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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                               ----------------

                                   FORM 10-K

(Mark one)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

                  For The Fiscal Year Ended December 31, 2001
                                      or

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934

                  for the transition period from     to    .

                       Commission File Number: 001-15713

                            ASIAINFO HOLDINGS, INC.
            (Exact name of Registrant as specified in its charter)

               Delaware                               752506390
       (State of incorporation)                   (I.R.S. Employer
                                                 Identification No.)

                    4th Floor, Zhongdian Information Tower
                 6 Zhongguancun South Street, Haidian District
                             Beijing 100086, China
         (Address of principal executive offices, including zip code)

      Registrant's telephone number, including area code +8610 6250 1658
       Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, $0.01 Par Value
                               (Title of Class)

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

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

Based on the closing sale price of the common stock on the Nasdaq National
Market System on March 1, 2002, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $271,880,045.31.

The number of shares outstanding of the Registrant's common stock, $0.01 par
value, was 42,693,394 at March 1, 2002.

                      DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated by reference to the Proxy Statement for
the Registrant's 2002 Annual Meeting of stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this Form 10-K.

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                            ASIAINFO HOLDINGS, INC.
                                   FORM 10-K
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                               TABLE OF CONTENTS

                                     PART I
<TABLE>
<S>                                                                         <C>
ITEM 1.Business...........................................................    3
ITEM 2.Properties.........................................................   20
ITEM 3.Legal Proceedings..................................................   20
ITEM 4.Submission of Matters to a Vote of Security Holders................   20

                                    PART II
ITEM 5.Market for Registrant's Common Equity and Related Stockholder
 Matters..................................................................   21
ITEM 6.Selected Financial Data............................................   22
ITEM 7.Management's Discussion and Analysis of Financial Condition and
 Results of Operation.....................................................   23
ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk........   42
ITEM 8.Financial Statements and Supplementary Data........................   42
ITEM 9.Changes in and Disagreements with Accountants on Accounting and
 Financial Disclosure.....................................................   42

                                    PART III
ITEM 10.Directors and Executive Officers of The Registrant................   43
ITEM 11.Executive Compensation............................................   43
ITEM 12.Security Ownership of Certain Beneficial Owners and Management....   43
ITEM 13.Certain Relationships and Related Transactions....................   43

                                    PART IV
ITEM 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K..   44
SIGNATURES................................................................   45
</TABLE>

                                       2
<PAGE>

Except for historical information, the statements contained in this Annual
Report on Form 10-K are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995, or
the Reform Act, contains certain safe harbors regarding forward-looking
statements. Certain of the forward-looking statements include management's
expectations, intentions and beliefs with respect to our growth, our operating
results, the nature of the industry in which we are engaged, our business
strategies and plans for future operations, our needs for capital expenditures,
capital resources and liquidity, and similar expressions concerning matters
that are not historical facts. Such forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those expressed in the statements. All forward-looking statements included
in this document are based on information available to us on the date hereof,
and we assume no obligation to update any such forward-looking statements.
These cautionary statements are being made pursuant to the provisions of the
Reform Act with the intention of obtaining the benefits of the safe harbor
provisions of the Reform Act. Among the factors that could cause actual results
to differ materially are the factors discussed below under the heading "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Factors Affecting Our Operating Results and Our Common Stock."

In this report, "AsiaInfo," the "Company," "we," "us," and "our" refer to
AsiaInfo Holdings, Inc. and its subsidiaries.

                                     PART I

ITEM 1. Business

OVERVIEW

We are a leading provider of telecommunications network integration and
management solutions in China. Our software products and network services
enable our customers to build, maintain, operate, manage and continuously
improve their Internet and telecommunications infrastructure.

Our key customers are the leading telecommunications service providers in
China, including China Telecommunications Corporation, or China Telecom, China
United Telecommunications Corporation or China Unicom, China Mobile
Communications Corporation, or China Mobile, China Network Communications
Corporation, or China Netcom, and China Railway Communications, or China
Railcom. We designed and built China Telecom's ChinaNET, which is China's first
commercial and largest national Internet "backbone," meaning the physical
network of cables and computers that carries Internet traffic. We are about to
complete the second phase of UniNET, China's second national commercial
Internet backbone, for China Unicom, and have completed the first phase of
CNCNET, China's fourth national commercial Internet backbone, for China Netcom.
We have also built CMCCNET, China Mobile's commercial Internet backbone and
recently won a contract to design and build RailNet, China Railcom's national
Internet backbone. In addition to these national Internet backbone projects, we
have built numerous provincial Internet backbones throughout China, including
GuangdongNET, the first and largest provincial commercial Internet backbone in
China.

Although we built our business through major Internet backbone construction and
integration projects, most of these projects have included the carrier-class,
meaning high performance, highly fault tolerant software components that we
develop and sell. Our software products can support millions of users, are
designed with open architecture to facilitate customization, and are tailored
for the specific needs of the China market. Because these software products,
along with our network integration services, have a broad range of applications
for our customers' businesses, including their fixed-line, wireless and
Internet protocol, or IP, telephony services, our business has grown from a
pure Internet infrastructure developer to a total telecommunications
infrastructure software and services provider. We currently organize our
combined network services and software product offerings into four solutions:

..  Network infrastructure solutions--which involve the construction, design,
   integration, management and optimization of large Internet and
   telecommunications networks;

..  Operation support system solutions, or OSS solutions--which include our
   highly scalable customer care and billing software capable of automating a
   telecom carrier's key business processes, such as billing and order and
   inventory management;

                                       3
<PAGE>

..  Service application solutions--which include our carrier-scale messaging
   software, as well as Internet protocol telephony and virtual private
   networks; and

..  Network security solutions--which include the design, integration and
   management of Internet protocol network security systems and the training of
   personnel to oversee such systems.

Three of these solutions--network infrastructure, operation support system, and
service application--are offered through our three strategic business units, or
SBUs, while network security solutions are offered through our majority-owned
subsidiary, Marsec System Inc., or Marsec.

We commenced our operations in Texas in 1993 and moved our operations from
Texas to China in 1995. We began generating significant network solutions
revenues in 1996 and significant software solutions revenues in 1998. For
detailed financial information, please refer to our consolidated financial
statements and the notes to those statements included in this report and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 23 of this report. While we source hardware for
our customers through our U.S. parent company, AsiaInfo Holdings, Inc., we
conduct the bulk of our business through our wholly-owned operating subsidiary,
AsiaInfo Technologies (China) Inc., or AsiaInfo Technologies, which is a
Chinese company.

RECENT DEVELOPMENTS

Bonson Acquisition

We completed our acquisition of Bonson Information Technology Holdings Limited,
or Bonson, on February 6, 2002. In connection with the acquisition, we
anticipate that the former shareholders of Bonson will receive approximately
$30 million cash and approximately $18.6 million in shares of our common stock.

Bonson is a leading provider of operation support system solutions to wireless
telecommunications businesses in China, including billing, accounting and
reporting, settlement, customer relationship management and decision support
systems. Bonson's other product lines include mobile network monitoring
systems, network management and wireless data applications. Bonson's largest
customers are China Mobile and various provincial subsidiaries of China Mobile.
The company is based in Guangzhou, China and has approximately 200 employees.

We believe that the acquisition of Bonson will allow us to fully capitalize on
growth opportunities in China's wireless operation support system solutions
market, and significantly increase our share of that market.

New Strategic Business Units

At the start of 2002, we reorganized our internal operations into three
strategic business units, which correspond with three of our product
offerings--network infrastructure solutions, operation support system
solutions, and service application solutions. Each of these business units is
responsible for both the service and software components that comprise their
product offerings. The investment focus of Chinese telecom carriers is evolving
from pure infrastructure to high value-added services and software, enabling
them to optimize network performance, streamline business processes, and
generate more revenue by offering new business. Our three new SBUs were formed
to address these market demands seamlessly. Our fourth product offering--
network security solutions--is provided by our majority-owned subsidiary,
Marsec.

INDUSTRY BACKGROUND

Over the past several years, the telecommunications industry in China has gone
through several restructurings, which are described in greater detail below.
These restructurings have been accompanied by deregulation and have led to
rapid growth in the market for telecommunications services. For example,
according to Wu Jichuan, Minister of China's Ministry of Information Industry,
or MII, in 2001 China's fixed-line phone subscribers increased by 23% to 179
million and wireless phone users increased by approximately 70% to 145 million.
During that period, total revenue generated by the telecommunications sector
reached approximately $42.6 billion, up 15% from the previous year. In July
2001, China surpassed the United States to become the largest

                                       4
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market for wireless telephony in the world. As the overall telecommunications
market has changed and expanded, the Internet market in China has grown rapidly
due to increased access to telecommunications services and declining personal
computer prices. Internet Data Corporation, or IDC, estimates that Internet
users in China will reach 25.1 million in 2002, representing a compound annual
growth rate of 77.3% from 1999.

Prior to a major industry restructuring in 1999, the telecommunications and
Internet markets in China were dominated by the predecessor company of China
Telecom. In 1999, the predecessor company of China Telecom was divided into the
following four companies:

..  China Telecom--providing fixed-line and data communication services;

..  China Mobile--providing mobile and data communication services;

..  China Satellite--providing satellite communications; and

..  Guoxin Paging--a paging business that was subsequently merged into China
   Unicom.

On December 11, 2001, in an effort to increase the efficiency of
telecommunications service providers through competition, the State Council of
China announced that it would again reorganize China Telecom by splitting it
geographically into a northern division (comprising ten provinces) and a
southern division (comprising 21 provinces). Under the State Council's plan,
the northern division of China Telecom will merge with China Netcom and Jitong
Communication, and will use the China Netcom name. The southern division will
continue to operate under the China Telecom name.

Today, all major sectors of China's telecommunications industry, including
fixed-line services, wireless telephony services and Internet services, contain
multiple service providers. The following is a list of China's major service
providers in different industry sub-sectors after the planned reorganization of
China Telecom:

<TABLE>
<CAPTION>
Industry Sub-Sector      Major Service Providers
-------------------      -----------------------
<S>                      <C>
Fixed-line telephony.... China Telecom, China Unicom, China Netcom and China Railcom
Wireless telephony...... China Mobile and China Unicom
Internet protocol        China Telecom, China Unicom, China Netcom,
 telephony.............. China Mobile and China Railcom
Data communications and  China Telecom, China Unicom, China Netcom,
 Internet............... China Mobile and China Railcom
</TABLE>
--------
Sources: IDC and AsiaInfo.

China's government has set aggressive goals for the future growth of China's
telecommunications industry. According to MII's Tenth Five-Year Plan, the
industry will continue to grow three times as fast as China's GDP during the
period from 2001 through 2005. By 2005, the MII expects telecommunications
service revenues to reach approximately $110 billion, which is triple the
figure in 2000. The capacity of fixed switching equipment is expected to reach
300 million lines, while mobile switching capacity is expected to reach 360
million lines. According to the Tenth Five-Year Plan, there will be
approximately 500 million telephone subscribers in China by 2005, representing
a penetration rate of more than 40%. The number of fixed-line subscribers is
expected to reach 240 million to 280 million with a penetration rate of 18% in
2005, compared to 11% in 2000. The number of mobile subscribers is expected to
reach 260 million to 290 million with a penetration rate of 21% in 2005,
compared to 6.7% in 2000. There will be approximately 200 million subscribers
of data, multimedia and Internet services with a penetration rate of 15%. Based
on preliminary calculations, a total of approximately $150 billion will be
invested in the telecommunications industry, which is 20-30% higher than the
total investment under China's Ninth Five-Year Plan.

In addition to the growing competition and increased infrastructure investment
we anticipate among China's domestic telecommunications service providers, we
expect future demand for telecommunications infrastructure solutions to be
driven by foreign investment. On December 11, 2001, after fifteen years of
negotiations, China

                                       5
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became a member of the World Trade Organization, or WTO. Pursuant to the terms
of China's accession to the WTO, China has agreed to allow foreign investment
in domestic telecommunications enterprises for the first time. Under the
implementing regulations that recently came into effect in China, foreign
equity participation in the telecommunications sector will take the form of
Sino-foreign joint ventures, and is expected to be phased in over a six year
schedule. By the end of 2007 foreign investors will be permitted to own up to
49% of China's fixed-line and mobile telecommunications businesses, and up to
50% of so-called value-added telecommunications businesses, which include
Internet service providers and Internet content providers.

China's liberalization of the foreign investment regime under the WTO is likely
to introduce competition from foreign Internet and telecommunications services
providers. We believe that increased competition from new market entrants will
cause existing telecommunications service providers to invest more heavily in
effective network management systems, operation support systems, and related
technology support platforms in order to maintain their competitive advantages
and sustain long-term development. With the rapidly increasing number of
subscribers and the restructuring of China's telecom industry, the competitive
focus will move from pricing to quality and product differentiation, while the
investment focus will move from network construction to operation support
systems that help carriers increase service quality and customer satisfaction,
and reduce time to market. In 2001, this trend was evident among almost all the
major service providers in China. China Mobile and China Unicom began operation
support system projects, while China Telecom planned an upgrade of its system
and began building integrated call centers.

MARKET OPPORTUNITIES

We believe the important trends in the telecommunications industry in China, as
described above, present major opportunities for us in the following areas:

NETWORK CONSULTING, INTEGRATION AND MANAGEMENT SERVICES. With the broad usage
of Internet technology and the development of Internet applications,
telecommunications networks will become more complex, more customized and more
difficult to manage. The deployment of telecommunications and Internet
infrastructure in a complex, multi-vendor environment requires significant
expertise that usually is not internally available to Chinese
telecommunications services providers. As a result, they rely on experienced
information technology, or IT, services companies like us to provide total
solutions to their telecommunications and Internet infrastructure requirements
in order to increase network efficiency, differentiate their services and
ensure service quality. We believe that as the telecommunications market
develops in China, our customers will continue to require high value IT
services such as network design, network planning, network security and project
management, and new high-end solutions such as operation support system
solutions and wireless solutions.

MISSION CRITICAL OPERATION SUPPORT SYSTEM, OR OSS, SOFTWARE AND SERVICES. As a
result of increased competition, telecommunications and Internet service
providers in China are investing in OSS solutions to manage their fast growing
businesses, meet the varying needs of their customers and reduce time to
market. Telecommunications and Internet service providers in China are now
focusing on differentiating their services, rather than competing solely on
price. They are investing in customer care and support in order to study
customer behavior and enhance customer satisfaction. Telecommunications and
Internet service providers in China must be able to monitor customer activity,
bill customer usage on a real-time basis, and scale services to millions of
users in order to facilitate the rapid growth of their subscriber bases. These
mission-critical needs cannot be met by traditional customer care and billing
solutions that are inflexible, capable only of period processing, and difficult
to scale. Our experience indicates that service providers in China prefer real-
time, scalable and reliable billing and business management software and
services that support their packaged services, flexible pricing policies and
integrated customer care initiatives.

CONVERGENT APPLICATION SOFTWARE. The emergence of convergent communications has
created an increasing demand for convergent software and solutions. Providers
of convergent communications services, such as Internet protocol telephony and
wireless data services, require customer care and billing software that is

                                       6
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capable of accounting for and billing their customers' voice, data and Internet
usage using common architecture. In addition, they need software products that
enable them to provide convergent communications applications such as unified
messaging products integrating email, voicemail, fax and messaging functions.

BROADBAND NETWORK SERVICES AND APPLICATION SOFTWARE. As a result of increased
competition in China's telecommunications and Internet markets, carriers with
narrowband networks are now aggressively upgrading to broadband networks with
new service offerings. As a result, service providers in China have
significantly accelerated their investment in broadband solutions for their
backbone and provincial access networks, such as unified messaging, media
streaming, video conferencing and wireless data related applications, to boost
network usage and to generate revenue. This trend is providing us with
opportunities to showcase our network consulting services, billing software and
application software.

OUR STRATEGY

Our strategy is to be the leading China-based company providing world class
network integration and management solutions, and to continue to enable our
customers to build, maintain, operate, manage and continuously improve their
telecommunications and Internet infrastructure. The key aspects of this
strategy include the following:

MAINTAIN OUR LEADING POSITION IN PROVIDING INTERNET AND TELECOMMUNICATIONS
INFRASTRUCTURE SOLUTIONS IN CHINA. With over seven years of experience in a
fast-growing market, we are a leading provider of network integration services
and software solutions to the largest telecommunications companies in China.
Based on forecasted growth as reported by Internet Data Corporation (IDC), as
well as communications with our customers and government agencies, we expect
investment in China's telecommunications industry to continue to grow rapidly.
We expect most of this investment to be made through our customers, which are
the largest telecommunications service providers in China. We believe that our
close relationships with our customers, our unique understanding of the China
market, our technical capabilities and our proven track record will allow us to
capitalize on these growth opportunities.

EXPAND OUR INTERNET-CENTRIC PRODUCTS AND SOLUTIONS TO SUPPORT THE OVERALL
TELECOMMUNICATIONS INDUSTRY. By designing and building most of China's major
commercial Internet backbones, we established our company as the leading
Internet infrastructure solutions provider in China. Our reputation in that
market has allowed us to grow our business as a provider of software and
solutions in vertical telecommunications markets. For example, our suite of
operation support system solutions has allowed us to capitalize on
opportunities in the wireless telecommunications market. Our recent acquisition
of Bonson, another leading company in China's wireless OSS market, has given us
the largest market share among solutions providers in that market. We
anticipate that our future growth in other vertical telecommunications markets
will be driven both organically and through further strategic acquisitions and
partnerships.

FOCUS ON HIGH VALUE INFORMATION TECHNOLOGY PROFESSIONAL SERVICES. Currently, we
offer our information technology professional services primarily in the context
of total solutions, which include systems integration and customization of our
proprietary and third party software. We minimize our exposure to hardware
risks by placing orders from hardware vendors only against back-to-back orders
from customers and having the equipment delivered by the vendor directly to the
customers' premises. As the IT market matures in China, we are focusing on
providing our customers with high value IT professional services, such as
network planning, design and optimization, while gradually outsourcing lower
end services, such as hardware installation, and encouraging customers to
purchase hardware directly from equipment vendors.

LEVERAGE OUR HIGH QUALITY CUSTOMER BASE TO GENERATE RECURRING REVENUES. We have
a high quality group of customers and, through our customers' end users, one of
the largest installed software customer bases (as measured by the number of
licensed end users) for leading telecommunications service providers and
Internet content and service providers in China. Our customers include China
Telecom, China Mobile, China Unicom, China Netcom and China Railcom, which
together have accounted for a majority of the investment in Internet

                                       7
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and telecommunications infrastructure in China. Our high quality customer base
enables us to foster close relationships with our customers and develop in-
depth understandings of their specific needs. Furthermore, our customers may
face significant costs and technological risks by switching from our services
and products to others. We generate recurring revenues from our existing
customer base through upgrades of their networks and implementation of new
services and products, including outsourced applications.

ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL. We intend to continue our
aggressive recruiting strategy to attract and retain the best and most
qualified personnel in the IT industry. In view of the specific needs of the
China market, we target our recruitment effort on Chinese citizens who have
information technology and professional competence and extensive exposure to
western education and management practices. We believe that we have been able
to attract and retain qualified personnel by offering them the following key
benefits:

..  attractive compensation packages, including stock options;

..  a challenging and rewarding work environment in which our employees have
   opportunities to enhance their technical knowledge; and

..  the opportunity to work for a company with an attractive image in China,
   which has been greatly enhanced by our becoming a public company in the
   United States in March, 2000.

Our current senior management consists of Chinese citizens, all of whom were
either educated at western universities or worked for leading international IT
companies. We continue to recruit senior software engineers from Silicon Valley
to spearhead our software product development.

OUR COMPETITIVE STRENGTHS

We believe that we are well positioned to continue meeting our customers'
network infrastructure and software needs in China. The key factors that
contribute to our strong competitive position are:

TELECOMMUNICATIONS INFRASTRUCTURE TECHNOLOGY LEADERSHIP IN CHINA. Our
engineering personnel have state-of-the-art expertise in telecommunications
infrastructure technologies in China. This expertise enables us to design and
implement network technology that is suitable for the Chinese market and that
employs high quality design and validated hardware and software components, and
to deliver solutions with high performance-to-cost ratios for our customers.

COMBINED INTERNATIONAL AND CHINA EXPERTISE. Our senior management is a Chinese
team, a majority of whom have been educated in the United States or have worked
with leading multinational companies in or outside of China. They have an in-
depth understanding of the China market, combined with a knowledge of best
management practices gained from some of the world's leading information
technology companies. We have well defined performance evaluation and reward
systems and a strong emphasis on sound, accountable corporate governance. We
believe that the unique strengths of our management team make us one of the
best managed China-based companies, and make us well positioned to anticipate
and capitalize on market opportunities for our business in China.

REAL-TIME, SCALABLE AND ADAPTABLE SOFTWARE. Our software allows service
providers to monitor user activity and analyze service usage data in real time.
The real time feature enables service providers to increase billing accuracy,
accelerate the time-to-market for new services and improve the effectiveness of
marketing and targeting efforts. The scalability of our software allows
telecommunications service providers to develop their network infrastructure
incrementally as their level of business grows, without the need for
architecture re-engineering or large-scale system replacements. In addition,
our software products are designed with fully documented, open architecture
that allows our customers, as well as third party systems integrators and
software developers, to integrate our software with existing applications and
services with minimal effort and programming overhead.

                                       8
<PAGE>

ESTABLISHED CUSTOMER RELATIONSHIPS. We have close relationships with all
leading telecommunications and Internet service providers in China and have
provided our services and products to most of them. Our in-depth understanding
of their requirements allows us successfully to deliver customized solutions
and maximize the opportunities created by increased investment in
telecommunications and Internet infrastructure in China. Moreover, we have
strong customer service and research and development teams based in China,
which allow us to respond quickly and inexpensively to the needs of our
customers in China.

PRODUCTS AND SERVICES

We provide telecommunications network integration and management solutions to
the leading telecommunications service providers in China. We offer these
solutions to our customers by leveraging our core strengths in information
technology services and software, and maintaining close relationships with
multiple hardware and third party software vendors. Substantially all of our
network integration and management solutions business is accounted for by the
various provincial entities of China Telecom and China Mobile, as well as China
Unicom and China Netcom. Our longstanding relationships with these customers
and our understanding of their specific requirements make us well positioned to
respond to their requests for proposals.

Our product offerings, or "solutions" as they are called in the
telecommunications industry, fall into four categories:

..  network infrastructure solutions;

..  operation support system, or OSS, solutions;

..  service application solutions; and

..  network security solutions.

As part of each of these solutions, we offer a combination of services and
software products to our customers.

Network Infrastructure Solutions

This core area of our current business includes network access and backbone
infrastructure design and implementation for telecommunications and Internet
service providers. Our network infrastructure solutions support a wide array of
broadband network technologies. Network infrastructure solutions projects
involve one or more of the following services:

..  Network planning. We provide our customers with strategic and tactical
   reviews of their current network operations and future network requirements.
   We do much of this work before the customer awards the contract in order to
   assist them in developing an appropriate request for proposal and to improve
   our chances in winning the contract. The planning includes defining client
   business requirements, developing appropriate information architectures and
   selecting preferred technology.

..  Network design. We detail the network specifications and implementation
   tactics necessary to achieve our customers' objectives. We also consider how
   the new technology will integrate with the customer's existing hardware and
   software and how it will be managed on an ongoing basis. Examples of
   services include defining functional requirements for the network and its
   components, development of multi-vendor integration plans and design of
   customer-specific network and service applications.

..  Network implementation. We install the recommended systems to meet our
   customers' network requirements. Key activities include project management,
   hardware and software procurement, configuration and field installation and
   testing, building network management centers and development of customized
   network and services management applications. We believe that our expertise
   in integrating new systems without disrupting ongoing business operations of
   our customers adds significant value and reduces risks.

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<PAGE>

..  Network optimization. We maximize the efficiency of communications networks
   by improving network utilization. Examples of our services include network
   traffic analysis and identification of bottlenecks, recommendations for
   efficient allocation of bandwidth, fault detection and isolation,
   performance testing and tuning, and security auditing and improvement.

..  Network performance. We conduct network performance audits and tuning
   services to improve overall network performance. This involves recommending
   more efficient bandwidth allocation and reducing network latency and
   response time for applications.

..  Maintenance and support services. We provide maintenance and technical
   support in connection with all of our network infrastructure and systems
   integration projects, content and network access provider platforms, and our
   proprietary software products. These services currently include assistance
   with the implementation of new information technology functions and/or
   features, configuration and programming services for new business processes,
   warranty repairs, and assistance in the case of technology upgrading. Our
   policy of on-going maintenance and technical support helps us to foster
   long-term relationships with our customers.

