |

 

38

----

Table of Contents

 

**EXHIBIT INDEX**

 
| **Exhibit No** | ** ** | **Description**                                                                                                                                                                                                                                            |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                 |
| 3.1                 |       | Fourth  Amended and Restated Articles of Incorporation of Tucows Inc.  (Incorporated by reference to Exhibit 3.1 filed with Tucows’ current  report on Form 8-K, as filed with the SEC on November 29, 2007)                      |
| 3.2                 |       | Second  Amended and Restated Bylaws of Tucows Inc. (Incorporated by reference to  Exhibit 3.2 filed with Tucows’ annual report on Form 10-K for the  year ended December 31, 2006, as filed with the SEC on March 29,  2007) |
| 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 †                                                                                                                                                                                     |

 

----

* Filed herewith.

† Furnished herewith.

 

39

----