..  Training. We provide technical training for our customers and strategic
   partners to increase their awareness and knowledge of network technologies
   in the Chinese information technology market and to support the operations
   of our customers' integrated network systems. Our training courses address
   issues relating to daily operations of network systems. Specific topics
   include daily network management tasks, advanced network troubleshooting,
   introductory network framework reviews, and advanced planning and design.

Our network infrastructure solutions projects give us an intricate
understanding of our customers' Internet infrastructure requirements and allow
us to understand the software requirements that are needed to support those
infrastructures. Software products within our network infrastructure solutions
include AISerBase and AIVelosurf.

AISERBASE. On April 2, 2001, we released our service-oriented network
management software product--AISerBase. Driven by an increasing demand for
sophisticated network management software, AISerBase offers high-end network
management features. AISerBase manages all aspects of a network environment,
including hardware, applications, services and customers at four different
layers: equipment, application, service and business.

Several unique characteristics of AISerBase differentiate it from other network
management software products. For large-scale networks, AISerBase groups and
manages systems by service category such as leased line services, dial-up
services and web services. This structure enables operators to streamline
management processes and prioritize management tasks in an organized fashion.
More importantly, the service-oriented management structure offers flexibility
to operators to provide multiple services in a convergent environment.
Furthermore, while traditional network management software products only deal
with static network elements such as hardware, AISerBase also manages dynamic
factors such as usage patterns.

With AISerBase, network operators, particularly telecommunications carriers and
Internet data centers, are able to improve their service offerings and quality
in the following ways:

..  through its multi-vendor support feature, AISerBase significantly increases
   the cost efficiency of network management activities;

..  by monitoring and assessing network traffic in real time, AISerBase collects
   and analyzes statistical data on the system by service category, which can
   be used to manage service level agreements and make sound investment
   decisions for network expansion; and

..  AISerBase facilitates many customer-oriented value-added services such as
   customer self-evaluation on service usage.

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AIVELOSURF. Our network optimization software, AIVelosurf, was launched in
September 2001. The software is designed to accelerate data transmission on
wireless data networks. With embedded data compressing technology, AIVelosurf
is able to speed up narrow-band network access by two to six times and support
carrier-scale capacity. Developed entirely in-house using proprietary
technology, AIVelosurf is designed to address bandwidth bottlenecks at the
"last mile" of an advanced second generation, or 2.5G, network and requires
minimal customization efforts. By offering applications that demand high-speed
data transmission, AIVelosurf enables carriers to generate new revenue streams
from existing wireless data infrastructure without much additional investment,
long before third generation, or 3G, networks reach maturity.

Operation Support System, or OSS, Solutions

Our operation support system solutions allow our customers to manage their
network infrastructure utilizing our proprietary and third-party software tools
and applications. Operation support system solutions projects involve one or
more of the following services:

..  designing and implementing network management centers for our clients;

..  installing proprietary and third party software products;

..  customizing software applications that allow our clients to perform
   activities such as customer care and billing, services offerings and
   promotions, provisioning and monitoring network utilization and customer
   service levels; and

..  providing technical training and support to our clients.

Software products within our operation support system solutions include
AsiaInfo Online Billing System (AIOBS) and AsiaInfo Convergent Billing System
(AICBS).

ASIAINFO ONLINE BILLING SYSTEM (AIOBS). Our flagship online billing software,
AIOBS, is an integral part of our operation support system solutions offerings.
The latest version of this Internet and Internet protocol telephony customer
care and billing software, AIOBS 6.2, was released in November 2001. AIOBS 6.2
is a real time, scalable solution that enables Internet service providers to
address mission critical needs such as customer care, services support, and
accurate and timely billing. First launched in 1996, this third generation
software product today offers tremendous improvements in architecture,
functionality and capacity. AIOBS 6.2 enables Internet service providers and
Internet protocol telephony providers to:

..  manage, authenticate and register users, create user accounts, check account
   status and activate services;

..  monitor and analyze user activity, "map" individual user consumer behavior
   and perform audit trials on user accounts;

..  price and rate a broad array of services, discount services and promotions
   using multiple bases and resources, such as time of usage, bytes
   transferred, size of server storage and number of page views; and

..  perform billing operations based on flexible billing cycles and manage user
   accounts receivable.

AIOBS 6.2 also allows service representatives and customers to access selected
user data to create, search and modify user accounts, change certain personal
information and perform other customer self-care functions using a browser-
based interface.

In addition, AIOBS 6.2 provides many features tailored to the China market,
including:

..  caller ID usage-based and restricted line services that allow telephone
   customers to log on to the Internet without first registering with Internet
   service providers, with usage-based fees charged to their regular monthly
   telephone bills, and to log on only from certain, specified phone numbers;

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<PAGE>

..  a roaming service that allows registered customers from different Internet
   service providers to log on to the Internet from each other's territories,
   an important feature since most Chinese Internet service providers operate
   and recruit users locally; and

..  a restricted credit (pre-paid card) service that allows customers to use the
   Internet with monthly monetary or usage-based limits, with real time cut-off
   the instant the credit limit is reached.

ASIAINFO CONVERGENT BILLING SYSTEM (AICBS). Our convergent billing software,
AICBS, offers real time, scalable solutions for customer care and billing
operations of wireless and long-distance telephony service providers,
including:

..  customer care, together with customer service, hierarchies and rapid report
   management;

..  call center support, including usage processing;

..  fraud detection and management;

..  billing and revenue management features, including accounts receivable and
   collection; and

..  inter-carrier settlement.

With AICBS, we pioneered the fraud management software market in China, which
has seen increasing customer demand. We believe AICBS is also the only customer
care and billing software used by Chinese operators that supports wireless
services based on the Code Division Multiple Access, or CDMA, standard in
addition to the GSM standard.

AIOMNIVISION. Our new analytical customer relationship management, or CRM,
software product marks our entry into the emerging market for
telecommunications customer relationship management. With embedded technology
ingredients such as data warehousing, online analytical process and data
mining, AIOmniVision enables carriers to make management decisions based on
analysis of customer behavior, competitive environment, business profitability
and other parameters. The system is able to proactively generate business
operation reports, which serve as a basis for top management decisions.

AIOmniVision allows service providers to:

..  understand and maximize business value from their existing customers;

..  identify and focus on profitable customer groups;

..  explore and attract potential customers;

..  improve service quality and ensure customer satisfaction and retention;

..  enhance return on investment of new service offerings;

..  increase service usage and network utilization; and

..  improve efficiency and reduce costs.

In the future, AIOmniVision will include product enhancements such as customer
credit analysis, customer behavior analysis, marketing campaign automation, and
up-sell/cross-sell modules.

Service Application Solutions

We design and provide applications for Internet access, Internet protocol
telephony and virtual private networks that allow our clients to provide
commercial services to their customers. We also provide high volume messaging
software and services, and web-based as well as other Internet applications.
Service application solutions projects involve one or more of the following
services:

..  installing proprietary software products;

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<PAGE>

..  customizing software applications for our clients;

..  providing technical training and support;

..  providing on-site maintenance services; and

..  providing consulting services on our AsiaInfo Mail Center (AIMC) software,
   which includes assisting clients in running and monitoring AIMC, providing
   monthly management reports and advising on system upgrades.

Software products within our service application solutions include AIMC and
AsiaInfo Unified Messaging System (AIUM).

ASIAINFO MAIL CENTER (AIMC). Our flagship online messaging software, AIMC, is
an integral part of our service application solutions offerings. AIMC is
carrier-scale messaging software designed to support electronic mail systems
from small Internet service providers to large-scale mail hosting providers
with millions of mailboxes and thousands of domains. Its flexible design allows
service providers to offer web-based free e-mail, basic e-mail service and
premium business secure e-mail to end-users. The ability to scale both
horizontally and vertically allows rapid expansion when more capacity is
needed. The system is built to accommodate clustering technology and is highly
fault tolerant. In addition to major telecommunications and Internet service
providers, top Internet content providers in China such as chinadotcom and
21cn.com are also among the key customers for AIMC.

ASIAINFO UNIFIED MESSAGING SYSTEM (AIUM). AIUM is an information-exchanging
platform for wire, wireless and Internet networks providing customers complete
access to message transmission and retrieval. AIUM gives the user freedom to
choose among various media, such as e-mail, telephone, facsimile and mobile
telephone, to send and retrieve messages.

Network Security Solutions

We provide high-end network security solutions through our majority-owned
subsidiary, Marsec. Through Marsec, we provide security solutions to
telecommunications carriers, Internet data centers, Internet content providers
and Internet service providers using third party software applications. Our
network security solutions include the following services:

..  assessing, designing and deploying network security systems of our clients;

..  managing network security systems for our clients; and

..  providing technical training and support to our clients.

STRATEGIC ACQUISITIONS AND ALLIANCES

We enter into strategic acquisitions and alliances in order to further our
business objectives, including:

..  expanding our product and service offerings;

..  entering vertical markets and obtaining complementary technology; and

..  increasing our distribution channels and co-marketing opportunities.

Our business development team, which includes former investment banking
professionals from major international financial institutions, is continuously
exploring acquisition and investment opportunities in order to fulfil these
objectives. To date, our strategic investments have included the following:

BONSON. In February of 2002 we completed our acquisition of Bonson Information
Technology Holdings Limited, or Bonson, a leading provider of operation support
system solutions to China's wireless telecommunications carriers. We acquired
Bonson for a combination of cash and shares of our common stock

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<PAGE>

valued at a total of approximately $47.3 million. Combined with our existing
share of the wireless OSS solutions market in China, our acquisition of Bonson
has given us the largest share of any participant in that market. For further
information on the acquisition of Bonson, please see the discussion above under
the heading "Recent Developments--Bonson Acquisition."

INTRINSIC. In April 2001, we invested approximately $6.2 million in shares of
Intrinsic Technology (Holdings) Ltd., or Intrinsic, representing 14.25% of the
company's outstanding equity capital. Intrinsic is a leading provider of
wireless Internet infrastructure products and solutions in China. In connection
with this investment, we also received an option to acquire a majority stake in
Intrinsic at a price to be determined on the basis of Intrinsic's future
performance.

MARSEC. In September 2000, we committed to invest $2 million in connection with
the establishment of our majority-owned subsidiary, Marsec System Inc., or
Marsec. Marsec is a high-end network security solutions provider focusing on
security assessment, security system design and implementation, and security
support services. We co-market Marsec's security solutions with our other
solutions and have helped Marsec to win significant network security projects
for Shanghai Online, a subsidiary of China Telecom, and Jitong Communication.
We own approximately 79% of Marsec's outstanding share capital, and the rest is
held by Marsec's employees.

In addition to acquisition and investment opportunities, our business
development team has secured numerous strategic alliances in furtherance of our
business objectives. To date, our major strategic alliances include alliances
with Ericsson, Redback Networks and Huawei Technologies, in which we have
integrated our AIOBS software with the products of those companies in order to
create new distribution channels for our software.

PRICING

We currently price our software products based on the number of user licenses
which our customers purchase from us (except for AIOmniVision, which is priced
based on modules, functions and requirements for follow-on services). In
addition to these license fees, our customers purchase technology support
services for which they pay a service fee comprised of a fixed percentage of
the total contract amount. We charge our customers for software customization
on a time plus materials basis. The pricing of our messaging software, AIMC, is
based on the total number of mail boxes purchased by our customers. However,
the unit price for each mail box differs among free web-based e-mail service,
basic ISP-provided Internet e-mail and business secure e-mail offerings.

Prices for our network solutions projects are calculated internally on an
estimated time and material basis, but are quoted to customers as a fixed fee.
Contracts for these projects are generally subject to competitive bidding
processes.

TECHNOLOGY

Internet customer care and billing software. Our Internet and Internet protocol
telephony customer care and billing software, AIOBS, is designed to allow
maximum flexibility, scalability and performance. It has state-of-the-art,
four-tier client/server architecture. This multi-tier architecture, coupled
with other technologies, gives our software the following advantages:

..  Flexibility. Because we use a data dictionary-based data model to collect
   data from databases and other resources, data definitions, such as new
   entries of demographic information, can be customized without any code
   modification.

..  Minimum interruption of existing services. The system is built on dynamic
   component modules which can be modified separately when a new product is
   introduced and updated without system downtime.

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<PAGE>

..  Ease of customization. Our software offers fully documented application
   programming interfaces that support standard scripts. As a result, our
   customers can build client applications without compilation and can
   customize and write new user interface applications with minimum training.

CONVERGENT BILLING SOFTWARE. Our convergent billing software, AICBS, also
utilizes state-of-the-art multi-tier architecture to achieve flexibility,
scalability and real-time performance. We are designing new architecture to
support convergent customer care and billing solutions for combined Internet,
Internet protocol telephony and traditional voice services. The technologies we
employ have given our wireless and long-distance telephony software advantages
such as well-designed applications for high performance under high capacity
subscribers and have enabled the software to ensure transaction integrity.

MESSAGING SOFTWARE. Our carrier-scale messaging software supports service
providers with a large number of subscribers and large volumes of messages. We
use the following technologies to achieve scalability and optimize performance:

..  advanced software technology that allows AIMC to scale both horizontally, by
   adding more servers, and vertically, by using higher speed or multiple
   central processing units, to handle subscriber growth without compromising
   system performance and hardware investment;

..  switching technology that distributes workloads in a manageable and flexible
   fashion and allows customers to easily add, remove or reconfigure running
   systems without downtime in a live production environment; and

..  storage area network, or SAN, technology that offers speedy, reliable and
   secure access to the data storage subsystem with ultra-high capacity
   databases.

We closely monitor world-wide technological developments in our service and
product areas. In developing these and other technologies, we sometimes source
knowledge and products from major international technology companies.
Cooperation with global technology leaders improves our access to the most
sophisticated technologies, which enables us to provide the latest and best
services and software products to our customers.

RESEARCH AND DEVELOPMENT

We are committed to researching, designing and developing information
technology solutions and software products that will meet the future needs of
our customers. In the information technology solutions areas, we focus our
research and development efforts on operation support system solutions, service
application solutions and network security solutions. We are currently
developing a number of upgrades of our existing software products to enhance
scalability and performance and provide added features and functions. In
addition, we are designing a wide array of new software products to address our
customers' growing need for convergent communications, such as unified
messaging products and convergent network management solutions.

The focus of our network solutions research is on new network technology
development and the evaluation of solutions based on multi-vendor products. The
focus of our software research is on architecture study, software development
platforms, commonly used libraries and other software management tools. We plan
to expand our research and development efforts further by adding more personnel
and financial resources.

CUSTOMERS

Our customers currently consist primarily of Chinese telecommunications service
providers, including China Telecom, China Unicom, China Mobile, China Netcom
and China Railcom. We are continuing to expand and diversify our customer base.
For the year ended December 31, 2001, China Telecom accounted for 45% of our
revenues net of hardware costs, while China Unicom accounted for 28%, China
Mobile accounted for 13%, China Netcom accounted for 6%, and other customers
accounted for 8%. Our customer base is changing and diversifying quickly as the
overall China telecommunications market grows due to deregulation and
significant

                                       15
<PAGE>

investment from several new players. This diversification not only reduces our
dependence on a small group of large customers, but also causes us to expect
strong and consistent growth in revenues net of hardware costs on a year over
year basis. For more information on recent restructurings and regulatory
changes affecting our customers, please see the discussion above under the
heading "Industry Background" and the discussion below under the heading
"Government Regulation."

CHINA TELECOM. China Telecom is the oldest voice and data communications
provider in China and has been our largest customer to date. As a result of the
restructuring of China's telecommunications industry that began in February
1999, China Telecom operates only fixed-line networks and provides fixed-line
telephone and data communications services. China Telecom and its various
provincial subsidiaries accounted for almost all of our revenues in 1997 and
1998. As part of the industry reorganization announced by China's State Council
in December 2001, the northern division of China Telecom (comprising ten
provinces) will merge with China Netcom and Jitong Communication, and will use
the China Netcom name. The southern division (comprising 21 provinces) will
continue to operate under the China Telecom name.

CHINA UNICOM. China Unicom was established in 1994 and is the second-largest
national public telecommunications network in China. China Unicom is China's
second largest mobile operator, providing services to over 39 million mobile
customers through its digital mobile (GSM) network and since January 2002, its
second generation, or 2G, CDMA network. China Unicom also provides a wide array
of services, including long distance telephone services, local telephone
services, data communications services, paging services, communications value-
added services and other communications services.

CHINA MOBILE. China Mobile was established in July 1999 to operate mobile
telecommunications networks nationwide that had previously been operated by
China Telecom. China Mobile is the largest wireless telephony service provider
in China with over 101 million subscribers and, like China Telecom, has various
provincial subsidiaries throughout China which are responsible for local
networks. China Mobile's digital mobile (GSM) network covers all of China's
cities and 96% of its counties. In addition to mobile services, the company
operates an Internet protocol telephony service and is an Internet service
provider.

CHINA NETCOM. China Netcom was formed in 1999 to build and operate a high-speed
telecommunications network initially linking 15 large Chinese cities. The new
network, one of the world's fastest fiber-optic backbones, is based entirely on
Internet protocol technology. It will also take advantage of existing cable
television networks, which will be linked to the system via fiber-optic and
fixed-wireless technology. China Netcom also acts as a bandwidth wholesaler for
Internet service providers, corporations and other telecom carriers in China.
As part of the industry reorganization announced by China's State Council in
December 2001, China Netcom will be merged with the northern division of China
Telecom and Jitong Communication, and the combined business will operate under
the China Netcom name.

CHINA RAILCOM. China Railcom was established in December 2000 and is the newest
of the six licensed telecommunications service providers in China. With the
second largest fixed communications network in China, it is a multi-service
vendor, providing long distance and local fixed-line services, as well as data
communications services. China Railcom is 51% owned by China's Ministry of
Railway and 49% owned by 14 railway bureaus.

SALES AND MARKETING

Sales

We market and sell our services and products primarily through our direct sales
force. Our direct sales professionals provide business consulting, promote pre-
sale activity and manage our relations with our customers. Our sales teams are
organized along the lines of our product offerings: network infrastructure
solutions, operation support system solutions, service application solutions
and network security solutions. We employ direct sales personnel in regional
offices in Beijing, Shanghai, Wuhan, Chengdu and Guangzhou.

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<PAGE>

We classify market segments and target opportunities on national and regional
levels. This classification helps us determine our primary sales targets and
prepare monthly and quarterly sales forecasts. Sales quotas are assigned to all
sales personnel according to annual sales plans. We approve target projects,
develop detailed sales promotion strategies and prepare reports on order
forecast, technical evaluation, sales budgeting expense, schedules and
competition analysis. After a report has been approved, a sales team is
appointed consisting of sales personnel, system design engineers and a senior
system architect.

Marketing

Our marketing strategy focuses on building long-term relationships with our
customers, educating them about technological developments and generating their
interest in our services and products. Historically, our marketing and sales
efforts were combined. As our businesses expanded and the marketplace became
increasingly sophisticated, we established a dedicated marketing department in
1998. Currently, we have independent marketing teams for each of our three
strategic business units (network infrastructure solutions, operation support
system solutions and service application solutions), and Marsec also has its
own marketing team for network security solutions. These departments
continuously analyze the needs of our customers, our competitive environment,
the market potential of our products and services, and the effectiveness of our
pricing and distribution channel strategies.

In addition to our marketing departments, we have a market communications, or
marcom, department, which engages in a number of activities aimed at increasing
awareness of our products and services. These activities include:

..  managing and maintaining our web site;

..  producing corporate and product brochures and monthly customer newsletters;

..  conducting seminars and media conferences;

..  conducting ongoing public relations programs; and

..  creating and placing advertisements.

COMPETITION

The market for telecommunications and Internet infrastructure solutions in
China is new and rapidly changing. Our competitors in the network
infrastructure solutions market mainly include domestic systems integrators
such as Zoom Networks and Openet Information Technology (Shenzhen) Corporation.
Although we are a leading player in this market, there are many large
multinational companies with substantial, existing information technology
operations in other markets in China, that have significantly greater
financial, technological, marketing and human resources than us. Should they
decide to enter the network infrastructure solutions market, this could hurt
our profitability and erode our market share.

In the operation support system solutions market, we compete with both
international and local software and solutions providers. In the online billing
segment, we compete primarily with Portal Software, MIND C.T.I. Ltd. and Zoom
Networks, and in the wireless billing segment, we compete with more than ten
local competitors. Currently, due in part to a stringent approval system for
providers of wireless billing software in China and competitive pricing offered
by domestic companies, some multinational information technology companies have
been deterred from entering this market. In view of the gradual deregulation of
the Chinese telecommunications industry and China's accession to the WTO, we
anticipate new competitors will enter the operation support system solutions
market.

The service application solutions sector is highly competitive. Our principal
competitor in this sector is Openwave Systems Inc. (formerly Software.com).

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<PAGE>

In the network security solutions market, we mainly compete with Information
Security One Limited, Nsfocus Information Technology Co., Ltd., and 21ViaNet
China Inc. An increasing number of companies are devoting their resources to
this sector in developing network security products. Through mergers and
acquisitions, many information technology companies are entering the network
security solutions market as part of their strategy of providing a full range
of system integration services.

We believe that we have competitive advantages in all of our product and
service segments due to our network infrastructure technology leadership,
combined international and China expertise, established customer relationships
and our high performance, scalable, flexible software. Our competitors, some of
whom have greater financial, technical and human resources than us, may be able
to respond more quickly to new and emerging technologies and changes in
customer requirements or devote greater resources to the development, promotion
and sale of new products or services. It is possible that competition in the
form of new competitors or alliances, joint ventures or consolidation among
existing competitors may decrease our market share. Increased competition could
result in lower personnel utilization rates, billing rate reductions, fewer
customer engagements, reduced gross margins and loss of market share, any one
of which could materially and adversely affect our profits and overall
financial condition.

GOVERNMENT REGULATION

The Chinese government has generally encouraged the development of the
information technology industry, and the products and services we offer are not
currently subject to extensive government regulation. The Internet and
telecommunications industry in which our customers operate, however, is subject
to government regulation and control. Currently, all the major
telecommunications and Internet service providers in China are primarily state
owned or state controlled and their business decisions and strategies are
affected by the government's budgeting and spending plans. In addition, they
are required to comply with regulations and rules promulgated from time to time
by China's Ministry of Information Industry, or MII, and other ministries and
government departments.

In September 2000, China published the Regulations of the People's Republic of
China on Telecommunications, also known as the Telecommunications Regulations.
The Telecommunications Regulations are the first comprehensive set of
regulations governing the conduct of telecommunications businesses in China.
The principles expressed by the Telecommunications Regulations reflected on
China's commitment to accede to the WTO. In particular, the Telecommunications
Regulations set out in clear terms the framework for operational licensing,
interconnection, the setting of telecommunications charges and standards of
telecommunications services in China.

The Circular on the Structural Adjustment of Telecommunication Charges, issued
in December of 2000, reduced telecommunications service and Internet service
fees in China, such as Internet access fees and leased line renting fees,
permitting Internet protocol telephony operators, paging business operators,
web hosting service providers and certain other value added service providers
to set their prices based on their own cost structure and competitive strategy.
We believe this Circular will have a positive impact on our business because,
with the decline in telecommunications and Internet services fees, China's
Internet population and tele-density are likely to grow, which in turn will
likely generate more demand for our products and services. In addition, with
declining leased line tariffs, more and more enterprises will be able to afford
to use the Internet as a business tool.

Under regulations introduced in December of 2001, foreign investors are now
permitted to invest in China's telecommunications industry through Sino-foreign
joint ventures. These important regulatory changes came about as a result of
China's accession to the WTO. The new regulations, known as the Provisions on
the Administration of Foreign-Invested Telecommunications Enterprises, are
expected to be implemented over a six year schedule agreed upon in connection
with China's WTO accession. Under the schedule, by the end of 2007 foreign
investors will be permitted to own up to 49% of fixed-line and mobile
telecommunications businesses in China, and up to 50% of so-called value-added
telecommunications businesses, which include Internet service providers and
Internet content providers.

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Notwithstanding the recent developments in China's telecommunications
regulations, many laws and regulations applicable to the telecommunications
industry in China are still evolving and unsettled. There are certain approval
and registration procedures in place for Internet users who wish to have access
to Internet-related services. In September 2000, China's State Council approved
the Administrative Measures on Internet Information Services. The
Administrative Measures on Internet Information Services provide for control
and censoring of information on the Internet. A restrictive regulatory
environment for our customers could adversely affect our business. For a
further discussion of the changing regulatory environment in China, please see
the discussion below under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation--Factors Affecting Our Operating
Results and Our Common Stock--Laws and regulations applicable to the Internet
in China remain unsettled and could have a material adverse affect on the
Internet's growth and thereby have a material adverse affect on our business."

INTELLECTUAL PROPERTY

Our success and ability to compete depends in part upon our intellectual
property rights, which we protect through a combination of copyright, trade
secret law and trademark law. We have filed five trademark applications with
the United States Patent and Trademark Office, two of which have been passed on
to registration and three of which are currently pending. Our trademark
application covering AsiaInfo's logo and design has been granted by the
Trademark Bureau of the State Administration of Industry and Commerce in China.
In addition, we have filed three trademark applications with the Hong Kong
Trade Marks Registry for AsiaInfo's logo, which are pending. We have also
completed the registration of the copyrights for 43 versions of our software
products with the State Copyright Bureau in China, including the AIOBS series
and the AIMC series. However, although we may apply for such protection in the
future, we have not applied for copyright protection in other jurisdictions
(including the United States, which does not require registration for
protection of copyrights). We do not own any patents and have not filed any
patent applications, as we do not believe that the benefits of patent
protection outweigh the costs of filing and updating patents for our software
products.

We enter into confidentiality agreements with our employees and consultants,
and control access to and distribution of our documentation and other licensed
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our licensed services or technology without
authorization, or to develop similar technology independently. Since the
Chinese legal system in general, and the intellectual property regime in
particular, is relatively weak, it is often difficult to enforce intellectual
property rights in China. In addition, there are other countries where
effective copyright, trademark and trade secret protection may be unavailable
or limited, and the global nature of the Internet makes it virtually impossible
to control the ultimate destination of certain of our products. Policing
unauthorized use of our licensed technology is difficult and there can be no
assurance that the steps we take will prevent misappropriation or infringement
of our proprietary technology. In addition, litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others, which could result in substantial costs and diversion of our resources
and could have a material adverse effect on our business, results of operations
and financial condition.

EMPLOYEES

Including our recent acquisition of Bonson Information Technology Holdings
Limited, we now have over 850 employees. Most of our employees are represented
by a labor union. Thus far, our operations have not been significantly
disrupted by labor disputes.

We devote significant resources to recruiting professionals with relevant
industry experience. Most of our senior management and technical employees are
western educated Chinese professionals with substantial expertise in
information technologies systems integration and application software
development. We believe that our success in attracting and retaining highly
skilled technical employees and sales and marketing personnel is largely a
product of our commitment to providing a motivating and interactive work
environment that features

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<PAGE>

continuous and extensive professional development opportunities, as well as
frequent and open communications at all levels of the organization. As an
incentive, we have created an employee stock option plan that includes vesting
provisions designed to encourage long term employment.

ITEM 2. Properties

Our principal sales, marketing and development facilities and administrative
offices currently occupy approximately 7,300 square meters in a new building
located in the Beijing Zhongguancun Science Park. The lease has a term of five
years, which expires in February 2005, subject to termination in 2003 if an
agreement on the adjustment of rent cannot be reached at that time. In
addition, we have regional field support offices in various cities in China,
namely Shanghai, Guangzhou, Chengdu, Hangzhou and Wuhan, as well as a regional
office in Santa Clara, California.

ITEM 3. Legal Proceedings

On December 4, 2001, a securities class action case was filed in New York City
against us, certain of our current officers and directors and the underwriters
of our initial public offering, or IPO. The lawsuit alleges violations of the
federal securities laws and has been docketed in the United States District
Court for the Southern District of New York as Hassan v. AsiaInfo Holdings,
Inc., et al. The lawsuit alleges, among other things, that the underwriters of
our IPO improperly required their customers to pay the underwriters excessive
commissions and to agree to buy additional shares of our common stock in the
aftermarket as conditions of receiving shares in our IPO. The lawsuit further
claims that these supposed practices of the underwriters should have been
disclosed in our IPO prospectus and registration statement. The suit seeks
rescission of the plaintiffs' alleged purchases of our common stock as well as
unspecified damages. In addition to the case against us, various other
plaintiffs have filed approximately 1,000 other, substantially similar class
action cases against approximately 300 other publicly traded companies and
their IPO underwriters in New York City, which along with the case against us
have all been transferred to a single federal district judge for purposes of
case management. We intend to seek dismissal of the complaint on various legal
grounds at the appropriate time, but no definitive schedule has been set by the
Court for the filing of such a motion. In addition, we believe that the
underwriters may have an obligation to indemnify us for the legal fees and
other costs of defending this suit and that our directors' and officers'
liability insurance policies will also cover the defense and potential exposure
or settlement of the suit.

ITEM 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of our security holders.

                                       20
<PAGE>

                                    PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

Our common stock has been quoted on the Nasdaq National Market under the symbol
"ASIA" since our initial public offering on March 2, 2000. The following table
sets forth, for the periods indicated, the high and low sale prices per share
of our common stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                 High     Low
                                                               -----------------
                                                               (in U.S. dollars)
<S>                                                            <C>      <C>
2001:
 Fourth Quarter...............................................    21.25    11.10
 Third Quarter................................................    20.00     9.37
 Second Quarter...............................................    19.75     9.63
 First Quarter................................................    18.81     7.19
2000:
 Fourth Quarter...............................................    19.50     7.38
 Third Quarter................................................    48.00    17.06
 Second Quarter...............................................    59.44    30.50
 First Quarter (from March 3, 2000)...........................    99.56    60.50
</TABLE>

As of March 1, 2002, we had approximately 197 holders of record of our common
stock.

We have never declared or paid any dividends on our capital stock, and do not
intend to pay dividends on our shares of common stock in the forseeable future.
Instead, we intend to retain all earnings for use in our business. Future cash
dividends, if any, will be at the discretion of our board of directors and will
depend upon our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and other
factors as the board of directors may deem relevant. Any dividends we declare
will be paid in U.S. dollars.

As a holding company, our primary source of cash for the payment of dividends
are distributions, if any, from our subsidiaries. Our operating subsidiaries
were established in China and are able to make distributions of profits to us
only if they satisfy certain conditions under Chinese law, including the
satisfaction of tax liabilities, recovery of losses from previous years and
mandatory contributions to statutory reserves. In addition, loan agreements and
contractual arrangements we enter into in the future may also restrict our
ability to pay dividends.

On March 2, 2000, our Registration Statement on Form S-1 covering the offering
of 5,000,000 shares of our common stock (No. 333-93199) was declared effective.
The underwriters in the offering exercised an over-allotment option to purchase
an additional 750,000 shares of our common stock. The total price to the public
for the shares offered and sold was $138,000,000. The net proceeds of the
offering (after deducting expenses) were approximately $126,610,000. From the
effective date of the Registration Statement through December 31, 2001, the net
proceeds have been used for the following purposes:

<TABLE>
<S>                                                                <C>
Purchase and installation of machinery and equipment.............. $  6,350,000
Temporary investments, including cash and cash equivalents........   85,610,000
Investments in subsidiaries.......................................   15,430,000
Research and development and sales and marketing expenses.........   19,220,000
                                                                   ------------
                                                                   $126,610,000
                                                                   ============
</TABLE>

The net proceeds will be used for general corporate purposes, including working
capital, and expenses such as research and development and sales and marketing.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses or products. None of the net proceeds of the offering
have been paid directly or indirectly to our directors, officers or their
associates, to persons owning 10% or more of our common stock, or to our
affiliates.

                                       21
<PAGE>

ITEM 6. Selected Financial Data

The following table sets forth our selected consolidated financial data. You
should read this information together with our consolidated financial
statements and the notes to those statements included in this report, and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 23 of this report. The selected statements of
operations data and consolidated balance sheet data in the table below have
been derived from our audited consolidated financial statements. Historical
results are not necessarily indicative of the results to be expected in the
future.

<TABLE>
<CAPTION>
                                        Years Ended December 31,
                         ----------------------------------------------------------
                            2001        2000        1999        1998        1997
                         ----------  ----------  ----------  ----------  ----------
                         (Amounts in thousands of U.S. dollars except share and
                                            per share data)
<S>                      <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENTS
 OF
 OPERATIONS DATA:
Revenues:
 Network solutions...... $  161,131  $  158,696  $   53,786  $   41,964  $   36,509
 Software solutions.....     27,875      17,367       6,494       2,258         775
                         ----------  ----------  ----------  ----------  ----------
  Total revenues........    189,006     176,063      60,280      44,222      37,284
                         ----------  ----------  ----------  ----------  ----------
Cost of revenues:
 Network solutions......    129,712     141,668      41,959      32,188      29,551
 Software solutions.....      3,821       3,030           4           1           5
                         ----------  ----------  ----------  ----------  ----------
  Total cost of
   revenues.............    133,533     144,698      41,963      32,189      29,556
                         ----------  ----------  ----------  ----------  ----------
Gross profit............     55,473      31,365      18,317      12,033       7,728
                         ----------  ----------  ----------  ----------  ----------
Operating expenses:
 Sales and marketing....     21,768      19,734       8,768       2,408         835
 General and
  administrative........     14,905      12,893       8,167       6,463       6,167
 Research and
  development...........      7,304       5,974       2,838       1,436         394
 Amortization of
  deferred stock
  compensation..........      1,144       2,209       3,508       1,045       1,045
                         ----------  ----------  ----------  ----------  ----------
  Total operating
   expenses.............     45,121      40,810      23,281      11,352       8,441
                         ----------  ----------  ----------  ----------  ----------
Income (loss) from
 operations.............     10,352      (9,445)     (4,964)        681        (713)
Other income (expense),
 net....................      6,107       6,865         352         477          31
Income tax expense
 (benefit)..............      3,444         218         383        (256)        267
Minority interests in
 (income) loss of
 consolidated
 subsidiaries...........       (396)         32          84         122         567
Equity in loss of
 affiliates.............       (885)         --         (35)         --          --
                         ----------  ----------  ----------  ----------  ----------
Net income (loss)....... $   11,734  $   (2,766) $   (4,946) $    1,536  $     (382)
                         ==========  ==========  ==========  ==========  ==========
Net income (loss) per
 share:
 Basic.................. $     0.28  $    (0.07) $    (0.34) $     0.11  $    (0.03)
                         ==========  ==========  ==========  ==========  ==========
 Diluted(/1/)........... $     0.26  $    (0.07) $    (0.34) $     0.05  $    (0.03)
                         ==========  ==========  ==========  ==========  ==========
Shares used in
 computation:
 Basic.................. 41,525,159  37,239,649  14,630,145  13,616,412  13,530,000
                         ==========  ==========  ==========  ==========  ==========
 Diluted(/1/)........... 45,924,724  37,239,649  14,630,145  31,765,534  13,530,000
                         ==========  ==========  ==========  ==========  ==========
ADDITIONAL DATA:
Total revenues net of
 hardware costs......... $   71,391  $   44,578  $   25,221  $   19,286  $   11,684
</TABLE>

                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                 As of December 31,
                                       ---------------------------------------
                                         2001    2000    1999    1998   1997
                                       -------- ------- ------- ------ -------
<S>                                    <C>      <C>     <C>     <C>    <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $110,635 $48,834 $25,404 $9,749 $24,066
Total current assets..................  232,836 254,190  64,773 42,805  36,131
Total assets..........................  245,860 264,003  71,427 45,359  37,085
Total liabilities (excluding minority
 interests)...........................   60,460  95,206  31,639 26,048  20,008
Total stockholders' equity............  184,790 168,609  39,788 19,247  16,179
</TABLE>
--------
(1) In 1997, 1999 and 2000 the diluted net loss per share computation excludes
    shares of common stock issuable under stock option plans, upon the
    exercise of warrants and upon the automatic conversion of our convertible
    preferred stock which, if included, would have had an antidilutive effect
    on the net loss reported in those periods. In 2001, the Company had
    options outstanding which could potentially dilute earnings per share in
    the future, but were excluded from the computation of diluted earnings per
    share in the year, as their exercise prices were above the average market
    values in the year. See note 10 of notes to consolidated financial
    statements for a detailed explanation of the determination of the shares
    used in computing basic and diluted net income (loss) per share.

ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation

OVERVIEW

We are a leading provider of telecommunications network integration and
management solutions in China. Our software products and network services
enable our customers to build, maintain, operate, manage and continuously
improve their Internet and telecommunications infrastructure.

We commenced our operations in Texas in 1993 and moved our operations from
Texas to China in 1995. We began generating significant network solutions
revenues in 1996 and significant software solutions revenues in 1998. While we
source hardware for our customers through our U.S. parent company, AsiaInfo
Holdings, Inc., we conduct the bulk of our business through our wholly-owned
operating subsidiary, AsiaInfo Technologies (China) Inc., or AsiaInfo
Technologies, which is a Chinese company.

Historically, our customer base was concentrated, with sales to China Telecom
and its provincial subsidiaries accounting for approximately 80%, 35% and 45%
of our revenues net of hardware costs in fiscal 1999, 2000 and 2001,
respectively. However, our customer base has diversified significantly and, at
December 31, 2001, approximately 23% of our backlog net of hardware costs was
attributable to China Telecom, while 37% was attributable to China Unicom, 22%
was attributable to China Mobile and 6% was attributable to China Netcom.

In the years ended December 31, 2001 and 2000, we entered into software and
network solutions contracts with China Netcom with a total contract sum
(including hardware pass-through) of approximately $9.3 million and $30
million, respectively. Edward Tian, a director and major shareholder of our
company, is the Chief Executive Officer of China Netcom. Revenue recognized in
2001 and 2000 from such contracts was approximately $17 million and $18
million, respectively. Accounts receivable due from China Netcom as of
December 31, 2001 and 2000 were approximately $2.2 million and $2.9 million,
respectively.

We believe that there are opportunities for us to expand into new business
areas and to grow our business both organically and through acquisitions. On
February 6, 2002, we completed our acquisition of Bonson Information
Technology Holdings Limited, or Bonson, a leading provider of operation
support system solutions to wireless telecommunications carriers in China. The
consideration paid to the former shareholders of Bonson consisted of
approximately $30 million in cash and approximately $18.4 million in shares of
our common stock. The cash we have paid and will pay in connection with the
acquisition has been and will be paid out of our existing cash reserves. On a
stand-alone basis in 2002, we anticipate that Bonson will generate net revenue
of $12 million to $13 million, operating profit of $4.5 million to $5.5
million, and net income of $3.8 million to $4.6 million. Bonson's operating
results will be consolidated with our operating results from February 6, 2002,
and the acquisition is expected to add approximately $0.08 to $0.10 cents to
our 2002 earnings per share. In view of this acquisition and potential future
acquisitions we may engage in, our historical operating results may not be an
adequate basis on which to evaluate our prospects.

                                      23
<PAGE>

As of December 31, 2001, we had invested a total of $2.7 million in our
majority-owned network security business, Marsec System Inc., or Marsec, which
focuses on high-end security services for our customers. Marsec generated sales
orders net of hardware costs of approximately $3 million in the year ended
December 31, 2001, and we anticipate that it will generate total sales orders
net of hardware costs of approximately $4-5 million in 2002. Marsec's operating
results are consolidated with our operating results for financial reporting
purposes.

On April 27, 2001, we invested approximately $6.2 million to acquire a 14.25%
equity interest in Intrinsic Technology (Holdings), Ltd., or Intrinsic, a
company organized in the Cayman Islands and engaged in wireless Internet
application and development through its two wholly-owned subsidiaries in China.
We account for our interest in Intrinsic using the equity method.

CRITICAL ACCOUNTING POLICIES

We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those
related to revenues and cost of revenues under customer contracts, warranty
obligations, bad debts, income taxes, investment in affiliate, goodwill and
litigation. We base our estimates and judgments on historical experience and on
various other factors that we believe are reasonable. Actual results may differ
form these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

REVENUES AND COST OF REVENUES. We derive a significant portion of our revenue
from fixed-price contracts using the percentage of completion method, which
relies on estimates of total expected contract revenue and costs. We follow
this method since reasonably dependable estimates of the revenue and costs
applicable to various stages of a contract can be made. Recognized revenues and
profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are charged to income in the period in which the
facts that give rise to the revisions become known. Accordingly, changes in our
estimates would impact our future operating results.

WARRANTY OBLIGATIONS. We record our estimate of warranty costs at the time
revenue is recognized. While we obtain manufacturers' warranties for hardware
we sell, we record our obligations based on historical experience. Future
warranty costs, which vary from our past experience, could require us to adjust
our accrual for warranty obligations, thereby impacting our future operating
results.

BAD DEBTS. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to change, changes to these
allowances may be required, which would impact our future operating results.

INCOME TAXES. We record a valuation allowance to reduce our deferred tax assets
to the amount that we believe is more likely than not to be realized. In the
event we were to determine that we would be able to realize our deferred tax
assets in the future in excess of their recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should we determine

                                       24
<PAGE>

that we would not be able to realize all or part of our net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.

INVESTMENT IN AFFILIATE. We account for our 14.25% interest in Intrinsic using
the equity method. Intrinsic has incurred operating losses since our investment
in April 2001. Sustained operating losses of this affiliate or other adverse
events could result in our inability to recover the carrying value of the
investment, which may require us to record an impairment charge in the future.
Through December 31, 2001, we have not recorded an impairment charge for this
investment.

GOODWILL. We make assumptions regarding estimated future cash flows and other
factors to determine the fair value of goodwill. If these estimates or their
related assumptions change in the future, we may be required to record an
impairment charge if the estimated fair value of goodwill is less than its
recorded amount. Through December 31, 2001, we have not recorded an impairment
charge for goodwill. Beginning January 1, 2002, we will be required to adopt
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," and will be required to analyze goodwill for impairment
issues during the first six months of fiscal 2002, and on a periodic basis
thereafter.

LITIGATION. We record contingent liabilities relating to litigation or other
loss contingencies when we believe that the likelihood of loss is probable and
the amount of the loss can reasonably be estimated. Changes in judgments of
outcome and estimated losses are recorded, as necessary, in the period such
changes are determined or become known. Any changes in estimates would impact
our future operating results. Significant contingent liabilities, which we
believe are at least possible, are disclosed in the notes to our consolidated
financial statements.

REVENUES

At the beginning of 2002, we reorganized our operations into three strategic
business units: network integration solutions, operation support system
solutions, and service application solutions. These strategic business units--
along with Marsec, which offers network security solutions--comprise our four
product offerings. Notwithstanding this organizational structure, we continue
to analyze our revenues on the basis of our two principal types of revenues:
network solutions revenues and software solutions revenues. For practical
reasons, we cannot reclassify and present our financial information to
correspond to our four product offerings prior to 2002. Although each of our
strategic business units generates both network solutions revenues and software
solutions revenues, in 2002 the network integration solutions unit is expected
to generate approximately 70 to 80% of our total network solutions revenues
(net of hardware pass-through) and the operation support system solutions and
service application solutions units are expected to generate approximately 90%
of our total software solutions revenues.

Although we account for our network solutions revenues on a gross basis,
inclusive of hardware acquisition costs that are passed through to our
customers, we manage our business internally based on revenues net of hardware
costs, which is consistent with our strategy of providing our customers with
high value IT professional services while gradually outsourcing lower-end
services such as hardware acquisition and installation. This strategy may
result in lower growth rates for total revenues as against prior periods, but
will not adversely impact revenues net of hardware costs. The following table
shows our revenue breakdown by business line on this basis:

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                   ----------------------------
                                                   2001  2000  1999  1998  1997
                                                   ----  ----  ----  ----  ----
<S>                                                <C>   <C>   <C>   <C>   <C>
SOURCES OF REVENUES
Network solutions net of hardware costs...........  61%   61%   74%   88%   93%
Software solutions................................  39%   39%   26%   12%    7%
                                                   ---   ---   ---   ---   ---
  Total revenues net of hardware costs............ 100%  100%  100%  100%  100%
                                                   ===   ===   ===   ===   ===
</TABLE>

                                       25
<PAGE>

As demonstrated by the foregoing table, software solutions revenues have
accounted for an increasing portion of our total revenues net of hardware costs
over the past several years, increasing from 7% in 1997 to 39% in 2000 and
2001. We anticipate that software solutions revenues will account for
approximately 40 to 45% of our total net revenues for 2002 (inclusive of
Bonson).

During 2001, we included as a component of software revenues the software
service revenue that had previously been included as a component of network
solutions revenue. Such change in classification is consistent with our
internal reporting structure through December 31, 2001. We have reclassified
prior year amounts to conform with the current year presentation.

BACKLOG. Most of our revenues are derived from customers' orders under separate
binding contracts for hardware, network solutions and software solutions. These
contracts constitute our backlog at any given time. Revenues for hardware,
network solutions and software solutions are recognized during the course of
the relevant project, as described in more detail below. At December 31, 2001,
our revenue backlog net of hardware costs was $44 million, 57% of which related
to network solutions and 43% of which related to software solutions. At
December 31, 2000 and 1999 our backlog net of hardware costs was $36 million
and $18 million, respectively.

NETWORK SOLUTIONS REVENUES. Network solutions revenues consist of hardware
sales for equipment procured by us on behalf of our customers from hardware
vendors, as well as services for planning, design, systems integration and
training. We procure for and sell hardware to our customers as part of our
total solutions strategy. We minimize our exposure to hardware risks by
sourcing equipment from hardware vendors against letters of credit from our
customers. We believe that as the telecommunications-related market in China
develops our customers will increasingly purchase hardware directly from
hardware vendors and pay us separately for the full value of our professional
services.

We generally charge a fixed price for network solutions projects and recognize
revenue based on the percentage of completion of the project. We use labor
costs and direct project expenses to determine the stage of completion, except
for revenues associated with the procurement of hardware on behalf of the
customer. We recognize such hardware-related revenues upon delivery. Since a
large part of the cost of a network solutions project often relates to
hardware, the timing of hardware delivery can cause our quarterly gross
revenues to fluctuate significantly. However, these fluctuations do not
significantly affect our gross profit because hardware-related revenues
generally approximate the costs of the hardware.

Network solutions projects generally have a life of nine to twelve months,
during which there are three key milestones. The first milestone occurs when
the hardware is delivered, which is usually between three and four months after
signing the contract. The second milestone in a network solutions project is at
primary acceptance, which usually occurs around five months after hardware
delivery. The third milestone is final acceptance, which occurs when the
customer agrees that we have satisfactorily completed all of our work on the
project.

SOFTWARE SOLUTIONS REVENUES. Software solutions revenues include two types of
revenues--software license revenues and software service revenues. Software
license revenues consist of fees received from customers for licenses to use
our software products in perpetuity, up to a specified maximum number of users.
Our customers must purchase additional user licenses from us when the number of
users exceeds the specified maximum. Our software license revenues also include
the benefit of value added tax rebates on software license sales, which are
part of the Chinese government's policy of encouraging China's software
industry. Software service revenues consist of revenues from software
installation, customization, training and other services. To date,
substantially all of our revenue from both software licenses and software
services has been contract-related, meaning that it has been derived from
customer orders requiring some modifications or customization of our software.
We recognize all software revenue that is contract-related over the
installation and customization periods, based on the percentage of completion
of the project as measured by labor costs and direct project expenses.

The foregoing network solutions and software solutions revenue recognition
policies result in our recognizing certain revenues even though we are not due
to receive the corresponding cash payment under the relevant

                                       26
<PAGE>

contract. In the case of hardware sales, the customer typically holds back
around 10 to 20% of the hardware contract amount at the time of delivery. In
the case of services, while there may be some down payment, most of the
revenues becomes billable at the time of primary acceptance. The unpaid amounts
for hardware and services become payable at the time of final project
acceptance, when payment of all unpaid contract amounts is due. When we
recognize revenues for which payments are not yet due, we book unbilled
accounts receivable until the corresponding amounts become payable.

COST OF REVENUES

NETWORK SOLUTIONS COSTS. Network solutions costs consist primarily of third
party hardware costs, compensation and travel expenses for the professionals
involved in designing and implementing projects, and hardware warranty costs.
We recognize hardware costs in full upon delivery of the hardware to our
customers. In order to minimize our working capital requirements, we generally
obtain from our hardware vendors payment terms that are timed to permit us to
receive payment from our customers for the hardware before our payments to
hardware vendors are due. However, in large projects we sometimes obtain less
favorable payment terms from our customers, thereby increasing our working
capital requirements. We accrue hardware warranty costs when hardware revenue
is fully recognized upon final acceptance. We obtain manufacturers' warranties
for hardware we sell, which cover a portion of the warranties that we give to
our customers. We currently accrue 0.8% of hardware sales to cover potential
warranty expenses. This estimate of warranty cost is based on our current
experience with contracts for which the warranty period has expired.

SOFTWARE SOLUTIONS COSTS. Software license costs consist primarily of packaging
and written manual expenses. The costs associated with creating and enhancing
software are classified as research and development expenses as incurred.
Software services costs consist primarily of compensation and travel expenses
for the professionals involved in modifying, customizing or installing our
software products and in providing consultation, training and support services.

OPERATING EXPENSES

Our operating expenses are comprised of sales and marketing expenses, research
and development expenses, general and administrative expenses, and amortization
expenses for goodwill and deferred stock compensation. Operating expenses
consist primarily of compensation expenses, which have risen as our business
has grown and we have hired new personnel. We review salaries on an annual
basis in order to ensure that we remain competitive with the market, and do not
foresee the need to make material increases in the near term. However, we may
be required to do so from time to time in the future.

Research and development expenses relate almost entirely to the development of
new software and the enhancement and upgrading of existing software. We expense
these costs as they are incurred.

We provide most of our officers, employees and directors with stock options. In
the past, we granted a number of options with exercise prices below the fair
market value of the related shares at the time of grant, resulting in our
incurring deferred compensation expenses. Most of the options granted with
exercise prices below fair market value on the date of grant were issued prior
to 1997. We do not, however, intend to issue options below fair market value in
the future. Therefore, our deferred compensation expenses have been
significantly higher historically than we expect them to be in future years.
The difference between the exercise price and the fair market value of the
related shares is amortized over the vesting period of the options and
reflected on our income statement as amortization of deferred stock
compensation. See note 15 of our notes to consolidated financial statements
included in this report.

We make bad debt provisions for accounts receivable balances based on
management's assessment of the recoverability of revenues in accordance with
the aging of the accounts receivable. Because our client base is continually
expanding to include smaller telecommunications and Internet service providers,
we revisit our estimates on collectibility on a periodic basis.

                                       27
<PAGE>

TAXES

Except for hardware procurement and resale, we conduct substantially all of our
business through our Chinese operating subsidiaries. Our Chinese subsidiaries
are generally subject to a 30% state corporate income tax and a 3% local income
tax. AsiaInfo Technologies, our principal operating subsidiary, is classified
as a "high technology" company for purposes of Chinese tax law and, as such, is
entitled to preferential tax treatment in China. AsiaInfo Technologies operated
free of Chinese state corporate income tax for three years, beginning with its
first year of operation, and was entitled to a 50% tax reduction for the
subsequent three years. The tax holiday for AsiaInfo Technologies expired on
December 31, 1997 and the 50% tax reduction expired on December 31, 2000.
However, AsiaInfo Technologies received a continuation of its preferential tax
treatment from the local tax authorities in China for an additional three
years, expiring at the end of 2003, which reduces our effective income tax rate
to not less than 10%. In 2001, the effective corporate income tax rate
applicable to AsiaInfo Technologies was 10%. Changes in Chinese tax laws may
adversely affect our future operations.

Sales of hardware in China are subject to a 17% value added tax. Most of our
hardware sales are made through our U.S. parent company and thus are not
subject to the value added tax. We effectively pass these taxes through to our
customers and do not include them in revenues reported in our financial
statements. Sales of software in China are subject to a 17% value added tax.
However, if the net amount of the value added tax payable exceeds 3% of
software sales, the excess portion of the value added tax can be refunded
immediately. We therefore enjoy an effective net value added tax burden of 3%
on software license revenues. This policy is effective until 2010.

We are also subject to U.S. income taxes on revenues generated in the U.S.,
including revenues from our hardware procurement activities in the U.S. and
interest income earned in the U.S.

FOREIGN EXCHANGE

Substantially all of our revenues and expenses relating to hardware sales are
denominated in U.S. dollars, and substantially all of our revenues and expenses
relating to the service component of our network solutions business and
software business are denominated in Renminbi. Although, in general, our
exposure to foreign exchange risks should be limited, the value of our shares
will be affected by the foreign exchange rate between the U.S. dollars and
Renminbi because the value of our business is effectively denominated in
Renminbi, while our shares are traded in U.S. dollars. Furthermore, a decline
in the value of Renminbi could reduce the U.S. dollar equivalent of the value
of the earnings from, and our investment in, our subsidiaries in China.

CONSOLIDATED RESULTS OF OPERATIONS

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

REVENUES. Total revenues, including hardware pass-through, increased 7% to $189
million in 2001, from $176 million in 2000. Revenues net of hardware costs
increased approximately 60%, to $71.4 million in 2001. Software solutions
revenues were $27.9 million in 2001, representing 39% of total revenues net of
hardware costs and a 61% increase over software solutions revenues from the
previous year. We experienced significant net revenue growth in 2001 as the
overall market for network infrastructure software and solutions continued to
grow in China. Although our net revenues in each quarter of 2001 grew as
compared to the comparable periods in 2001, we experienced a sequential decline
in net revenues during the fourth quarter of 2001. Software solutions revenues
were $6.5 million, down 15% as compared to the preceding quarter, and total net
revenues were $20.0 million, down approximately 1% as compared to the preceding
quarter. This sequential decline was attributable to a slow-down in network
infrastructure spending resulting from the announcement of the restructuring of
certain state-controlled telecommunications companies in China, including China
Telecom. Although the planned restructuring caused some service providers to
delay infrastructure expansion and improvement projects, we anticipate that
spending will resume in the second half of 2002, and that the restructuring
will be a long-term driver of telecommunications infrastructure projects in
China. For more

                                       28
<PAGE>

information on the restructuring, please see the discussion above under the
heading "Item 1. Business--Industry Background."

Looking forward, we anticipate that on a pro forma basis inclusive of Bonson's
operating results, our net revenues will increase 15 to 25% in 2002, from pro
forma net revenue of $80 million in 2001. We expect software solutions revenues
to account for 40 to 45% of total net revenues in 2002.

COST OF REVENUES. Our cost of revenues decreased 7.7% to $133.5 million in
2001, primarily due to a 10.5% decrease in total hardware costs to $117.6
million. This decrease in total hardware costs illustrates our continuing focus
on high-end solutions as opposed to hardware resale in 2001. Our cost of
revenues net of hardware costs increased 20% to $15.9 million in 2001 while our
revenues net of hardware cost increased 60%.

GROSS PROFIT. Our gross profit increased 77% to $55.5 million in 2001. Gross
profit as a percentage of net revenues was 78% in 2001, as compared to 70% in
2000, reflecting a large contribution from our higher-margin software solutions
revenues and our increasing focus on high-end network solutions projects.

OPERATING EXPENSES. Total operating expenses, nearly half of which consisted of
sales and marketing expenses, increased 11% to $45.1 million in 2001. Sales and
marketing expenses for the year grew at a slightly lower rate than total
operating expenses, and decreased substantially to $4.0 million in the fourth
quarter as compared to $6.4 million in the fourth quarter of 2000 and $6.3
million in the immediately preceding quarter. This decrease was a direct result
of effective cost control measures we implemented in the fourth quarter to
counteract the impact of the planned telecommunications industry restructuring
in China. Research and development expenses increased 22% to $7.3 million in
2001. The growth rate in research and development in 2001 was slower as
compared to that in 2000 because our previous research and development
investments have reached a level of scalability. General and administrative
expenses increased 16% to $14.9 million in 2001, and are expected to continue
to grow at a relatively low rate as our business continues to achieve economies
of scale.

OTHER INCOME AND EXPENSES. Other income and expenses, consisting primarily of
net interest income and expense, decreased to income of $6.1 million in 2001
from income of $6.9 million in 2000, primarily due to a decrease in our
interest income attributable to lower interest rates and lower cash balances
held during the year.

INCOME TAX EXPENSE. Income tax expense increased to $3,444,000 in 2001 from
approximately $218,000 in 2000, primarily due to an increase in our net income
for the year ended December 31, 2001.

MINORITY INTEREST. In 2001, minority interest of $396,000 represented the
portion of our income before minority interests attributable to the minority
shareholders of two of our subsidiaries, Marsec and Guangdong Wangying
Information Technology Co. Ltd., or Guangdong Wangying.

EQUITY IN LOSS OF AFFILIATES. In April 2001, we invested $6.2 million in
Intrinsic Technology (Holdings), Ltd., or Intrinsic, for a 14.25% interest in
that company. Our investment in Intrinsic is recorded using the equity method
because we are able to exercise significant influence over the operating and
financial policies of Intrinsic through representation on the company's board
of directors. Our share of loss of $885,000 includes amortization of goodwill
in the amount of approximately $751,000.

NET INCOME (LOSS). Net income increased to $11.7 million in 2001, or $0.26 per
share on a fully diluted basis, as compared to a net loss of $2.8 million in
2000.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

REVENUES. Total revenues increased 192% to $176 million in 2000, from $60.3
million in 1999. Network solutions revenues accounted for $105 million of this
increase due in large part to the UniNET project, which we commenced in 2000 on
behalf of China Unicom. The UniNET project contributed $52 million in hardware
costs, which was 40% of our total hardware costs for the year. Revenues net of
hardware costs increased

                                       29
<PAGE>

approximately 77%, from $25 million in 1999 to $45 million in 2000. Software
solutions revenues were $17.4 million in 2000, representing 39% of revenues net
of hardware costs and a 167% increase over software solutions revenues of $6.5
million in 1999. The growth in software solutions revenues reflected the
overall growth of the Internet-related software market in China and our
increased share of that market, which we believe was attributable to our
investments in software-related research and development and sales and
marketing. In addition, $1.3 million of the increase in software solutions
revenues was attributable to the value added tax rebates discussed above under
the heading "Taxes."

COST OF REVENUES. Our cost of revenues increased 245% to $144.7 million in
2000, from $42.0 million in 1999, primarily due to the high hardware costs
incurred in connection with the UniNET project, as discussed above. Total
hardware costs increased 275% to $131 million in 2000, as compared to $35
million in 1999. Our cost of revenues net of hardware costs increased 91% to
$13.2 million, as compared to $6.9 million in 1999, primarily due to an
increase in our high-end network solutions engineering personnel.

GROSS PROFIT. Our gross profit increased 71% to $31.4 million in 2000 from
$18.3 million in 1999. As a partial result of high hardware costs related to
the UniNET project, gross profit as a percentage of total revenues decreased to
18% in 2000, as compared to 30% in 1999. However, gross profit as a percentage
of revenues net of hardware costs remained relatively constant for 2000 at 70%,
as compared to 73% in 1999.

OPERATING EXPENSES. Operating expenses increased 75% to $40.8 million in 2000,
from $23.3 million in 1999. Sales and marketing expenses increased 125% to
$19.7 million in 2000 from $8.8 million in 1999, primarily as a result of our
aggressive marketing of our software products, which included the creation of a
department devoted exclusively to software marketing. Research and development
expenses increased 110% to $6 million in 2000 from $2.8 million in 1999,
primarily due to increased expenditure on research and development in the area
of convergent billing software and the aggressive upgrading of our AIOBS and
AIMC software products. Our strategy for 2000 was to accelerate spending in
sales and marketing and research and development in order to scale our business
quickly and take advantage of the rapid acceleration of the build out of
China's Internet infrastructure.

General and administrative expenses increased 58% to $12.9 million in 2000 from
$8.2 million in 1999. Included in this amount was $963,672 in amortization of
goodwill resulting from an acquisition we completed in 1999. The overall
increase in general and administrative expenses was partially attributable to
increased regulatory compliance and investor relations expenses related to our
becoming a public company in March of 2000. Amortization of deferred stock
compensation decreased from $3.5 million in 1999 to $2.2 million in 2000
because deferred stock compensation arising from awards in 1996 had been
completely amortized and no new deferred stock compensation has arisen since
October of 1999.

OTHER INCOME AND EXPENSES. Other income and expenses, consisting primarily of
net interest income and expense, increased to income of $6.9 million in 2000
from income of $352,000 in 1999, primarily due to interest income on the
proceeds of our initial public offering in March of 2000.

MINORITY INTEREST. In 2000, minority interest of $31,897 represented the
portion of our loss before minority interests attributable to the other
shareholders of Marsec and Guangdong Wangying.

NET (LOSS) INCOME. Net loss decreased to $2.8 million in 2000 from $4.9 million
in 1999, because we began generating net income in the second quarter of 2000.
For the second, third and fourth quarters of 2000, we had net income of
approximately $434,000, $415,000 and $1.0 million, respectively.

                                       30
<PAGE>

SELECTED UNAUDITED QUARTERLY COMBINED RESULTS OF OPERATIONS

The following table sets forth unaudited quarterly statements of operations
data for the four quarters ended December 31, 2001 and 2000. We believe this
unaudited information has been prepared substantially on the same basis as the
annual audited combined financial statements appearing elsewhere in this
report.

We believe this data includes all necessary adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. You should
read the quarterly data together with the consolidated financial statements and
the notes to those statements appearing elsewhere in this report. The
consolidated results of operations for any quarter are not necessarily
indicative of the operating results for any future period. We expect that our
quarterly revenues may fluctuate significantly.

<TABLE>
<CAPTION>
                                                             Three Months Ended
                         ---------------------------------------------------------------------------------------------
                         December 31, September 30, June 30,  March 31, December 31, September 30, June 30,  March 31,
                             2001         2001        2001      2001        2000         2000        2000      2000
                         ------------ ------------- --------  --------- ------------ ------------- --------  ---------
                                                   (Amounts in thousands of U.S. dollars)
<S>                      <C>          <C>           <C>       <C>       <C>          <C>           <C>       <C>
CONSOLIDATED STATEMENTS
 OF OPERATIONS DATA:
Revenues:
 Network solutions......   $31,127       $86,323    $13,772    $29,909    $38,331       $52,820    $46,446    $21,099
 Software solutions.....     6,518         7,708      7,779      5,870      5,681         5,248      4,645      1,793
                           -------       -------    -------    -------    -------       -------    -------    -------
  Total revenues........    37,645        94,031     21,551     35,779     44,012        58,068     51,091     22,892
Cost of revenues........   (22,340)      (78,491)    (8,202)   (24,500)   (33,104)      (48,278)   (43,100)   (20,216)
                           -------       -------    -------    -------    -------       -------    -------    -------
Gross profit............    15,305        15,540     13,349     11,279     10,908         9,790      7,991      2,676
Operating expenses:
 Sales and marketing....    (3,999)       (6,322)    (5,820)    (5,627)    (6,443)       (5,702)    (4,138)    (3,451)
 General and
  administrative........    (4,210)       (3,550)    (3,539)    (3,606)    (3,619)       (3,500)    (3,403)    (2,371)
 Research and
  development...........    (1,782)       (1,945)    (1,945)    (1,632)    (1,541)       (1,743)    (1,594)    (1,096)
 Amortization of
  deferred stock
  compensation .........      (208)         (216)      (283)      (437)      (458)         (467)      (585)      (699)
                           -------       -------    -------    -------    -------       -------    -------    -------
Total operating
 expenses...............   (10,199)      (12,033)   (11,587)   (11,302)   (12,061)      (11,412)    (9,720)    (7,617)
                           -------       -------    -------    -------    -------       -------    -------    -------
Income (loss) from
 operations.............     5,106         3,507      1,762        (23)    (1,153)       (1,622)    (1,729)    (4,941)
                           -------       -------    -------    -------    -------       -------    -------    -------
Net interest income.....       825         1,428      1,854      2,059      2,279         1,998      2,346        264
Other income, net.......       (20)           (5)       (27)        (7)       170            14       (288)        82
                           -------       -------    -------    -------    -------       -------    -------    -------
Income (loss) before
 tax....................     5,911         4,930      3,589      2,029      1,296           390        329     (4,595)
Income tax expense
 (benefit)..............     1,182           986        805        471        286            (6)      (105)        43
                           -------       -------    -------    -------    -------       -------    -------    -------
Income (loss) before
 minority interest......     4,729         3,944      2,784      1,558      1,010           396        434     (4,638)
Minority interest.......      (160)         (105)        48       (179)        13            19        --         --
Equity in loss of
 affiliates.............      (309)         (320)      (256)       --         --            --         --         --
                           -------       -------    -------    -------    -------       -------    -------    -------
Net income (loss).......   $ 4,260       $ 3,519    $ 2,576    $ 1,379    $ 1,023       $   415    $   434    $(4,638)
                           =======       =======    =======    =======    =======       =======    =======    =======
ADDITIONAL DATA:
Total revenues net of
 hardware costs.........   $20,013       $20,146    $17,026    $14,206    $14,072       $13,299    $11,736    $ 5,471
</TABLE>

Our revenues and operating results can vary significantly from quarter to
quarter due to a number of factors. In particular, our business is
characterized by limited numbers of large projects. As discussed above, the
majority of revenues for a project are recognized at the point of hardware
delivery. Thus, in any given quarter, we may recognize exceptionally large or
exceptionally small amounts of revenue, depending on the timing of hardware
delivery and size of the project.

                                       31
<PAGE>

In the fourth quarter of 2000, we benefited from a change in regulations issued
in that quarter by the Department of Finance of Beijing, which reduced the
contributions, effective the beginning of 2000, we were required to make to the
government for PRC employee benefits. As a result, during the fourth quarter we
reversed $900,000 of costs accrued in the first three quarters of 2000 which
had previously been expensed ($257,000 in the first quarter, $300,000 in the
second quarter and $345,000 in the third quarter 2000).

Our actual results from year to year can vary considerably, particularly as our
company grows. We believe that our business is subject to a certain degree of
seasonality. In particular, orders tend to be slow in the first quarter because
of two major Chinese holidays during this period, including the Chinese Lunar
New Year. In addition, the Chinese government conducts its internal budgetary
review and allocation process during this period, which has the effect of
delaying project commitments by our customers.

LIQUIDITY AND CAPITAL RESOURCES

Our capital requirements are primarily working capital requirements related to
hardware sales and costs associated with the expansion of our business, such as
research and development and sales and marketing expenses. We recognize
hardware costs in full upon delivery of the hardware to our customers. In order
to minimize our working capital requirements, we generally obtain from our
hardware vendors payment terms that are timed to permit us to receive payment
from our customers for the hardware before our payments to hardware vendors are
due. However, we sometimes obtain less favorable payment terms from our
customers, thereby increasing our working capital requirements. We have
historically financed our working capital and other financing requirements
through careful management of our billing cycle, private placements of our
equity securities, our initial public offering in March of 2000 and, to a
limited extent, bank loans.

We ended 2001 with a strong cash position which included cash and cash
equivalent of $110.6 million, short-term investments of $27.2 million and
restricted cash of $13.5 million for the purpose of securing local currency
loans. Our short-term investments feature fixed income, liquidity and low risk
investments (including bank deposits and US government obligations). The cash
equivalents include investments in cash management accounts to enhance our
interest income. Our cash position, including cash and cash equivalents,
restricted cash and short-term investments, decreased by $34.7 million as
compared to the beginning of 2001. Of this decrease, $6.3 million was expended
on operating activities, $14 million was used in investment activities
(including equity investments in Intrinsic, a pre-acquisition bridge loan we
extended to Bonson, and purchases of property and equipment), and $18 million
was used to retire Renminbi-denominated borrowings. In 2002, we anticipate
paying approximately $30 million in cash in connection with our acquisition of
Bonson.

As of December 31, 2001, we had short-term credit facilities totaling $20.9
million, secured by bank deposits of $10.9 million, expiring by June, 2002, for
working capital purposes, of which unused short-term credit facilities were
$18.9 million at that date. At December 31, 2001, borrowings under these
facilities totaled $2.0 million, of which $1.4 million had been used to issue a
letter of credit. Additional borrowings of approximately $2.3 million were
secured by bank deposits of $2.4 million. All the borrowings were in Renminbi,
the currency of China. The loans carry interest of 5.58% per annum and are
repayable within one year. Additional bank deposits of $208,000 were used for
issuing a standby letter of credit. Bank deposits pledged as security for these
bank loans and short-term credit facilities totaled $13.5 million as of
December 31, 2001, and are presented as restricted cash in our consolidated
balance sheets.

As of December 31, 2001, we were committed under certain operating leases,
requiring annual minimum rentals of approximately $2.15 million, $598,000 and
$70,000 in 2002, 2003 and 2004, respectively.

Our accounts receivable balance at December 31, 2001 was $66.7 million,
consisting of $20.8 million in billed receivables and $45.9 million in unbilled
receivables. Our billed receivables are based on revenue we have booked and
billed. Our unbilled receivables are based on revenue we have booked through
the percentage

                                       32
<PAGE>

completion method, but for which we have not yet billed the customer. For
example, we recognize revenues for hardware pass-through at the time the
hardware is accepted by the customer, based on the cost of the underlying
hardware. However, our contracts with our customers will often allow the
customers to withhold 10 to 20% of the total contract payments until final
project acceptance, which on average is eight to nine months after hardware
delivery. As a result, revenues from hardware pass-through generally represent
a significant portion of our unbilled receivables and can cause the aging of
these receivables to be relatively long. At the end of 2001, our days sales
outstanding were 127 days, a 17 day improvement compared to the end of the
third quarter. Billed receivables were 40 days sales outstanding and our
unbilled receivables were 87 days sales outstanding. During 2002, we expect
days sales outstanding to decrease slightly from this level.

Our inventory position at the end of 2001 was approximately $1.2 million, down
from $8.9 million at the beginning of the year, demonstrating our well-managed
inventory control process.

We anticipate that the net proceeds of our initial public offering in March
2000, together with available funds and cash flows generated from operations,
will be sufficient to meet our anticipated needs for working capital, capital
expenditures and business expansion through 2002. We may need to raise
additional funds in the future, however, in order to fund acquisitions, develop
new or enhanced services or products, respond to competitive pressures to
compete successfully for larger projects involving higher levels of hardware
purchases, or if our business otherwise grows more rapidly than we currently
predict. We plan to raise additional funds, if necessary, through new issuances
of shares of our equity securities in one or more public offerings or private
placements, or through credit facilities extended by lending institutions.

In the event that we decide to pay dividends to our shareholders, our ability
to pay dividends will depend in part on our ability to receive dividends from
our operating subsidiaries in China. Foreign exchange and other regulations in
China may restrict our ability to distribute retained earnings from our
operating subsidiaries in China or convert those payments from Renminbi into
foreign currencies.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
Adoption of SFAS No. 141 did not have a significant impact on our financial
position or results of operations.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets," which is effective for us on January 1,
2002. SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles such as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential
future impairments of goodwill. SFAS No. 142 also requires us to complete a
transitional goodwill impairment test six months from the date of adoption. We
are currently assessing but have not yet determined the impact of SFAS No. 142
on our financial position and results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," that addresses the accounting
for the recognition of obligations associated with the retirement of tangible
long-lived assets. SFAS No. 143 is effective for us on January 1, 2003. In
October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," effective for
us on January 1, 2002. SFAS No. 144 addresses the financial accounting and
reporting requirements for the impairment or disposal of long-lived assets and
discontinued operations. SFAS No. 144 applies to all recorded long-lived assets
that are held for use or that will be disposed of, but excludes goodwill and
other intangible assets that are not amortized. Management does not believe
that the adoption of SFAS Nos. 143 and 144 will have a significant impact on
its financial position or results of operations.

                                       33
<PAGE>

FACTORS AFFECTING OUR OPERATING RESULTS AND OUR COMMON STOCK

In addition to the other information in this report, the following factors
should be considered in evaluating our business and our future prospects:

THE GROWTH OF OUR BUSINESS IS DEPENDENT ON GOVERNMENT BUDGETARY POLICY,
PARTICULARLY THE ALLOCATION OF FUNDS TO SUSTAIN THE GROWTH OF THE
TELECOMMUNICATIONS INDUSTRY AND THE INTERNET IN CHINA.

Virtually all of our large customers are directly or indirectly owned or
controlled by the government of China. Accordingly, their business strategies,
capital expenditure budgets and spending plans are largely decided in
accordance with government policies, which, in turn, are determined on a
centralized basis at the highest level by the State Development and Planning
Commission of China. As a result, the growth of our business is heavily
dependent on government policies for telecommunications and Internet
infrastructure. Despite the high priority currently accorded by the government
to the development of China's telecommunications industry and Internet
infrastructure, and a high level of funding allocated by the government to
these sectors, insufficient government allocation of funds to sustain the
growth of China's telecommunications and Internet industries in the future
could reduce the demand for our products and services and have a material
adverse effect on our ability to grow our business.

On December 11, 2001, in an effort to increase the efficiency of
telecommunications service providers through competition, the State Council of
China announced that it would split China Telecom geographically into a
northern division (comprising ten provinces) and a southern division
(comprising 21 provinces). Under the State Council's plan, the northern
division of China Telecom will merge with China Netcom and Jitong
Communication, and will use the China Netcom name, while the southern division
will continue to operate under the China Telecom name. As a result of the
planned restructuring, new orders for telecommunications infrastructure
expansion and improvement projects decreased in the third and fourth quarters
of 2001, adversely affecting our backlog and our rate of net revenue growth on
a sequential basis. Although we expect that spending will resume in the second
half of 2001 and that the restructuring will have a positive impact on growth
in the telecommunications industry in China in the long-term, similar
restructurings of this nature could cause our operating results to vary
unexpectedly from quarter to quarter.

OUR CUSTOMER BASE IS CONCENTRATED AND THE LOSS OF ONE OR MORE OF OUR CUSTOMERS
COULD CAUSE OUR BUSINESS TO SUFFER SIGNIFICANTLY.

We have derived, and believe that we will continue to derive, a significant
portion of our revenues from a limited number of large customers, such as China
Telecom, China Unicom, China Mobile and China Netcom. China Telecom accounted
for almost all of our revenues in 1997 and 1998. In 1999, China Telecom,
together with China Unicom, accounted for almost all of our revenues. At
December 31, 2001, China Telecom and China Unicom accounted for approximately
60% of our backlog net of hardware costs. The loss, cancellation or deferral of
any large contract by any of our large customers would have a material adverse
effect on our revenues, and consequently our profits.

LAWS AND REGULATIONS APPLICABLE TO THE INTERNET IN CHINA REMAIN UNSETTLED AND
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE INTERNET'S GROWTH AND THEREBY HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

Growth of the Internet in China could be materially adversely affected by
government regulation of the industry. Due to the increasing popularity and use
of the Internet and other online services, new regulations have been and may
continue to be adopted with respect to the Internet or other online services.
In September 2000, China's Ministry of Information Industry promulgated the
Administrative Measures on Internet Information Services and related
implementing regulations. Among other things, the Administrative Measures on
Internet Information Services:

..  require Internet content providers to obtain approval from the Ministry of
   Information Industry before they can list securities overseas or obtain
   foreign investment;

                                       34
<PAGE>

..  require Internet content providers to obtain licenses from various
   ministries, depending on the nature of the content they provide; and

..  require Internet content providers to police their content in order to
   prevent restricted material from appearing on their websites.

Because we are engaged in telecommunications and Internet infrastructure
development, we do not expect these regulations to have a direct impact on us.
However, we cannot guarantee that the adoption of these regulations or other
regulations will not slow the growth of the Internet or other online services
in China. In particular, the prohibitions against a broad but vague range of
information on the Internet (such as information that is damaging to national
security, national interest, and social order), the relevant monitoring,
record-keeping, reporting and other administrative burdens imposed on Internet
access and content providers, and the severe penalties for violations of these
regulations could have a chilling effect on Internet content providers and
Internet users and could lead to increased compliance costs for Internet
content providers. Any slowdown in the growth of the Internet in China could in
turn lead to reduced Internet traffic, and a decrease in the demand for our
network solutions and software products.

THE LONG AND VARIABLE SALES CYCLES FOR OUR PRODUCTS AND SERVICES CAN CAUSE OUR
REVENUES AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM PERIOD TO PERIOD AND
MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR COMMON STOCK.

Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control
and any of which may cause our stock price to fluctuate. A customer's decision
to purchase our services and products involves a significant commitment of its
resources and an extended evaluation. As a result, our sales cycle tends to be
lengthy. We spend considerable time and expense educating and providing
information to prospective customers about features and applications of our
services and products. Because our major customers operate large and complex
networks, they usually expand their networks in large increments on a sporadic
basis. The combination of these factors can cause our revenues and results of
operations to vary significantly and unexpectedly from quarter to quarter.
Other factors that may affect us include the following:

..  fluctuation in demand for our products and services as a result of the
   budgetary cycles of our large customers, particularly state-owned
   enterprises;

..  the reduction, delay, interruption or termination of one or more
   infrastructure projects; and

..  our ability to introduce, develop and deliver new software products that
   meet customer requirements in a timely manner.

A large part of the contract amount of a network solutions project usually
relates to hardware procurement. Since we recognize most of the revenues
relating to hardware plus a portion of contract services revenues at the time
of hardware delivery, the timing of hardware delivery can cause our quarterly
revenues to fluctuate significantly. Due to the foregoing factors, we believe
that quarter to quarter comparisons of our operating results are not a good
indication of our future performance and should not be relied upon. It is
likely that our operating results in some periods may be below the expectations
of public market analysts and investors. In this event, the price of our common
stock will probably decline, perhaps significantly more in percentage terms
than any corresponding decline in our operating results.

OUR WORKING CAPITAL REQUIREMENTS MAY INCREASE SIGNIFICANTLY.

We typically purchase hardware for our customers as part of our turn-key total
solutions services. We generally require our customers to pay 80 to 90% of the
invoice value of the hardware upon delivery. We typically place orders for
hardware against back-to-back orders from customers and seek favorable payment
terms from hardware vendors. This policy has historically minimized our working
capital requirements. However, for certain large and strategically important
projects, we have agreed to payment of less than 80 to 90% of the

                                       35
<PAGE>

invoice value of the hardware upon delivery in order to maintain
competitiveness. Wider adoption of less favorable payment terms or delays in
hardware deliveries will require us to increase our working capital needs
significantly.

Our working capital requirements may also increase significantly in order to
fund more rapid expansion and acquisitions, to develop new or enhanced services
or products, to respond to competitive pressure to compete successfully for
larger projects involving higher levels of hardware purchases or otherwise if
our business grows more rapidly than we currently predict. An increase in our
working capital needs may require that we raise additional funds sooner than we
presently expect.

WE HAVE SUSTAINED LOSSES IN PRIOR YEARS AND MAY INCUR SLOWER EARNINGS GROWTH,
EARNINGS DECLINES OR NET LOSSES IN THE FUTURE.

Although we have recently achieved operating profitability and had net income
in 1998 and 2001, we sustained net losses in 1997, 1999 and 2000. There are no
assurances that we can sustain profitability or avoid net losses in the future.
We continue to expect that certain of our operating expenses will increase as
our business grows. The level of these expenses will be largely based on
anticipated organizational growth and revenue trends and a high percentage will
be fixed. As a result, any delays in expanding sales volume and generating
revenue could result in substantial operating losses. Any such developments
could cause the market price of our common stock to decline.

OUR ACQUISITION OF BONSON HAS BEEN, AND ANY ACQUISITIONS WE UNDERTAKE IN THE
FUTURE MAY BE, COSTLY, AND WE MAY REALIZE LOSSES ON OUR INVESTMENTS

As a key component of our business and growth strategy, we have recently
acquired Bonson Information Technology Holdings Limited, or Bonson. In the
future, we may acquire other companies or assets that we feel will enhance our
revenue growth, operations and profitability. Such acquisitions could result in
the use of significant amounts of cash, dilutive issuances of our common stock
and amortization expenses related to goodwill and other intangible assets, each
of which could materially and adversely affect our business. Such acquisitions
involve other significant risks, including:

..  the difficulties of integrating, assimilating and managing the operations,
   technologies, intellectual property, products and personnel of the acquired
   business;

..  the diversion of management attention from other business concerns;

..  the additional expense associated with acquired contingent liabilities;

..  the loss of key employees in acquired businesses; and

..  the risk of being sued by terminated employees and contractors.

We will need to integrate and manage Bonson and any other businesses we
determine to acquire in the future. Our failure to do so successfully could
have a material adverse effect on our business, results of operations and
financial condition.

MANAGEMENT'S ABILITY TO IMPLEMENT ADEQUATE CONTROL SYSTEMS WILL BE CRITICAL TO
THE SUCCESSFUL MANAGEMENT OF OUR FUTURE GROWTH.

In recent years, we have been expanding our operations rapidly, both in size
and scope. Our growth places a significant strain on our management systems and
resources. Our ability to market our products successfully and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We will need to continue to improve our financial,
managerial and operational controls and reporting systems, and to expand, train
and manage our work force. Our future growth will be compromised if we cannot
implement adequate control systems in an efficient and timely manner.

                                       36
<PAGE>

WE ARE HIGHLY DEPENDENT ON OUR EXECUTIVE OFFICERS.

Each of our executive officers is responsible for an important segment of our
operations. Although we believe that we have significant depth at all levels of
management, the loss of any of our executive officers' services could be
detrimental to our operations. To ensure continuity of management, we have
entered into employment agreements with all of our executive officers. We do
not have, and do not plan to obtain, "key man" life insurance on any of our
employees.

WE FACE A COMPETITIVE LABOR MARKET IN CHINA FOR SKILLED PERSONNEL AND THEREFORE
ARE HIGHLY DEPENDENT ON THE SKILLS AND SERVICES OF OUR EXISTING KEY SKILLED
PERSONNEL AND OUR ABILITY TO HIRE ADDITIONAL SKILLED EMPLOYEES.

Competition for highly skilled software design, engineering and sales and
marketing personnel is intense in China. Our failure to attract, assimilate or
retain qualified personnel to fulfill our current or future needs could impair
our growth. Competition for skilled personnel comes primarily from a wide range
of foreign companies active in China, many of which have substantially greater
resources than we have. Limitations on our ability to hire and train a
sufficient number of personnel at all levels would limit our ability to
undertake projects in the future and could cause us to lose market share.

SINCE OUR BUSINESS HAS BEEN EVOLVING, OUR HISTORICAL FINANCIAL INFORMATION MAY
NOT BE AN APPROPRIATE BASIS ON WHICH TO EVALUATE US OR OUR PROSPECTS.

We founded our business in Texas in 1993, moved our operations from Texas to
China in 1995, and began generating significant network solutions revenue in
1996 and significant software solutions revenues in 1998. We expect our
business to continue to evolve as the Internet and telecommunications markets
in China change and expand. As a result, our historical financial data may not
provide a meaningful basis upon which investors may evaluate us and our
prospects. You should consider the risks and difficulties encountered by
companies like ours in a new and rapidly evolving market. Our ability to sell
products and our level of success depend, among other things, on the level of
demand for telecommunications and Internet-related, professional IT services
and software products in China.

WE EXTEND WARRANTIES TO OUR CUSTOMERS THAT EXPOSE US TO POTENTIAL LIABILITIES.

We customarily provide our customers with one to three year warranties, under
which we agree to maintain installed systems at no additional cost to our
customers. The maintenance services cover both hardware and our proprietary and
third party software products. Although we seek to arrange back-to-back
warranties with hardware and software vendors, we have the primary
responsibility to maintain the installed hardware and software. Our contracts
do not have disclaimers or limitations on liability for special, consequential
and incidental damages, nor do we cap the amounts our customers can recover for
damages. In addition, we do not currently maintain any insurance policy with
respect to our exposure to warranty claims. The failure of our installed
projects to operate properly could give rise to substantial liability for
special, consequential or incidental damages, that in turn could materially and
adversely affect us.

WE SELL OUR LARGE SYSTEMS INTEGRATION PROJECTS ON A FIXED-PRICE, FIXED-TIME
BASIS WHICH EXPOSES US TO RISKS ASSOCIATED WITH COST OVERRUNS AND DELAYS.

We sell substantially all of our systems integration projects on a fixed-price,
fixed-time basis. In contracts with our customers, we typically agree to pay
late completion fines of up to 5% of the total contract value. In large scale
telecommunications infrastructure projects, there are many factors beyond our
control which could cause delays or cost overruns. In this event, we would be
exposed to cost overruns and liable for late completion fines. Our failure to
complete a fixed-price, fixed-time project within budget and the required time
frame would expose us to cost overruns and penalties that could have a material
adverse effect on our business, operating results and financial condition. A
part of our business is installing network hardware. If we are unable to

                                       37
<PAGE>

obtain access to such equipment in a timely manner or on acceptable commercial
terms, our business, particularly our relationships with our customers, may be
materially and adversely affected.

WE MAY BECOME LESS COMPETITIVE IF WE ARE UNABLE TO DEVELOP OR ACQUIRE NEW
PRODUCTS OR ENHANCEMENTS TO OUR SOFTWARE PRODUCTS THAT ARE MARKETABLE ON A
TIMELY AND COST-EFFECTIVE BASIS.

We continually develop new services and proprietary software products.
Unexpected technical, operational, distribution or other problems could delay
or prevent the introduction of one or more of these products or services or any
products or services that we may plan to introduce in the future. Moreover, we
cannot be sure that any of these products and services will achieve widespread
market acceptance or generate incremental revenues.

OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED AND THERE IS A RISK OF
POOR ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS IN CHINA.

Our success and ability to compete depend substantially upon our intellectual
property rights, which we protect through a combination of copyright, trade
secret law and trademark law. We have registered some marks and filed trademark
applications for other marks with the United States Patent and Trademark
Office, the Trademark Bureau of the State Administration of Industry and
Commerce in China and the Trade Marks Registry in Hong Kong. We have also
registered copyrights with the State Copyright Bureau in China with respect to
Internet-related software products, although we have not applied for copyright
protection elsewhere (including the United States, which does not require
registration for protection of copyrights). Despite these precautions, the
legal regime protecting intellectual property rights in China is weak. Because
the Chinese legal system in general, and the intellectual property regime in
particular, are relatively weak, it is often difficult to enforce intellectual
property rights in China. In addition, there are other countries where
effective copyright, trademark and trade secret protection may be unavailable
or limited, and the global nature of the Internet makes it virtually impossible
to control the ultimate destination of our products.

We do not own any patents and have not filed any patent applications, as we do
not believe that the benefits of patent protection outweigh the costs of filing
and updating patents for our software products. We enter into confidentiality
agreements with our employees and consultants, and control access to, and
distribution of, our documentation and other licensed information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our licensed services or technology without authorization, or to
develop similar technology independently. Policing unauthorized use of our
licensed technology is difficult and there can be no assurance that the steps
we take will prevent misappropriation or infringement of our proprietary
technology. In addition, litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others, which could result in
substantial costs and diversion of our resources.

WE ARE EXPOSED TO CERTAIN BUSINESS AND LITIGATION RISKS WITH RESPECT TO
TECHNOLOGY RIGHTS HELD BY THIRD PARTIES.

We currently license technology from third parties and intend to do so
increasingly in the future as we introduce services that require new
technology. There can be no assurance that these technology licenses will be
available to us on commercially reasonable terms, if at all. Our inability to
obtain any of these licenses could delay or compromise our ability to introduce
new services. In addition, we may or may allegedly breach the technology rights
of others and incur legal expenses and damages, which could be substantial.

INVESTORS MAY NOT BE ABLE TO ENFORCE JUDGMENTS BY UNITED STATES COURTS AGAINST
US.

We are incorporated in the State of Delaware. However, a majority of our
directors, executive officers and principal shareholders live outside the
United States, principally in Beijing and Hong Kong. As a result, you may not
be able to:

..  effect service of process upon us or these persons within the United States;
   or

                                       38
<PAGE>

..  enforce against us or these persons judgments obtained in United States
   courts, including judgments relating to the federal securities laws of the
   United States.

WE DO NOT INTEND TO PAY AND MAY BE RESTRICTED FROM PAYING DIVIDENDS ON OUR
COMMON STOCK.

We have never declared or paid dividends on our capital stock and we do not
intend to declare any dividends in the foreseeable future. We currently intend
to retain future earnings to fund our growth. Furthermore, if we decide to pay
dividends, foreign exchange and other regulations in China may restrict our
ability to distribute retained earnings from China or convert these payments
from Renminbi, the currency of China, into foreign currencies. In addition,
loan agreements and contractual arrangements we enter into in the future may
also restrict our ability to pay dividends.

THE FACT THAT OUR BUSINESS IS CONDUCTED IN BOTH U.S. DOLLARS AND RENMINBI MAY
SUBJECT US TO CURRENCY EXCHANGE RATE RISK DUE TO FLUCTUATIONS IN THE EXCHANGE
RATE BETWEEN THESE TWO CURRENCIES.

Substantially all of our revenues, expenses and liabilities are denominated in
either U.S. dollars or Renminbi. As a result, we are subject to the effects of
exchange rate fluctuations between these currencies. Because of the unitary
exchange rate system introduced in China on January 1, 1994, the official bank
exchange rate for conversion of Renminbi to U.S. dollars experienced a
devaluation of approximately 50%. We report our financial results in U.S.
dollars, therefore, any future devaluation of the Renminbi against the U.S.
dollar may have an adverse effect on our reported net income.

Substantially all our revenues and expenses relating to hardware sales are
denominated in U.S. dollars, and substantially all our revenues and expenses
relating to the software and services component of our business and software
business are denominated in Renminbi. Although, in general, our exposure to
foreign exchange risks should be limited, the value in our shares may be
affected by the foreign exchange rate between the U.S. dollar and the Renminbi
because the value of our business is effectively denominated in Renminbi, while
our shares are traded in U.S. dollars. Furthermore, a decline in the value of
the Renminbi could reduce the U.S. dollar value of earnings from, and our
investments in, our subsidiaries in China.

THE MARKETS IN WHICH WE SELL OUR SERVICES AND PRODUCTS ARE COMPETITIVE AND WE
MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

The market for telecommunications and Internet infrastructure solutions in
China is new and rapidly changing. Our competitors in the network
infrastructure solutions market mainly include domestic systems integrators
such as Zoom Networks and Openet Information Technology (Shenzhen) Corporation.
Although we are a leading player in this market, there are many large
multinational companies with substantial, existing information technology
operations in other markets in China, that have significantly greater
financial, technological, marketing and human resources. Should they decide to
enter the network infrastructure solutions market, this could hurt our
profitability and erode our market share.

In the operation support system solutions market, we compete with both
international and local software and solutions providers. In the online billing
segment, we compete primarily with Portal Software, MIND C.T.I. Ltd. and Zoom
Networks, and in the wireless billing segment, we compete with more than ten
local competitors. Currently, due in part to a stringent approval system for
providers of wireless billing software in China and competitive pricing offered
by domestic companies, some multinational information technology companies have
been deterred from entering this market. In view of the gradual deregulation of
the Chinese telecommunications industry and China's entry into the WTO, we
anticipate the entrance of new competitors into the operation support system
solutions market.

The service application solutions sector is highly competitive. Our principal
competitor in this sector is Openwave Systems Inc. (formerly Software.com).

                                       39
<PAGE>

In the network security solutions market, we mainly compete with Information
Security One Limited, Nsfocus Information Technology Co., Ltd., and 21ViaNet
China Inc. An increasing number of companies are devoting their resources to
this sector in developing network security products. Through mergers and
acquisitions, many information technology companies are entering the network
security solutions market as part of their strategy of providing a full range
of system integration services.

Our competitors, some of whom have greater financial, technical and human
resources than us, may be able to respond more quickly to new and emerging
technologies and changes in customer requirements or devote greater resources
to the development, promotion and sale of new products or services. It is
possible that competition in the form of new competitors or alliances, joint
ventures or consolidation among existing competitors may decrease our market
share. Increased competition could result in lower personnel utilization rates,
billing rate reductions, fewer customer engagements, reduced gross margins and
loss of market share, any one of which could materially and adversely affect
our profits and overall financial condition.

POLITICAL AND ECONOMIC POLICIES OF THE CHINESE GOVERNMENT COULD AFFECT OUR
INDUSTRY IN GENERAL AND OUR COMPETITIVE POSITION IN PARTICULAR.

Since the establishment of the People's Republic of China in 1949, the
Communist Party has been the governing political party in China. The highest
bodies of leadership are the Politburo of the Communist Party, the Central
Committee and the National People's Congress. The State Council, which is the
highest institution of government administration, reports to the National
People's Congress and has under its supervision various commissions, agencies
and ministries, including The Ministry of Information Industry, the
telecommunications regulatory body of the Chinese government. Since the late
1970s, the Chinese government has been reforming the Chinese economic system.
Although we believe that economic reform and the macroeconomic measures adopted
by the Chinese government have had and will continue to have a positive effect
on economic development in China, there can be no assurance that the economic
reform strategy will not from time to time be modified or revised. Such
modifications or revisions, if any, could have a material adverse effect on the
overall economic growth of China and investment in the Internet and the
telecommunications industry in China. Such developments could reduce, perhaps
significantly, the demand for our products and services. There is no guarantee
that the Chinese government will not impose other economic or regulatory
controls that would have a material adverse effect on our business.
Furthermore, changes in political, economic and social conditions in China,
adjustments in policies of the Chinese government or changes in laws and
regulations could adversely affect our industry in general and our competitive
position in particular.

UNCERTAINTIES WITH RESPECT TO THE CHINESE LEGAL SYSTEM COULD ADVERSELY AFFECT
US.

Our principal operating subsidiary, AsiaInfo Technologies, is a wholly foreign
owned enterprise for Chinese legal purposes, which means that it is
incorporated in China and wholly-owned by foreign investors. AsiaInfo
Technologies, along with certain of our other subsidiaries, are subject to laws
and regulations applicable to foreign investment in China in general and laws
applicable to wholly foreign owned enterprises in particular. Legislation and
regulations over the past 20 years have significantly enhanced the protections
afforded to various forms of foreign investment in China. However, since the
Chinese legal system is still evolving, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws,
regulations and rules involve uncertainties, which may limit remedies available
to us.

HIGH TECHNOLOGY AND EMERGING MARKET SHARES HAVE HISTORICALLY EXPERIENCED
EXTREME VOLATILITY AND MAY SUBJECT YOU TO LOSSES.

The trading price of our shares may be subject to significant market volatility
due to:

..  investor perceptions of us and investments relating to China and Asia;

..  developments in the Internet and telecommunications industries;

                                       40
<PAGE>

..  variations in our operating results from period to period due to project
   timing; and

..  announcements of new products or services by us or by our competitors.

In addition, the high technology sector of the stock market frequently
experiences extreme price and volume fluctuations, which have particularly
affected the market prices of many Internet and computer software companies and
which have often been unrelated to the operating performance of these
companies.

IF OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION
WHICH IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF RESOURCES.

In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Many companies in our industry have been
subject to this type of litigation in the past, and we have recently become the
subject of this type of litigation. For more information on this litigation,
see the discussion above under the heading "Item 3. Legal Proceedings."
Litigation is often expensive and diverts management's attention and resources,
which could materially and adversely affect our business.

FUTURE SALES OF SHARES BY OUR COMPANY OR EXISTING SHAREHOLDERS COULD CAUSE THE
MARKET PRICE OF OUR COMMON STOCK TO FALL.

If our stockholders sell substantial amounts of our common stock in the public
market, including shares issued upon the exercise of outstanding options, the
market price of our common stock could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate.

A SMALL NUMBER OF SHAREHOLDERS CONTROLS US.

Our five largest shareholders, Warburg-Pincus Ventures, ChinaVest Group, and
their affiliates, as well as Edward Tian, James Ding, our President and Chief
Executive Officer, and Louis Lau, our Chairman, control over 60% of our voting
stock. As a result, these shareholders collectively are able to control all
matters requiring shareholder approval, including election of directors and
approval of significant corporate transactions, such as a sale of our assets
and the terms of future equity financings. The combined voting power of our
large shareholders could have the effect of delaying or preventing a change in
control.

WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD PREVENT A CHANGE OF
CONTROL OF ASIAINFO AND PREVENT OUR SHAREHOLDERS FROM REALIZING A PREMIUM ON
THEIR COMMON STOCK.

Our board of directors has the authority to issue up to 10,000,000 shares of
our preferred stock. Without any further vote or action on the part of our
stockholders, the board of directors has the authority to determine the price,
rights, preferences, privileges and restrictions of the preferred stock. This
preferred stock, if it is ever issued, may have preference over and harm the
rights of the holders of our common stock. Although the issuance of this
preferred stock will provide us with flexibility in connection with possible
acquisitions and other corporate purposes, this issuance may make it more
difficult for a third party to acquire a majority of our outstanding voting
stock.

We currently have authorized the size of our board of directors to be not less
than three nor more than nine directors. The terms of the office of the eight-
member board of directors have been divided into three classes: Class I, whose
term will expire at the annual meeting of the stockholders to be held in 2003;
Class II, whose term will expire at the annual meeting of stockholders to be
held in 2004; and Class III, whose term will expire at the annual meeting of
stockholders to be held on April 23, 2002. This classification of the board of
directors may have the effect of delaying or preventing changes in our control
or management.

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an

                                       41
<PAGE>

"interested stockholder" for a period of three years after the date when the
person became an interested stockholder unless, subject to exceptions, the
business combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the stockholder.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest-rate risk primarily associated with our cash, short-
term investments and short-term bank loans. To date, we have not entered into
any types of derivatives to hedge against interest-rate changes, nor do we
speculate in foreign currency. However, we do maintain a significant portion of
our cash deposits in U.S. dollars to avoid currency risk related to Renminbi. A
portion of these U.S. dollar deposits are used to collateralize Renminbi-
denominated loans from Chinese banks.

Because substantially all of our revenues and expenses relating to hardware
sales are denominated in U.S. dollars, and substantially all of our revenues
and expenses relating to the service component of our network solutions
business and software business are denominated in Renminbi, we do not have
significant exposure to either the U.S. dollar or Renminbi. Thus, we do not
believe that it is necessary to enter into derivatives contracts to hedge our
exposures to either currency.

There have been no significant changes in our exposure to changes in either
interest rates or foreign currency exchange rates for the year ended December
31, 2001. Our exposure to interest rates is limited as we do not have variable
rate and long-term borrowings. We are subject to variable interest rates on our
bank deposits that are cash and short-term investments. As there are no
significant market price movements, such investments are held at cost. As of
December 31, 2001, a hypothetical 10% immediate increase or decrease in
interest rates would increase or decrease our annual interest expense and
income by approximately $97,000 and $713,000, respectively.

ITEM 8. Financial Statements and Supplementary Data

The independent auditor's report, consolidated financial statements and notes
to consolidated financial statements begin on Page F-1.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.


                                       42
<PAGE>

                                    PART III

ITEM 10. Directors and Executive Officers Of The Registrant

Information concerning our directors and executive officers is incorporated by
reference to the sections titled "Proposal No. 1: Election of Directors--
Nominees for Class III Directors" and "Management-- Executive Officers"
contained in our definitive proxy statement with respect to our 2002 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this Form
10-K (the "Proxy Statement"). Information concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference to
the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in our Proxy Statement.

ITEM 11. Executive Compensation

Information concerning executive compensation is incorporated by reference to
the sections titled "Proposal No. 1: Election of Directors--Director
Compensation," "Executive Compensation--Summary Compensation Table," "Executive
Compensation--Option Grants in Last Fiscal Year," "Executive Compensation--
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values," "Executive Compensation--Employment Agreements," "Executive
Compensation--Pension Plans," "Compensation Committee Report," and "Stock Price
Performance" contained in our Proxy Statement.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

Information concerning the security ownership of certain beneficial owners and
management is incorporated by reference to the section titled "Security
Ownership of Certain Beneficial Owners and Management" contained in our Proxy
Statement.

ITEM 13. Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions is
incorporated by reference to the section titled "Certain Relationships and
Related Transactions" contained in our Proxy Statement.


                                       43
<PAGE>

                                    PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)1. Financial Statements

  The financial statements as set forth under Item 8 of this report on Form
  10-K are incorporated herein by reference.

  2. Financial Statement Schedule

  The information required is either not applicable or is included in the
  notes to the consolidated financial statements.

(b)Reports on Form 8-K

  We filed a Current Report on Form 8-K on February 21, 2002 relating to the
  completion of our acquisition of Bonson Information Technology Holdings
  Limited, or Bonson, pursuant to a Share Purchase Agreement dated as of
  January 20, 2002 by and among the Company, Bonson and the shareholders of
  Bonson.

(c)Exhibit Listing

<TABLE>
<CAPTION>
   Exhibit
   Number    Description of Exhibits
   -------   -----------------------
   <S>       <C>
    2.1      Share Purchase Agreement for the acquisition of Bonson Information Technology
             Holdings Limited/****/
    3.1      Certificate of Incorporation of AsiaInfo Holdings, Inc., dated June 8, 1998/*/
    3.2      Certificate of Amendment to Certificate of Incorporation of AsiaInfo Holdings,
             Inc., dated
             August 27, 1999/*/
    3.3      Certificate of Amendment to Certificate of Incorporation of AsiaInfo Holdings,
             Inc., dated November 15, 2000/***/
    3.4      Certificate of Correction to Certificate of Amendment to Certificate of
             Incorporation of AsiaInfo Holdings, Inc., dated January 18, 2001/***/
    3.5      By-Laws of AsiaInfo Holdings, Inc., dated December 19, 2000/***/
    4.1      Specimen Share Certificate representing AsiaInfo Holdings, Inc. shares of common
             stock/*/
   10.1      2000 Stock Option Plan, approved and adopted as of October 18, 2000/**/
   10.2      Certificate of Merger of HTC Investments, Inc., a Delaware corporation, with and
             into AsiaInfo Holdings, Inc., a Delaware corporation, dated October 13, 1999/*/
   10.3      Shareholders' Agreement of Marsec Holdings Inc., dated as of September 15, 2000,
             by and among AsiaInfo Holdings, Inc. and the Founders (as defined therein) of
             Marsec Holdings, Inc. /**/
   10.4      Warrant to purchase Series A Preferred Shares of Marsec Holdings, Inc., issued to
             AsiaInfo Holdings, Inc. as of September 15, 2000/**/
   10.5      Lease of AsiaInfo's headquarters at 6 Zhongguancun South Street, Beijing, dated
             August 31, 1999/*/
   10.6      Agreement for the Merger of AsiaInfo Technologies (China) Inc. and Zhejiang
             AsiaInfo Telecommunications Technology Co. Ltd. /***/
   10.7      Agreement for the Establishment of a Limited Liability Company (Guangdong
             Wangying Information Technology Co., Ltd.) and Capital Contribution/***/
   11.1      Statement regarding computation of per share earnings (included in note 10 to
             consolidated financial statements)
   21.1      Subsidiaries of AsiaInfo Holdings, Inc.
   23.1      Consent of Deloitte Touche Tohmatsu
   24.1      Power of Attorney (included on signature page to this report)
</TABLE>
--------
/*/    Incorporated by reference to the same numbered exhibit previously filed
       with our Registration Statement on Form S-1 (No. 333-93199).
/**/   Incorporated by reference to our Quarterly Report on Form 10-Q/A for
       the quarter ended September 30, 2000.
/***/  Incorporated by reference to our Annual Report on Form 10-K for the
       fiscal year ended December 31, 2000.
/****/ Incorporated by reference to our Current Report on Form 8-K filed on
       February 21, 2002.

                                      44
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, AsiaInfo Holdings, Inc. has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 22, 2002.

                                          ASIAINFO HOLDINGS, INC.

                                          /s/ James Ding
                                          -------------------------------------
                                          James Ding
                                          President and Chief Executive Officer

                               POWER OF ATTORNEY

KNOW BY ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James Ding his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
Amendments hereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.

  Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons in the capacities
and on the dates indicated.

<TABLE>
<CAPTION>
    Signature                              Title                                 Date
    ---------                              -----                                 ----
 <S>               <C>                                                      <C>
  /s/ Louis Lau      Board Member and Chairman of the Board                 March 22, 2002
------------------
    Louis Lau


  /s/ James Ding     Board Member, President and Chief Executive Officer    March 22, 2002
------------------   (principal executive officer)
    James Ding


   /s/ Ying Han      Executive Vice President and Chief Financial Officer   March 22, 2002
------------------   (principal financial officer and principal accounting
     Ying Han        officer)


 /s/ Michael Zhao    Board Member, Senior Vice President and General        March 22, 2002
------------------   Manager for Network Infrastructure Solutions
   Michael Zhao


 /s/ Alan Bickell    Board Member                                           March 22, 2002
------------------
   Alan Bickell


 /s/ Steve Chang     Board Member                                           March 22, 2002
------------------
   Steve Chang
</TABLE>

                                       45
<PAGE>

<TABLE>
 <S>               <C>                                              <C>
 /s/ Patrick Keen  Board Member                                     March 22, 2002
------------------
   Patrick Keen


  /s/ Chang Sun    Board Member                                     March 22, 2002
------------------
    Chang Sun


 /s/ Edward Tian   Board Member                                     March 22, 2002
------------------
   Edward Tian
</TABLE>

                                       46
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                 <C>
Independent auditors' report.......................................         F-2
Consolidated balance sheets as of December 31, 2001 and 2000.......         F-3
Consolidated statements of operations for the years ended December
 31, 2001, 2000 and 1999...........................................         F-4
Consolidated statements of stockholders' equity and comprehensive
 income (loss) for the years ended December 31, 2001, 2000 and
 1999..............................................................         F-5
Consolidated statements of cash flows for the years ended December
 31, 2001, 2000 and 1999...........................................  F-6 to F-7
Notes to consolidated financial statements......................... F-8 to F-23
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of AsiaInfo Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of AsiaInfo
Holdings, Inc. ("Company") and its subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss), and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.

                                                    /s/ Deloitte Touche Tohmatsu

Hong Kong
January 22, 2002

                                      F-2
<PAGE>

                            ASIAINFO HOLDINGS, INC.

                          CONSOLIDATED BALANCE SHEETS
              (In US Dollars thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              2001      2000
                                                            --------  --------
                          ASSETS
<S>                                                         <C>       <C>
Current Assets:
 Cash and cash equivalents................................. $110,635  $ 48,834
 Restricted cash...........................................   13,475    26,733
 Short-term investments....................................   27,184   110,400
 Accounts receivable, trade (net of allowance for doubtful
  accounts of $1,094 and $545 at December 31, 2001 and
  2000, respectively)......................................   66,723    55,598
 Inventories-hardware and parts............................    1,180     8,876
 Other receivables.........................................   10,533     3,079
 Deferred income taxes--current............................    1,689        78
 Prepaid expenses and other current assets.................    1,417       592
                                                            --------  --------
   Total current assets....................................  232,836   254,190
 Property and equipment-net................................    5,376     6,340
 Goodwill, at cost less accumulated amortization...........    2,188     3,245
 Investment in affiliate...................................    5,272       --
 Deferred income taxes.....................................      188       228
                                                            --------  --------
   Total Assets............................................ $245,860  $264,003
                                                            ========  ========
<CAPTION>
           LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                         <C>       <C>
Current Liabilities:
 Short-term bank loans..................................... $  2,924  $ 20,645
 Accounts payable..........................................   23,789    42,037
 Other payables............................................    1,682     1,591
 Deferred revenue..........................................    4,279    12,502
 Accrued employee benefits.................................    9,088    10,020
 Accrued expenses..........................................   11,431     6,195
 Income taxes payable......................................    4,743       307
 Other taxes payable.......................................    2,524     1,909
                                                            --------  --------
   Total current liabilities...............................   60,460    95,206
                                                            --------  --------
Minority interest..........................................      610       188
                                                            --------  --------
Commitments and contingencies (Note 11)
Stockholders' Equity:
 Preferred stock, 10,000,000 shares authorized, $0.01 par
  value....................................................      --        --
 Common stock, 100,000,000 shares authorized, $0.01 par
  value, shares issued and outstanding: 2001:42,132,818;
  2000: 40,822,940.........................................      421       408
 Additional paid-in capital................................  178,649   175,370
 Deferred stock compensation...............................     (512)   (1,656)
 Retained earnings (accumulated deficit)...................    6,204    (5,530)
 Accumulated other comprehensive income....................       28        17
                                                            --------  --------
   Total stockholders' equity..............................  184,790   168,609
                                                            --------  --------
   Total Liabilities and Stockholders' Equity.............. $245,860  $264,003
                                                            ========  ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-3
<PAGE>

                            ASIAINFO HOLDINGS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
              (In US Dollars thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                             ----------------------------------
                                                2001        2000        1999
                                             ----------  ----------  ----------
<S>                                          <C>         <C>         <C>
Revenues:
 Network solutions.........................  $  161,131  $  158,696  $   53,786
 Software solutions........................      27,875      17,367       6,494
                                             ----------  ----------  ----------
  Total revenues...........................     189,006     176,063      60,280
                                             ----------  ----------  ----------
Cost of revenues:
 Network solutions.........................     129,712     141,668      41,959
 Software solutions........................       3,821       3,030           4
                                             ----------  ----------  ----------
  Total cost of revenues...................     133,533     144,698      41,963
                                             ----------  ----------  ----------
Gross profit...............................      55,473      31,365      18,317
                                             ----------  ----------  ----------
Operating expenses:
 Sales and marketing (excluding stock-based
  compensation: 2001:$380; 2000: $653;
  1999: $1,194)............................      21,768      19,734       8,768
 General and administrative (excluding
  stock-based
  compensation: 2001:$584; 2000: $1,180;
  1999: $1,331)............................      14,905      12,893       8,167
 Research and development (excluding stock-
  based
  compensation: 2001:$180; 2000: $376;
  1999: $983)..............................       7,304       5,974       2,838
 Amortization of deferred stock
  compensation.............................       1,144       2,209       3,508
                                             ----------  ----------  ----------
  Total operating expenses.................      45,121      40,810      23,281
                                             ----------  ----------  ----------
Income (loss) from operations..............      10,352      (9,445)     (4,964)
                                             ----------  ----------  ----------
Other income (expense):
 Interest income:
  Bank.....................................       7,099       7,919         827
  Other....................................          36         --          --
 Bank interest expense.....................        (969)     (1,032)       (618)
 Other (expense) income, net...............         (59)        (22)        143
                                             ----------  ----------  ----------
   Total other income, net.................       6,107       6,865         352
                                             ----------  ----------  ----------
Income (loss) before income taxes, minority
 interests and equity in loss of
 affiliate.................................      16,459      (2,580)     (4,612)
Income tax expense.........................       3,444         218         383
                                             ----------  ----------  ----------
Income (loss) before minority interests....      13,015      (2,798)     (4,995)
Minority interests in (income) loss of
 consolidated subsidiaries.................        (396)         32          84
Equity in loss of affiliates...............        (885)        --          (35)
                                             ----------  ----------  ----------
Net income (loss)..........................  $   11,734  $   (2,766) $   (4,946)
                                             ==========  ==========  ==========
Net income (loss) per share:
 Basic.....................................  $     0.28  $    (0.07) $    (0.34)
                                             ==========  ==========  ==========
 Diluted...................................  $     0.26  $    (0.07) $    (0.34)
                                             ==========  ==========  ==========
Shares used in computation:
 Basic.....................................  41,525,159  37,239,649  14,630,145
                                             ==========  ==========  ==========
 Diluted...................................  45,924,724  37,239,649  14,630,145
                                             ==========  ==========  ==========
</TABLE>

                See notes to consolidated financial statements.

                                      F-4
<PAGE>

                            ASIAINFO HOLDINGS, INC.

   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                                    (LOSS)
              (In US Dollars thousands, except per share amounts)

<TABLE>
<CAPTION>
                       Convertible                                                 Retained
                     Preferred Stock     Common Stock    Additional   Deferred     Earnings       Other
                    ------------------ -----------------  Paid-in      Stock     (accumulated Comprehensive Comprehensive
                      Shares    Amount   Shares   Amount  Capital   Compensation   deficit)   Income (loss) Income (loss)
                    ----------  ------ ---------- ------ ---------- ------------ ------------ ------------- -------------
<S>                 <C>         <C>    <C>        <C>    <C>        <C>          <C>          <C>           <C>
Balance at January
1, 1999...........   2,160,864   $ 22  14,160,002 $ 142   $ 17,666     $ (783)     $ 2,181          $19
Comprehensive
loss:
 Net loss.........         --     --          --    --         --         --        (4,945)         --         $(4,945)
 Other
 comprehensive
 income, net of
 tax:
 Foreign currency
 translation
 adjustments......         --     --          --    --         --         --           --           (22)           (22)
                                                                                                               -------
  Comprehensive
  loss............                                                                                             $(4,967)
                                                                                                               =======
Issuance of common
stock.............         --     --      437,500     4      1,877        --           --           --
Proceeds received
on issuance of
convertible
preferred stock...   2,630,425     26         --    --      19,974        --           --           --
Issue cost........         --     --          --    --        (150)       --           --           --
Stock option
exercises and
other.............         --     --    1,485,416    15        208        --           --           --
Warrants
exercises.........         --     --    9,449,226    94        (47)       --           --           --
Deferred stock
compensation......         --     --          --    --       6,590     (6,590)         --           --
Amortization of
deferred stock
compensation......                --          --    --         --       3,508          --           --
                    ----------   ----  ---------- -----   --------     ------      -------       ------
Balance at
December 31,
1999..............   4,791,289     48  25,532,144   255     46,118     (3,865)      (2,764)          (3)
Comprehensive
loss:
 Net loss.........         --     --          --    --         --         --        (2,766)         --         $(2,766)
 Other
 comprehensive
 income, net of
 tax:
 Foreign currency
 translation
 adjustments......         --     --          --    --         --         --           --            20             20
                                                                                                               -------
  Comprehensive
  loss............                                                                                             $(2,746)
                                                                                                               =======
Issuance of common
stock in public
offering..........         --     --    5,750,000    58    137,942        --           --           --
Issue cost........         --     --          --    --     (11,391)       --           --           --
Issuance of common
stock on
conversion of
preferred stock...  (4,791,289)   (48)  6,952,153    70        (22)       --           --           --
Stock option
exercises and
other.............         --     --    2,548,643    25      2,723        --           --           --
Warrants
exercised.........         --     --       40,000   --         --         --           --           --
Amortization of
deferred stock
compensation......         --     --          --    --         --       2,209          --           --
                    ----------   ----  ---------- -----   --------     ------      -------       ------
Balance at
December 31,
2000..............         --     --   40,822,940   408    175,370     (1,656)      (5,530)          17
Comprehensive
income:
 Net income.......         --     --          --    --         --         --        11,734          --         $11,734
 Other
 comprehensive
 income, net of
 tax:
 Foreign currency
 translation
 adjustments......         --     --          --    --         --         --           --            11             11
                                                                                                               -------
  Comprehensive
  income..........                                                                                             $11,745
                                                                                                               =======
Stock option
exercises and
other.............         --     --    1,309,878    13      3,279        --           --           --
Amortization of
deferred stock
compensation......         --     --          --    --         --       1,144          --           --
                    ----------   ----  ---------- -----   --------     ------      -------       ------
Balance at
December 31,
2001..............         --    $--   42,132,818 $ 421   $178,649     $ (512)     $ 6,204       $   28
                    ==========   ====  ========== =====   ========     ======      =======       ======
<CAPTION>
                        Total
                    Stockholders'
                       Equity
                    -------------
<S>                 <C>
Balance at January
1, 1999...........    $ 19,247
Comprehensive
loss:
 Net loss.........      (4,945)
 Other
 comprehensive
 income, net of
 tax:
 Foreign currency
 translation
 adjustments......         (22)
  Comprehensive
  loss............
Issuance of common
stock.............       1,881
Proceeds received
on issuance of
convertible
preferred stock...      20,000
Issue cost........        (150)
Stock option
exercises and
other.............         223
Warrants
exercises.........          47
Deferred stock
compensation......         --
Amortization of
deferred stock
compensation......       3,508
                    -------------
Balance at
December 31,
1999..............      39,789
                    =============
Comprehensive
loss:
 Net loss.........      (2,766)
 Other
 comprehensive
 income, net of
 tax:
 Foreign currency
 translation
 adjustments......          20
  Comprehensive
  loss............
Issuance of common
stock in public
offering..........     138,000
Issue cost........     (11,391)
Issuance of common
stock on
conversion of
preferred stock...         --
Stock option
exercises and
other.............       2,748
Warrants
exercised.........
Amortization of
deferred stock
compensation......       2,209
                    -------------
Balance at
December 31,
2000..............     168,609
                    =============
Comprehensive
income:
 Net income.......      11,734
 Other
 comprehensive
 income, net of
 tax:
 Foreign currency
 translation
 adjustments......          11
  Comprehensive
  income..........
Stock option
exercises and
other.............       3,292
Amortization of
deferred stock
compensation......       1,144
                    -------------
Balance at
December 31,
2001..............    $184,790
                    =============
</TABLE>

                See notes to consolidated financial statements.

                                      F-5
<PAGE>

                            ASIAINFO HOLDINGS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              (In US Dollars thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                   ---------------------------
                                                    2001      2000      1999
                                                   -------  ---------  -------
<S>                                                <C>      <C>        <C>
Cash flows from operating activities:
 Net income (loss)................................ $11,734  $  (2,766) $(4,946)
 Adjustments to reconcile net income (loss) to net
  cash generated from (used in) operating
  activities:
  Depreciation....................................   2,232      1,301      621
  Amortization of goodwill........................   1,083      1,057      785
  Amortization of deferred stock compensation.....   1,144      2,209    3,508
  Deferred income taxes...........................  (1,571)      (113)     210
  Minority interest in income (loss) of
   subsidiaries...................................     396        (32)     (84)
  Equity in loss of affiliates....................     885        --        35
  Loss on disposal of property and equipment......       2         56       49
  Provision for doubtful accounts.................   2,782        (33)     840
  Gain on sale of business........................     --         --      (166)
  Changes in operating assets and liabilities:
   Restricted cash................................  13,258    (14,543)  (6,190)
   Accounts receivable............................ (13,896)   (33,642)   2,176
   Inventories....................................   7,696     (5,968)  (2,354)
   Other receivables..............................  (1,025)    (1,732)     740
   Amount due from a related party................     --         --        57
   Deferred offering costs........................     --         --      (402)
   Prepaid expenses and other current assets......    (825)       (23)     294
   Accounts payable............................... (18,248)    30,170     (293)
   Other payables.................................      91      1,230     (352)
   Deferred revenue...............................  (8,222)    12,006   (3,193)
   Accrued employee benefits......................    (931)     5,209    2,231
   Accrued expenses...............................   5,236      4,265      266
   Income taxes payable...........................   4,436        127     (112)
   Other taxes payable............................     614       (386)     251
                                                   -------  ---------  -------
Net cash generated from (used in) operating
 activities.......................................   6,871     (1,608)  (6,029)
                                                   -------  ---------  -------
Cash flows from investing activities:
 Decrease (increase) in short-term investments....  83,215   (110,400)     --
 Purchases of property and equipment..............  (1,342)    (5,669)  (1,003)
 Proceeds on disposal of property and equipment...      73        156      --
 Increase in loan receivable......................  (6,428)       --       --
 Investment in an affiliate.......................  (6,157)       --       --
 Cash (used) received net of cash acquired or
  disposed on purchase and sale of interests in
  subsidiaries:
  AI Zhejiang.....................................     --         --    (1,297)
  AI Data.........................................     --         --       136
                                                   -------  ---------  -------
Net cash generated from (used in) investing
 activities....................................... $69,361  $(115,913) $(2,164)
                                                   =======  =========  =======
</TABLE>

                                      F-6
<PAGE>

                            ASIAINFO HOLDINGS, INC.

               CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
              (In US Dollars thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                    --------------------------
                                                      2001     2000     1999
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
Cash flows from financing activities:
 Increase in short-term bank loans................. $ 43,460  $42,981  $16,173
 Repayment of short-term bank loans................  (61,185) (32,036) (12,314)
  Net proceeds from issuance of common stock in
   public offering.................................      --   127,010      --
  Net proceeds from issuance of convertible
   preferred stock.................................      --       --    19,850
 Proceeds on exercise of stock options.............    3,292    2,748       81
 Warrants exercised................................      --       --        47
 Capital contribution by minority interest.........      --       220      --
                                                    --------  -------  -------
Net cash (used in) provided by financing
 activities........................................  (14,433) 140,923   23,837
                                                    --------  -------  -------
Net increase in cash and cash equivalents..........   61,799   23,402   15,644
Cash and cash equivalents at beginning of year.....   48,834   25,404    9,749
Effect of exchange rate changes on cash and cash
 equivalents.......................................        2       28       11
                                                    --------  -------  -------
Cash and cash equivalents at end of year........... $110,635  $48,834  $25,404
                                                    ========  =======  =======
Supplemental cash flow information:
 Cash paid during the year:
 Interest.......................................... $    937  $ 1,018  $   593
 Income taxes......................................      578      204      301
                                                    ========  =======  =======
Noncash investing and financing activities:
 Deferred stock compensation....................... $    --   $   --   $ 6,590
                                                    ========  =======  =======
</TABLE>

Acquisitions and disposals of interests in subsidiaries:

  In April 1999 the Company acquired AI Zhejiang for cash of $2,000, of which
  $400 was paid as a deposit in 1998, and issuance of 437,500 shares of
  common stock to AI Zhejiang's senior management for their past services,
  and acquired assets with a fair value of $2,873 and assumed liabilities of
  $3,658.

  In 1999 the Company sold its interest in AI Data for cash of $351 and
  disposed of assets with a fair value of $403 and liabilities of $184.

                See notes to consolidated financial statements.

                                      F-7
<PAGE>

                            ASIAINFO HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years ended December 31, 2001, 2000 and 1999
              (In US Dollars thousands, except per share amounts)

1.Organization and Principal Activities

AsiaInfo Holdings, Inc. (the "Company") is incorporated in the State of
Delaware, in the United States ("US"). The Company principally operates through
the following subsidiaries: AsiaInfo Technologies (China), Inc. ("AI
Technology") (100% owned), and Guangdong Wangying Information Technology Co.,
Ltd. ("Wangying") (40% owned, but controlled by the Company), both incorporated
in the People's Republic of China ("China" or the "PRC") and Marsec Holdings,
Inc. ("Marsec") (79% owned), incorporated in the Cayman Islands.

On March 2, 2000, the Company completed an initial public offering of 5,750,000
shares of its common stock, raising net proceeds of $126,610. The Company's
common stock is traded on The Nasdaq National Market in the US.

The Company acts as a holding company and sources computer related equipment in
the United States for sale to customers in the PRC.

AI Technology was established as a wholly foreign owned enterprise with an
initial operating term of 15 years commencing May 2, 1995 (date of
establishment). Its principal activities are conducted in the PRC and comprise
the provision of Internet-related information technology professional services
and software products. In October 2001, the Company merged it's wholly-owned
subsidiary, Zhejiang AsiaInfo Telecommunication Technology Co., Ltd. ("AI
Zhejiang"), into AI Technology. AI Zhejiang's activities were performed in the
PRC and comprised the development and sale of communication hardware and
software as well as providing related technology services. AI Zhejiang was
acquired in April 1999, and the Company recorded goodwill of approximately $4.7
million that is being amortized over 5 years. Its results of operations are
included in the Company's financial statements from the date of acquisition. On
December 31, 2001, AI Technology formed a wholly-owned subsidiary, AsiaInfo
Technologies (Chengdu), Inc., with an initial operating term of 15 years to
provide hardware procurement support for network solution projects.

Wangying was established on September 6, 2000 with an initial operating term of
4 years for a particular customer project in the PRC.

Marsec, through its wholly-owned subsidiary, provides internet security
consulting and services in the PRC. In September 2001, the Company exercised
warrants to purchase 200,000 voting preferred shares at $3.50 a share
increasing its investment in Marsec from 75% to 79%.

On April 27, 2001, the Company invested $6,157 to acquire a 14.25% interest
(voting preferred shares) in Intrinsic Technology (Holdings), Ltd., a Cayman
Islands company engaged in wireless infrastructure solutions development
through two wholly-owned subsidiaries in the PRC.

In 2000, the Company dissolved its subsidiary AsiaInfo-CTC Network Systems Inc.
In 1999, the Company sold, in stages, its entire interest in its 55% owned
subsidiary, Beijing AsiaInfo Data Communication Technology Co., Ltd., which was
consolidated until the sale of a 16.5% interest in August 1999 and subsequently
accounted for under the equity method until the sale in December 1999 of the
remaining interest.

2.Basis of Preparation

These financial statements of the Company and its subsidiaries are prepared in
accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP"). This basis of accounting differs

                                      F-8
<PAGE>

from that used in the statutory financial statements of the PRC subsidiaries
which are prepared in accordance with the accounting principles and the
relevant financial regulations applicable to enterprises with foreign
investment as established by the Ministry of Finance of China.

The principal adjustments made to conform the statutory financial statements of
these subsidiaries to U.S. GAAP included the following:

  (i) Adjustment to depreciation expense for property and equipment to
      reflect more accurately the economic useful life of the assets;

  (ii) Adjustment to recognize sales and cost of sales in accordance with the
       Company's revenue recognition accounting policy;

  (iii) Adjustment to record goodwill and amortization on business
     acquisition; and

  (iv) Adjustment to recognize compensation expense on the issue of stock
     options.

3.Summary of Significant Accounting Policies

Principles of consolidation--The consolidated financial statements include the
financial statements of the Company and its subsidiaries. All significant
inter-company transactions and balances are eliminated in consolidation.
Investments in 50% or less owned affiliates over which the Company exercises
significant influence, but not control, are accounted for using the equity
method. The Company's share of earnings (losses) of these companies is included
in the accompanying consolidated statement of operations.

Cash and cash equivalents--Cash and cash equivalents consist of cash on hand,
demand deposits and highly liquid investments, which are unrestricted as to
withdrawal or use, and which have original maturities of three months or less.

Short-term investments--Short-term investments are classified as available for
sale and consist principally of certificates of deposits issued by major
financial institutions which have maturities of between 6 and 12 months. As
there are no significant market price movements, such investments are held at
cost and accrued interest. There were no realized or unrealized gains or
losses.

Inventories--Inventories of hardware and parts are stated at the lower of cost,
determined principally by the specific identification method, or market. Cost
includes the purchase price of computer-related equipment, transportation,
insurance expense, import and other taxes, and other related expenses.

Property and equipment--Property and equipment is stated at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives as follows:

<TABLE>
   <S>                                   <C>
   Furniture, fixtures and electronic
    equipment........................... 5 years
   Motor vehicles....................... 5 years
   Leasehold improvements............... Shorter of the lease term or 5 years
   Accounting software.................. 3 years
</TABLE>

Goodwill--Goodwill is capitalized and amortized on a straight-line basis over
its expected useful economic life of 5 years. Accumulated amortization was
$2,971 at December 31, 2001 and $1,888 at December 31, 2000.

Impairment--The Company reviews its long-lived assets, including goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may no longer be recoverable. An impairment loss,
measured based on the fair value of the asset, is recognized if expected future
undiscounted cash flows are less than the carrying amount of the assets.

                                      F-9
<PAGE>

Revenue recognition--Revenue from network solutions contracts, which includes
the procurement of hardware on behalf of customers, systems design, planning,
consulting, and system integration is recognized based on the percentage of
completion method. Labor costs and direct project expenses are used to
determine the stage of completion except for revenues associated with the
procurement of hardware. Such hardware-related revenues are recognized upon
delivery. Estimates of hardware warranty costs are included in determining
project costs. In 1999, costs of revenues were reduced by $1,200 representing
$0.08 per share as the Company's experience in that year determined that
reduced warranty cost provisions were required.

Software solutions revenues represent license fees and related services that
allow customers to use the Company's software products in perpetuity up to a
maximum number of users. Contract revenue from software license fees and
software implementation services, which generally represent customer orders
requiring significant production, modifications, or customization of the
software, is recognized in conjunction with the revenues of the related
solutions project over the installation and customization period based on the
percentage of completion of the project as measured by labor costs and direct
project expenses.

Revenue from packaged software license fees through resellers is recorded when
related products are shipped and installed. Costs related to insignificant
obligations for a period up to one year, which include telephone support, are
accrued at the time the revenue is recorded. Software revenues include the
benefit of the rebate of value added taxes on sales of software received from
the tax authorities as part of the PRC government's policy of encouragement of
software development in the PRC. The rebate was $2,950 and $1,314 in 2001 and
2000, respectively; no amount was receivable before 2000.

Revisions in estimated contract profits are made in the period in which the
circumstances requiring the revision become known. Provisions, if any, are made
currently for anticipated losses on uncompleted contracts. Revenue in excess of
billings is recorded as unbilled receivables and included in trade accounts
receivable, and amounted to $45,910 at December 31, 2001 and $33,242 at
December 31, 2000. Billings in excess of revenues recognized are recorded as
deferred income. Billings are rendered based on agreed milestones included in
the contracts with customers.

At December 31, 2001 and 2000, the balance of trade accounts receivable of
$20,813 and $22,356 respectively, represented amounts billed but not yet
collected. All billed and unbilled amounts are expected to be collected within
1 year.

Software development costs--Costs for the development of new software products
and substantial enhancements to existing software products are expensed as
incurred until technological feasibility has been established, at which time
any additional costs would be capitalized. To date, the Company has essentially
completed its software development concurrently with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.

Foreign currency translation--The Company uses the United States dollar as its
reporting currency. Monetary assets and liabilities denominated in currencies
other than United States dollars are translated into United States dollars at
the rates of exchange ruling at the balance sheet date. Transactions in
currencies other than United States dollars during the year are converted into
United States dollars at the rates of exchange ruling at the transaction dates.
Transaction differences are recognized in the statement of operations and
amounted to exchange losses of $59 in 2001, $22 in 2000, and $47 in 1999.

The financial records of the Company's PRC subsidiaries are maintained in
Renminbi, the functional currency and the currency of the PRC. Their balance
sheets are translated into United States dollars based on the rates of exchange
ruling at the balance sheet date. Their statements of operations are translated
using a weighted average rate for the period. Translation adjustments are
reflected as cumulative translation adjustments in stockholders' equity.


                                      F-10
<PAGE>

The Renminbi is not fully convertible into United States dollars or other
foreign currencies. The rate of exchange quoted by the People's Bank of China
on December 31, 2001 was US$1.00=RMB8.2766. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States
dollars at that rate or at any other rate.

Income taxes--Deferred income taxes are provided using the asset and liability
method. Under this method, deferred income taxes are recognized for tax credit
and net operating losses available for carry forwards and all significant
temporary differences. Deferred tax assets and liabilities are classified as
current or non-current based upon the classification of the related asset or
liability in the financial statements or the expected timing of their reversal
if they do not relate to a specific asset or liability. A valuation allowance
is provided to reduce the amount of deferred tax assets if it is considered
more likely than not that some portion of, or all of, the deferred tax asset
will not be realized.

Use of estimates--The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Stock-based compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees."

Net income (loss) per share ("EPS")--Basic EPS excludes dilution and is
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock (convertible preferred stock, warrants to
purchase common stock and common stock options and warrants using the treasury
stock method) were exercised or converted into common stock. Potential common
shares in the diluted EPS computation are excluded in net loss periods as their
effect would be antidilutive.

Comprehensive income--Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Comprehensive income (loss) for the periods presented has been
disclosed within the consolidated statements of stockholders' equity and
comprehensive income (loss).

Financial instruments--The carrying value of financial instruments, which
consist of cash and cash equivalents, restricted cash, short-term investments,
accounts receivable, accounts payable, other payables and short-term bank loans
are carried at cost which approximates fair value due to the short-term nature
of these instruments. The Company does not use derivative investments to manage
risks. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
did not have an impact on the Company's financial position or results of
operations.

Business Combinations--In July 2001, the Financial Accounting Standards Board
issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires the
purchase method of accounting for business combinations initiated after June
30, 2001 and eliminates the pooling-of-interests method. Adoption of SFAS No.
141 did not have a significant impact on the Company's financial position or
results of operations.

New accounting standards not yet adopted--In July 2001, the Financial
Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective January 1, 2002. SFAS No. 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously

                                      F-11
<PAGE>

reported goodwill and the identification of reporting units for purposes of
assessing potential future impairment of certain intangible assets, including
goodwill. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
currently assessing but has not yet determined the impact of SFAS No. 142 on
its financial position and results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," that addresses the accounting
for the recognition of obligations associated with the retirement of tangible
long-lived assets. SFAS No. 143 is effective for financial statements issued
for years beginning after June 15, 2002. In October 2001, the Financial
Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which is effective for fiscal years
beginning after December 15, 2001. SFAS No. 144 addresses the financial
accounting and reporting requirements for the impairment or disposal of long-
lived assets and discontinued operations. SFAS No. 144 applies to all recorded
long-lived assets that are held for use or that will be disposed of, but
excludes goodwill and other intangible assets that are not amortized.
Management does not believe that the adoption of SFAS Nos. 143 and 144 will
have a significant impact on its financial position or results of operations.

Reclassifications--Certain prior period amounts have been reclassified to
conform to the 2001 presentation.

4.Other Receivables

Included in the other receivables at December 31, 2001 is a loan of $6,428 to
Bonson Information Technology Holdings, Ltd. ("Bonson") collateralized by
shares of Bonson. The loan bears interest at the London Inter Bank Offered Rate
plus 0.75% per annum (2.4425% at December 31, 2001) and is repayable by
September, 2002. As outlined in note 20, the Company has entered into an
agreement in January 2002 to acquire Bonson.

5.Property and Equipment, Net

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   2001   2000
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Furniture, fixtures and electronic equipment.................. $5,836 $5,283
   Motor vehicles................................................    420    331
   Leasehold improvements........................................  1,834  2,100
   Accounting software...........................................  1,047    695
                                                                  ------ ------
     Total.......................................................  9,137  8,409
   Less: Accumulated depreciation................................  3,761  2,069
                                                                  ------ ------
     Net book value.............................................. $5,376 $6,340
                                                                  ====== ======
</TABLE>

6.Investment in Affiliate

In April 2001, the Company invested $6,157 in Intrinsic Technology (Holdings),
Ltd. ("Intrinsic") for a 14.25% interest. The investment in Intrinsic is
recorded using the equity method because the Company is able to exercise
significant influence over the operating and financial policies of Intrinsic
through its representation on the Board. The excess of purchase price over the
Company's percentage interest in the recorded amount of the net assets of
Intrinsic as of the acquisition date is $5,631. The period of amortization for
the goodwill is five years based on the estimated useful life. The Company's
share of loss of the affiliate of $885 includes amortization of goodwill in the
amount of $751. In connection with the investment, the Company also received
warrants from Intrinsic that will entitle the Company and its co-investors to
acquire a controlling interest in Intrinsic. Intrinsic and its wholly-owned
subsidiaries are engaged in wireless internet application and development. The
Company's net investment in affiliate at December 31, 2001 was $5,272.


                                      F-12
<PAGE>

7.Short-Term Bank Loans

As of December 31, 2001, the Company had total short-term credit facilities for
working capital purposes totaling $20,870 mainly expiring by June 2002. The
facilities were secured by bank deposits of $10,900. At December 31, 2001,
unused short-term credit facilities were $18,865 and used facilities totaled
$2,005 of which $1,376 was used for issuing standby letters of credit provided
to hardware suppliers. Additional borrowings of $2,295 were secured by bank
deposits of $2,367. All the borrowings were in RMB. The loans carry interest of
5.58% per annum. Additional bank deposits of $208 were used for issuing a
standby letter of credit. Bank deposits pledged as security for these credit
facilities totaled $13,475 and $26,733 as of December 31, 2001 and 2000,
respectively, and are presented as restricted cash in the consolidated balance
sheets.

8.Other Taxes Payable

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   2001   2000
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Individual income tax......................................... $1,125 $1,195
   Business tax payable..........................................    530    197
   Value added taxes payable, net................................    869    517
                                                                  ------ ------
                                                                  $2,524 $1,909
                                                                  ====== ======
</TABLE>

The Company's PRC subsidiaries are subject to value added tax at a rate of 17%
on revenue from procurement of hardware on behalf of customers and revenues
from software licenses. They are also subject to business tax at the rate of 5%
on other service revenues from network solutions. Value added tax payable on
revenues is computed net of value added tax paid on purchases. In respect of
revenue from software licenses, however, if the net amount of value added tax
payable exceeds 3% of software sales, the excess portion of value added tax can
be refunded immediately. The Company therefore enjoys an effective net value
added tax burden of 3% from software license revenues. This government policy
is effective until 2010. The Company is also required to withhold PRC
individual income tax on employees' payroll for remittance to the tax
authorities.

9.Income Taxes

The components of income (loss) before income taxes, minority interests and
equity in loss of affiliate are as follows:

<TABLE>
<CAPTION>
                                                        Years Ended December
                                                                 31,
                                                       ------------------------
                                                        2001    2000     1999
                                                       ------- -------  -------
   <S>                                                 <C>     <C>      <C>
   United States...................................... $ 2,543 $(2,025) $(4,040)
   Foreign............................................  13,917    (555)    (572)
                                                       ------- -------  -------
                                                       $16,460 $(2,580) $(4,612)
                                                       ======= =======  =======
</TABLE>

The Company is subject to US federal and state income taxes. The Company's
subsidiaries incorporated in the PRC are subject to PRC income taxes.


                                      F-13
<PAGE>

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                              Years Ended
                                                              December 31,
                                                           --------------------
   <S>                                                     <C>     <C>    <C>
<CAPTION>
                                                            2001   2000   1999
                                                           ------  -----  -----
   <S>                                                     <C>     <C>    <C>
   Current
    United States:
     Federal.............................................  $4,006  $ --   $ --
     State...............................................     212    --     --
    Foreign..............................................     797    331    173
                                                           ------  -----  -----
   Total current income taxes............................   5,015    331    173
                                                           ------  -----  -----
   Deferred
    United States:
     Federal.............................................  (1,931)   --     --
     State...............................................     (94)   --     --
    Foreign..............................................     454   (113)   210
                                                           ------  -----  -----
   Total deferred income taxes...........................  (1,571)  (113)   210
                                                           ------  -----  -----
   Total income tax expense..............................  $3,444  $ 218  $ 383
                                                           ======  =====  =====
</TABLE>

The components of deferred income tax assets are as follows:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 --------------
                                                                  2001    2000
                                                                 ------  ------
   <S>                                                           <C>     <C>
   Deferred tax assets:
    Allowances and reserves..................................... $1,615  $  874
    Depreciation................................................    188     306
    Net operating loss carry forwards...........................    347     618
    Others......................................................     74     --
                                                                 ------  ------
   Total gross deferred tax assets..............................  2,224   1,798
   Valuation allowance..........................................   (347) (1,492)
                                                                 ------  ------
   Total net deferred tax assets................................ $1,877  $  306
                                                                 ======  ======
</TABLE>

At December 31, 2001, tax loss carry forwards in the PRC amounted to
approximately $2.5 million, which will expire between 2002 and 2005.

The subsidiaries incorporated in the PRC are governed by the Income Tax Law of
the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and
various local income tax laws (the "Income Tax Laws"). Under the Income Tax
Laws, foreign investment enterprises ("FIE") generally are subject to an income
tax at an effective rate of 33% (30% state income taxes plus 3% local income
taxes) on income as reported in their statutory financial statements after
appropriate tax adjustments unless the enterprise is located in specially
designated regions or cities for which more favorable effective rates apply.
Upon approval by the PRC tax authorities, FIEs scheduled to operate for a
period of 10 years or more and engaged in manufacturing and production may be
exempt from income taxes for two years, commencing with their first profitable
year of operations, and thereafter with a 50% exemption for the next three
years.

Pursuant to the Income Tax Laws, FIEs approved as high-tech or new technology
enterprises which are established in the Beijing New Technology Industry
Development Zone ("BDZ") are subject to income tax at the reduced rate of 15%.
High technology enterprises are also eligible for a three-year exemption from
income tax followed by a 50% reduction of income tax for the next three years.
This relief commences from the date of commencement of the enterprise's
business operations. AI Technology has been approved as a new technology

                                      F-14
<PAGE>

enterprise and as it is established in the BDZ, it enjoys the preferential tax
treatment described above. In 2001, 2000 and 1999 all of the Company's PRC
subsidiaries, except for AI Technology, were either exempt from income taxes or
did not have any assessable income. AI Technology's 50% reduction in income tax
expired on December 31, 2000. AI Technology received a continuation of its
preferential tax treatment from the local government for an additional three
years, which will reduce its effective income tax rate to not less than 10%.

Income tax of AI Technology in 2001, 2000 and 1999 was $1,251, $218 and $383,
respectively. In the absence of such income tax exemptions or preferential tax
treatment, additional income tax of $615 in 2001 and $252 in 2000 would
otherwise have been payable and the effect on net income (loss) per share would
be to decrease basic income per share and diluted income per share by $0.01 in
2001 and increase basic and diluted loss per share by $0.01 in 2000. There was
no impact on loss per share in 1999.

Undistributed foreign earnings amounted to approximately $11 million at
December 31, 2001. Those earnings are considered to be indefinitely reinvested
and, accordingly, no provision for US federal and state income tax or foreign
withholding taxes has been made. Upon distribution of those earnings, the
Company would be subject to US income taxes (subject to a reduction for foreign
tax credits) and withholding taxes payable to the PRC, if any.

A reconciliation between the provision (benefit) for income taxes computed by
applying the US federal tax rate to income (loss) before income taxes and the
actual provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                              Years Ended
                                                              December 31,
                                                             -----------------
                                                             2001  2000   1999
                                                             ----  ----   ----
   <S>                                                       <C>   <C>    <C>
   US federal statutory rate...............................   35%  (35)%  (35)%
   Differences between statutory rate and foreign effective
    tax rate...............................................  (20)   29     37
   Amortization of goodwill................................    2    14      6
   Others..................................................    4    --     --
                                                             ---   ---    ---
                                                              21%    8%     8%
                                                             ===   ===    ===
</TABLE>

10.CAPITAL STOCK

The Company's authorized capital stock consists of 110,000,000 shares,
consisting of 100,000,000 of common stock, par value $0.01 per share, and
10,000,000 shares of preferred stock, par value $0.01 per share.

The Company's previously issued Series A and the Series B Convertible Preferred
Stock automatically converted into an aggregate of 6,952,153 shares of common
stock upon the Company's initial public offering in March, 2000 (the "IPO").
Prior to their conversion into common stock the holders of the Series A and
Series B Convertible Preferred Stock were entitled to participate in all
dividends paid to the common stockholders, on an as converted base, when and if
such dividends were declared by the Board. While the convertible preferred
stock was outstanding, the Company was not permitted to pay any dividend with
regard to any share of common stock of the Company unless and until all
dividends on the convertible preferred stock had been paid. The holders of
convertible preferred stock were entitled to the same voting rights as that of
common stockholders. This Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock had aggregate liquidation preferences of $18
million and $20 million, respectively, as of December 31, 1999 and were senior
to all common stock.

In 2000, the Company issued 292 shares of common stock at a price of $0.01 per
share to a third party for services provided to the Company. The Company has
accounted for such issuance in accordance with SFAS 123, "Accounting for Stock-
Based Compensation" and recorded expense of $5.


                                      F-15
<PAGE>

 Net income (loss) per share

The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations:

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                            ---------------------------------
                                               2001       2000        1999
                                            ---------- ----------  ----------
   <S>                                      <C>        <C>         <C>
   Net income (loss) (numerator):
    Net income (loss)
     Basic and diluted..................... $   11,734 $   (2,766) $   (4,946)
                                            ========== ==========  ==========
   Shares (denominator):
    Weighted average Common Stock
     Outstanding........................... 41,525,159 37,239,649  15,576,580
    Outstanding subject to repurchase......        --         --      946,435
                                            ---------- ----------  ----------
    Basic.................................. 41,525,159 37,239,649  14,630,145
    Options................................  4,399,565        --          --
                                            ---------- ----------  ----------
    Diluted................................ 45,924,724 37,239,649  14,630,145
                                            ========== ==========  ==========
   Net income (loss) per share:
    Basic.................................. $     0.28 $    (0.07) $    (0.34)
    Diluted................................ $     0.26 $    (0.07) $    (0.34)
</TABLE>

In 2000 and 1999, the Company had securities outstanding which could
potentially dilute basic EPS in the future, but were excluded in the
computation of diluted EPS in such periods, as their effect would have been
antidilutive due to the net loss reported in these periods. In 2001, the
Company had options outstanding which could potentially dilute EPS in the
future, but were excluded in the computation of diluted EPS in the year, as
their exercise prices were above the average market values in the year. Such
outstanding securities consist of the following:

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                  ------------------------------
   <S>                                            <C>       <C>       <C>
<CAPTION>
                                                    2001      2000       1999
                                                  --------- --------- ----------
   <S>                                            <C>       <C>       <C>
   Outstanding options..........................  1,326,180 8,781,865  8,891,811
   Convertible preferred stock..................        --        --   6,952,153
   Warrants.....................................        --        --      40,000
                                                  --------- --------- ----------
                                                  1,326,180 8,781,865 15,883,964
                                                  ========= ========= ==========
</TABLE>

11.COMMITMENTS AND CONTINGENCIES

Operating Leases--As of December 31, 2001, the Company was committed under
certain operating leases, requiring annual minimum rentals as follows:

<TABLE>
   <S>                                                                    <C>
   2002.................................................................. $2,146
   2003..................................................................    598
   2004..................................................................     70
                                                                          ------
                                                                          $2,814
                                                                          ======
</TABLE>

The leased properties are principally located in the PRC and are used for
administration and research and development. The leases are renewable subject
to negotiation. Rental expense for the three years in the period ended December
31, 2001 was $2,190, $2,401, and $1,539, respectively.

Letters of credit--At December 31, 2001, the Company had outstanding letters of
credit to vendors of $1,585 fully collateralized by pledge of bank deposits.


                                      F-16
<PAGE>

Litigation--On December 4, 2001, a securities class action suit was filed in
the United States against the Company, certain of the Company's directors and
co-lead underwriters involved in the Company's Initial Public Offering ("IPO")
on behalf of all persons and entities who purchased, converted, exchanged or
otherwise acquired the common stock of the Company between March 2, 2000 and
December 6, 2000, inclusive. The complaint alleges, among other things, that
the Company and certain of its officers and directors at the time of the IPO
violated the federal securities laws by issuing and selling the Company's
common stock pursuant to the IPO without disclosing to investors that several
of the underwriters of the IPO had solicited and received excessive and
undisclosed commissions from certain investors. The plaintiffs seek class
action certification and claim for an unspecified amount of damages. Management
intends to vigorously defend the action; however, the outcome of this
litigation is uncertain. In addition, management believes that the underwriters
may have an obligation to indemnify the Company for the legal fees and other
costs of defending this suit and that its directors' and officers' liability
insurance policies may also cover the defense and exposure or settlement of the
suit.

12.EMPLOYEE RETIREMENT BENEFITS

The Company's employees in the PRC are entitled to retirement benefits
calculated with reference to their basic salaries on retirement and their
length of service in accordance with a government managed benefits plan. The
PRC government is responsible for the benefit liability to these retired
employees. The Company is required to make contributions to the state
retirement plan at 19% to 25.5% of the monthly basic salaries of the current
employees. Employees who are citizens or permanent residents of the United
States and who have been employed for more than six months are entitled to
retirement benefits under a Simplified Employee Pension Plan (the "Plan"). The
Company contributes 5% of employees' monthly salaries to the Plan. The expense
of such arrangements to the Company for the three years in the period ended
December 31, 2001 was $754, $736 and $784, respectively.

In addition, the Company is required by law to contribute approximately 23.5%
to 34.5% of basic salaries of the PRC employees for employee welfare, housing,
medical and education benefits representing Company expense of $3,443, $2,921
and $2,470 for 2001, 2000 and 1999, respectively. The Company does not have any
post retirement benefit plans.

13.DISTRIBUTION OF PROFITS

As stipulated by the relevant laws and regulations applicable to China's
foreign investment enterprises, the Company's PRC subsidiaries are required to
make appropriations from net income as determined under accounting principles
generally accepted in the PRC ("PRC GAAP") to nondistributable reserves which
include a general reserve, an enterprise expansion reserve and a staff welfare
and bonus reserve. Wholly-owned PRC subsidiaries are not required to make
appropriations to the enterprise expansion reserve but appropriations to the
general reserve are required to be made at not less than 10% of the profit
after tax as determined under PRC GAAP. The staff welfare and bonus reserve is
determined by the board of directors.

The general reserve is used to offset future extraordinary losses. The
subsidiaries may, upon a resolution passed by the stockholders, convert the
general reserve into capital. The staff welfare and bonus reserve is used for
the collective welfare of the employees of the subsidiaries. The enterprise
expansion reserve is used for the expansion of the subsidiaries' operations and
can be converted to capital subject to approval by the relevant authorities.
These reserves represent appropriations of retained earnings determined
according to Chinese law. Appropriations to general reserves by the Company's
PRC subsidiaries were $697 in 2001. There were no appropriations to reserves
prior to 2001.

14.CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

Financial instruments, which potentially subject the Company to concentration
of credit risk, consist principally of temporary cash and short-term
investments, and trade accounts receivable.


                                      F-17
<PAGE>

The Company places its temporary cash and short-term investments with various
financial institutions in the PRC and the United States. At December 31, 2001,
the amounts were placed principally with financial institutions in the United
States.

The Company's business activities and accounts receivable are principally in
the PRC with a limited number of large customers, principally China
Telecommunications Corporation ("China Telecom") and its provincial
subsidiaries, and China United Telecommunications Corporation ("China Unicom").
Sales to China Telecom and its subsidiaries amounted to approximately 31%, 34%
and 84% of total revenues in 2001, 2000 and 1999, respectively. During the year
ended December 31, 1999, certain entities related to China Telecom represented
more than 10% of total revenues. In 1999, one provincial entity accounted for
29% of total revenues and another provincial entity accounted for 17% of total
revenues. In 2001 and 2000, no individual provincial entity represented more
than 10% of total revenues. Sales to China Unicom accounted for 45% of total
revenues in 2001, 43% in 2000 and 14% in 1999. Sales to China Netcom
Corporation Ltd. accounted for 9% and 10% of total revenues in 2001 and 2000,
respectively.

Details of the amounts receivable from the customers with the largest
receivable balances at December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                               Percentage of
                                                                 accounts
                                                                receivable
                                                               December 31,
                                                               ---------------
                                                                2001     2000
                                                               ------   ------
   <S>                                                         <C>      <C>
   Five largest receivables balances..........................     84%      51%
</TABLE>

The Company maintains allowances for estimated potential bad debt losses. The
Company's client basis is expanding to include smaller telecommunication and
internet service providers and the Company revises its estimates of
collectibility on a periodic basis. The Company maintained provisions for
doubtful accounts of $1,094, $545 and $640 at December 31, 2001, 2000 and 1999,
respectively. Bad debt expense was $2,782 in 2001 and $840 in 1999. Reduction
of bad debt provision was $(33) in 2000 and write-offs of bad debts were $2,233
in 2001, $62 in 2000 and $262 in 1999. There were no other movements in the
provision for doubtful accounts.

The Company's business growth is indirectly dependent on government budgetary
policy for the telecommunications and Internet industries in China. The laws
and regulations applicable to the Internet industry in China remain unsettled
and could have a material adverse effect on the Company's business. The
Company's customer base is concentrated and the loss of one or more customers
could cause the business to suffer.

15.STOCK OPTION PLANS

General--Under the Company's 2000 Stock Option Plan, in each calendar year
through 2010, the Company may grant options to purchase up to 4 million shares
of common stock to employees, directors and consultants at prices not less than
the fair market value at the date of grant for incentive stock options ("ISO")
and nonqualified options ("NQO"). Prior to adoption of the 2000 Stock Option
Plan, the Company adopted annual stock option plans for each of 1995, 1996,
1997, 1998 and 1999 (such plans, together with the 2000 Stock Option Plan, are
referred to hereinafter as the "Plans").

The vesting periods of the options under the Plans are determined based on
individual stock option agreements. Options granted prior to 1998 generally
vest and become exercisable over three one-year cliffs at an equal rate.
Exercise terms of options granted in 1998, 1999 and 2000 are substantially
comparable to options granted prior to 1998 except that the vesting and
exercise periods are generally over four one-year cliffs at a rate of 20%, 20%,
30% and 30% for the 1999 plan and are generally over four one-year cliffs at a
rate of 25%, 25%, 25% and 25% for the 2000 plan. However, for common shares
issued upon exercise of ISO's granted in 1998 and up

                                      F-18
<PAGE>

to September 30, 1999, the Company retained a right of repurchase at the
exercise price, expiring 60 days after termination of employment. Accordingly,
these ISO awards are accounted for as variable awards. Vesting terms on NQO's
granted in 1998, 1999 and 2000 are substantially comparable to options granted
prior to 1998. The options granted prior to 1998 also contained the right of
repurchase by the Company at fair market value. Subsequent to September 30,
1999 the Company amended the terms of the ISO's and NQO's to eliminate the
Company's right of repurchase.

Total number of options exercisable and the weighted average exercise price
were 3,775,807, 4,039,625 and 5,603,111, and $5.44, $2.81 and $2.37 as of
December 31, 2001, 2000 and 1999, respectively.

Option activity for the Plans is summarized as follows:

<TABLE>
<CAPTION>
                                                      Outstanding Options
                                                                  Weighted
                                                  Number of   average exercise
                                                    shares    price per share
                                                  ----------  ----------------
   <S>                                            <C>         <C>
   Outstanding, January 1, 1999..................  7,702,000       $1.39
    Granted (weighted average fair value of
     $2.92)......................................  2,892,000        6.07
    Canceled.....................................    (52,300)       2.81
    Exercised.................................... (1,649,889)       0.89
                                                  ----------
   Outstanding, December 31, 1999................  8,891,811        2.99
    Granted (weighted average fair value of
     $9.89)......................................  3,307,640       20.83
    Cancelled....................................   (834,876)       9.43
    Exercised.................................... (2,582,710)       1.86
                                                  ----------
   Outstanding, December 31, 2000................  8,781,865        9.43
    Granted (weighted average fair value of
     $7.02)......................................  2,476,840        9.50
    Cancelled.................................... (1,639,659)      15.21
    Exercised.................................... (1,309,878)       2.51
                                                  ----------
   Outstanding, December 31, 2001................  8,309,168        9.40
                                                  ==========
</TABLE>

The fair value of the common stock underlying the issue of the options under
the Plans is based on valuations by independent appraisers or by reference to
stock sales prices, as appropriate.

Additional information on options outstanding at December 31, 2001 is as
follows:

<TABLE>
<CAPTION>
                                                            Options Exercisable
                              Options Outstanding as of      as of December 31,
                                  December 31, 2001                 2001
                           -------------------------------- --------------------
                                        Weighted
                                         average   Weighted             Weighted
                                        remaining  average              average
Range of average exercise    Number    contractual exercise   Number    exercise
Prices                     outstanding life (yrs.)  price   exercisable  price
-------------------------  ----------- ----------- -------- ----------- --------
<S>                        <C>         <C>         <C>      <C>         <C>
$0.005 to 0.01...........     650,000     3.75      $0.01      650,000   $0.01
$0.25 to 0.75............      11,117     4.58       0.75       11,117    0.75
$1.00 to 1.50............     727,223     5.11       1.14      723,890    1.14
$2.00 to 2.75............     867,265     5.75       2.67      857,265    2.67
$3.00....................     299,550     7.14       3.00       90,800    3.00
$4.17....................     294,200     7.41       4.17       62,000    4.17
$7.60 to 10.00...........   3,218,818     9.07       8.63      876,200    7.60
$10.25 to 13.00..........     892,815     8.85      12.24      203,735   12.28
$14.06 to 19.63..........      32,500     9.12      17.52        1,100   19.63
$24.00...................   1,068,180     8.13      24.00      227,700   24.00
$29.625 to 47.03.........     247,500     8.52      32.04       72,000   31.29
                            ---------     ----      -----    ---------   -----
  Total..................   8,309,168     7.66      $9.40    3,775,807   $5.44
                            =========     ====      =====    =========   =====
</TABLE>

                                      F-19
<PAGE>

Deferred stock compensation--As discussed in Note 3, the Company accounts for
its stock-based awards to employees using the intrinsic value method in
accordance with APB No. 25. Accordingly, the Company recorded deferred
compensation expense equal to the difference between the grant price and deemed
fair value of the Company's common stock for options granted prior to December
31, 1997, which were all fixed awards. Such deferred compensation expense
aggregated $3,136 and was amortized to expense over the three year vesting
period of the options.

As discussed above, ISO grants to employees in 1998 and 1999 were variable
awards. Accordingly, the Company recorded deferred compensation expense at the
grant date equal to the difference between the grant price and deemed fair
value of the Company's common stock at the grant date and adjusts the deferred
compensation expense at the end of each period based on the deemed fair value
of the Company's common stock at the end of the period. The related
amortization of deferred compensation expense, which is recognized over the
four year exercise period of the options, is also adjusted accordingly.

In 1999, the Company issued NQO's to nonemployees to purchase 96,000 shares of
common stock at prices ranging from $3.00 to $4.17 per stock. In accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation", and its related
interpretations, the Company accounted for this transaction under the fair
value method and as a variable award. Accordingly, the Company recorded
deferred compensation expense at the grant date equal to the fair value of the
options (using the Black-Scholes option pricing model) at the grant date and
adjusts the deferred compensation expense at the end of the period. The related
amortization of deferred compensation expense, which is recognized over the
four year exercise period of the options, is also adjusted accordingly.

Amortization of deferred stock compensation was $1,144, $2,209 and $3,508 for
the years ended December 31, 2001, 2000 and 1999, respectively.

Additional stock plan information--Since the Company continues to account for
its stock-based awards to employees using the intrinsic value method in
accordance with APB No. 25, SFAS No. 123 requires the disclosure of pro forma
net income (loss) and income (loss) per share had the Company adopted the fair
value method. The Company's calculations were made using the Black-Scholes
valuation model which requires subjective assumptions, including expected time
to exercise, which affects the calculated values. The following weighted
average assumptions were used: expected life, seven years; risk free interest
rate 4.4% in 2001, 5.89% in 2000 and 6.5% in 1999; volatility of 78% in 2001,
75% in 2000 and 30% in 1999; and no dividends during the expected term. The
Company's calculations are based on a single option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
2001, 2000 and 1999 awards had been amortized to expense over the vesting
period of the awards, pro forma net (loss) income would have been approximately
$(7,084) ($(0.17) per share, basic and diluted), $(11,409) ($(0.31) per share,
basic and diluted) and $(5,757) ($(0.39) per share, basic and diluted), in
2001, 2000 and 1999, respectively.

16.WARRANTS

 Convertible preferred stock

In connection with a private placement in December 1997, the Company issued
9,429,226 stock purchase warrants ("Warrants") to its Series A Convertible
Preferred Stock holders, which were exercisable in whole at any time after
December 31, 1999 at an initial value of $0.005 per Warrant. Each Warrant
represented the right to purchase one share of the Company's common stock. All
the warrants were exercised in 1999 pursuant to amended warrant terms which
accelerated the warrant exercise term.

 Common stock

At December 31, 1999 warrants granted to a consultant to purchase 40,000 shares
of common stock at $0.01 per share were outstanding. In accordance with SFAS
No. 123 and its related interpretations, the arrangement

                                      F-20
<PAGE>

was accounted for as a variable award and the Company recognized compensation
expense using an option pricing model of $47,178 in 1999. In 2000, the
remaining warrants were exercised and at December 31, 2001 and 2000, no
warrants to purchase shares of common stock were outstanding.

17.SEGMENT AND GEOGRAPHIC OPERATING INFORMATION

Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker. By this definition, the Company has
two operating segments (separate lines of business): network solutions net of
hardware costs and software solutions. Each business line has separate
operating data and separate management individuals responsible for the sales,
marketing and development efforts. The network solutions business provides
customers the necessary hardware (e.g. network routers and servers from third
party original equipment manufacturers) and consulting and systems integration
services to develop a network system. The Company manages its business
internally based on total revenues net of hardware costs. The software
solutions business sells software products which include Internet customer
management and billing, wireless customer management and billing and messaging
software. These software products and the related services can be sold
separately or in connection with a systems integration arrangement. Costs and
expenses allocated between operating segments are generally on an actual basis
and for those common expenses, allocation is made proportionally to the revenue
of network solutions net of hardware costs and software solutions.

<TABLE>
<CAPTION>
                                                      Years Ended December
                                                               31,
                                                     ------------------------
                                                      2001    2000     1999
                                                     ------- -------  -------
   <S>                                               <C>     <C>      <C>
   Revenues net of hardware costs:
   Network solutions net of hardware cost........... $43,516 $27,211  $18,727
   Software solutions...............................  27,875  17,367    6,494
                                                     ------- -------  -------
   Consolidated revenues net of hardware costs......  71,391  44,578   25,221
   Consolidated cost of sales net of hardware
    costs...........................................  15,918  13,213    6,904
                                                     ------- -------  -------
   Consolidated gross profit........................ $55,473 $31,365  $18,317
                                                     ======= =======  =======
   Gross profit:
   Network solutions................................ $31,419 $17,028  $11,827
   Software solutions...............................  24,054  14,337    6,490
                                                     ------- -------  -------
   Consolidated gross profit........................ $55,473 $31,365  $18,317
                                                     ======= =======  =======
   Depreciation and amortization:
   Network solutions................................ $ 2,021 $ 1,263  $   854
   Software solutions...............................   1,294   1,095      552
                                                     ------- -------  -------
                                                      $3,315 $ 2,358  $ 1,406
                                                     ======= =======  =======
   Amortization of deferred stock compensation:
   Network solutions................................     588   1,119    1,875
   Software solutions ..............................     556   1,090    1,633
                                                     ------- -------  -------
                                                     $ 1,144 $ 2,209  $ 3,508
                                                     ======= =======  =======
   Income (loss) from operations:
   Network solutions................................ $ 8,368 $(4,283) $(4,167)
   Software solutions...............................   1,984  (5,162)    (797)
                                                     ------- -------  -------
   Consolidated income (loss) from operations....... $10,352 $(9,445) $(4,964)
                                                     ======= =======  =======
</TABLE>

For the years ended December 31, 2001, 2000 and 1999, almost all of the
Company's revenues have been derived from sales to customers in the PRC.
Revenues are attributed to the country based on the country of installation of
hardware, software and performance of system integration work and software
related service. Also, as of December 31, 2001, 2000 and 1999, 99% of the
Company's long-lived assets are located in the PRC.


                                      F-21
<PAGE>

During 2001, the Company included as a component of software revenues the
software service revenue that had previously been included as a component of
network solutions revenue. Such change in classification is consistent with the
Company's current internal reporting structure through December 31, 2001. The
Company has reclassified prior year amounts to conform with the current year
presentation.

At the start of 2002, the Company reorganized the internal operations into
three strategic business units, which correspond with three of its product
offerings--network infrastructure solutions, operation support system
solutions, and service application solutions. Each of these business units is
responsible for both the services and software components that comprise their
product offerings. The fourth product offering of the Company is network
security solutions provided by Marsec, the majority-owned subsidiary of the
Company. The Company cannot practically reclassify and present the financial
information for 2001, 2000 and 1999 to correspond with its operational
structure that became effective at the beginning of 2002.

18.SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected quarterly financial data for the years ended December 31, 2001, 2000
and 1999 are presented in the following table.

<TABLE>
<CAPTION>
                                                Three Months Ended
                                     -----------------------------------------
                                     December 31 September 30 June 30 March 31
                                     ----------- ------------ ------- --------
   Year Ended December 31, 2001
   ----------------------------
   <S>                               <C>         <C>          <C>     <C>
   Revenues.........................   $37,645     $94,031    $21,551 $35,779
   Gross profit.....................    15,305      15,540     13,349  11,279
   Net income.......................     4,260       3,519      2,576   1,379
   Net income per share--basic......      0.10        0.08       0.06    0.03
   --diluted........................      0.09        0.08       0.06    0.03
<CAPTION>
   Year Ended December 31, 2000
   ----------------------------
   <S>                               <C>         <C>          <C>     <C>
   Revenues.........................   $44,012     $58,068    $51,091 $22,892
   Gross profit.....................    10,908       9,790      7,991   2,676
   Net income (loss)................     1,023         415        434  (4,638)
   Net income (loss) per share--
    basic...........................      0.03        0.01       0.01   (0.16)
   --diluted........................      0.02        0.01       0.01   (0.16)
<CAPTION>
   Year Ended December 31, 1999
   ----------------------------
   <S>                               <C>         <C>          <C>     <C>
   Revenues.........................   $11,965     $23,521    $19,546 $ 5,248
   Gross profit.....................     3,537       7,300      5,677   1,803
   Net (loss) income................    (3,817)       (522)     1,252  (1,859)
   Net (loss) income per share--
    basic...........................     (0.23)      (0.04)      0.09   (0.14)
   --diluted........................     (0.23)      (0.04)      0.04   (0.14)
</TABLE>

In the fourth quarter of 2000, the Company benefited from a change in
regulations issued in that quarter by the Department of Finance of Beijing,
which reduced the contributions, effective the beginning of 2000, the Company
was required to make to the government for PRC employee benefits. As a result
during the fourth quarter, the Company reversed $900 of costs accrued in the
first three quarters of 2000 which had previously been expensed ($257 in the
first quarter, $300 in the second quarter and $345 in the third quarter).


                                      F-22
<PAGE>

19.RELATED PARTY TRANSACTIONS

In the years ended December 31, 2001 and 2000, the Company entered into
software and network solutions contracts with China Netcom Corporation ("China
Netcom") with a total contract sum of approximately $9,300 and $30,000,
respectively. Edward Tian, a Director and major shareholder of the Company, is
the Chief Executive Officer of China Netcom. Revenue recognized in 2001 and
2000 from such contracts was approximately $17,000 and $18,000, respectively.
Accounts receivable due from China Netcom as of December 31, 2001 and 2000 were
$2,226 and $2,917, respectively.

On January 17, 2001, the Company purchased a convertible promissory note in the
principal amount of $750 from ChinaPalmInfo Holdings Co., Ltd.
("ChinaPalmInfo"). At the time of the purchase, ChinaVest V LP also held a
convertible promissory note of ChinaPalmInfo in the principal amount of $500. A
director of the Company is a principal of ChinaVest V LLC, the general partner
of ChinaVest V LP.

20.SUBSEQUENT EVENT

On January 20, 2002, the Company entered into an agreement (the "Agreement") to
acquire 100% of the outstanding share capital of Bonson Information Technology
Holdings Limited, a wireless telecommunications operation support system
solutions provider in China. The Company expects the aggregate acquisition
price to consist of approximately 830,000 shares of the Company's common stock
and approximately $30,000 in cash; although the final consideration is subject
to adjustment based on the provisions of the Agreement.

                                      F-23
<PAGE>

                               INDEX TO EXHIBITS

The following exhibits are filed as a part of this Report.

<TABLE>
<CAPTION>
 Exhibit
 Number    Description of Exhibits
 -------   -----------------------
 <S>       <C>
  2.1      Share Purchase Agreement for the acquisition of Bonson Information Technology
           Holdings Limited/****/
  3.1      Certificate of Incorporation of AsiaInfo Holdings, Inc., dated June 8, 1998/*/
  3.2      Certificate of Amendment to Certificate of Incorporation of AsiaInfo Holdings,
           Inc., dated
           August 27, 1999/*/
  3.3      Certificate of Amendment to Certificate of Incorporation of AsiaInfo Holdings,
           Inc., dated November 15, 2000/***/
  3.4      Certificate of Correction to Certificate of Amendment to Certificate of
           Incorporation of AsiaInfo Holdings, Inc., dated January 18, 2001/***/
  3.5      By-Laws of AsiaInfo Holdings, Inc., dated December 19, 2000/***/
  4.1      Specimen Share Certificate representing AsiaInfo Holdings, Inc. shares of common
           stock/*/
 10.1      2000 Stock Option Plan, approved and adopted as of October 18, 2000/**/
 10.2      Certificate of Merger of HTC Investments, Inc., a Delaware corporation, with and
           into AsiaInfo Holdings, Inc., a Delaware corporation, dated October 13, 1999/*/
 10.3      Shareholders' Agreement of Marsec Holdings Inc., dated as of September 15, 2000,
           by and among AsiaInfo Holdings, Inc. and the Founders (as defined therein) of
           Marsec Holdings, Inc./**/
 10.4      Warrant to purchase Series A Preferred Shares of Marsec Holdings, Inc., issued to
           AsiaInfo Holdings, Inc. as of September 15, 2000/**/
 10.5      Lease of AsiaInfo's headquarters at 6 Zhongguancun South Street, Beijing, dated
           August 31, 1999/*/
 10.6      Agreement for the Merger of AsiaInfo Technologies (China) Inc. and Zhejiang
           AsiaInfo Telecommunications Technology Co. Ltd. /***/
 10.7      Agreement for the Establishment of a Limited Liability Company (Guangdong
           Wangying Information Technology Co., Ltd.) and Capital Contribution/***/
 11.1      Statement regarding computation of per share earnings (included in note 10 to
           consolidated financial statements)
 21.1      Subsidiaries of AsiaInfo Holdings, Inc.
 23.1      Consent of Deloitte Touche Tohmatsu
 24.1      Power of Attorney (included on signature page to this report)
</TABLE>
--------
/*/    Incorporated by reference to the same numbered exhibit previously filed
       with our Registration Statement on Form S-1 (No. 333-93199).
/**/   Incorporated by reference to our Quarterly Report on Form 10-Q/A for
       the quarter ended September 30, 2000.
/***/  Incorporated by reference to our Annual Report on Form 10-K for the
       fiscal year ended December 31, 2000.
/****/ Incorporated by reference to our Current Report on Form 8-K filed on
       February 21, 2002.