Edgar Filing: ASIAINFO HOLDINGS INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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, 2003

[_] 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. [_]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]

Based on the closing sale price of the common stock on the Nasdaq National
Market System on June 30, 2003, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $269,771,109.60.

The number of shares outstanding of the Registrant's common stock, $0.01 par
value, was 45,416,754 at March 9, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated by reference to the Proxy Statement for the
Registrant's 2004 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, 2003

TABLE OF CONTENTS

PART I
ITEM 1. Business............................................................................ 3
ITEM 2. Properties.......................................................................... 16
ITEM 3. Legal Proceedings................................................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders................................. 17

PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 18
ITEM 6. Selected Financial Data............................................................. 19
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 20
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.......................... 37
ITEM 8. Financial Statements and Supplementary Data......................................... 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
ITEM 9A. Controls and Procedures............................................................. 38

PART III
ITEM 10. Directors and Executive Officers of the Registrant.................................. 38
ITEM 11. Executive Compensation.............................................................. 38
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................... 38
ITEM 13. Certain Relationships and Related Transactions...................................... 38
ITEM 14. Principal Accountant Fees and Services.............................................. 39
ITEM 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..................... 39
SIGNATURES................................................................................... 41

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 (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 future
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 high-quality software and network solutions in
China. We provide total customer solutions to some of China's largest
companies, helping our customers to increase their business value in
fast-growing and evolving markets. In the telecommunications market, our
software products and network services enable our customers to build, maintain,
operate, manage and continuously improve their communications infrastructure.
Our largest customers are the major telecommunications carriers in China and
their provincial subsidiaries, such as China Telecommunications Corporation, or
China Telecom, China Network Communications Group Corporation, or China Netcom
Group, China Mobile Communications Corporation, or China Mobile, and China
United Telecommunications Corporation, or China Unicom. Recently, through our
acquisition of a human resources management, or HRM, and business intelligence,
or BI, software business, we have gained exposure to new customers in
industries such as transportation, power and iron and steel.

We commenced our operations in the United States in 1993 and moved our major
operations from the United States to China in 1995. We began generating
significant network solutions revenues in 1996 and significant software
revenues in 1998. We conduct the bulk of our business through our wholly-owned
operating subsidiaries, AsiaInfo Technologies (China) Inc., or AsiaInfo
Technologies, and AsiaInfo Management Software, Inc., or AsiaInfo Management,
which are both Chinese companies.

In China, we have designed and implemented most of the nation's major
commercial Internet backbone projects, including ChinaNET for China Telecom,
UniNET for China Unicom and CMCCNET for China Mobile. Each of those projects
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 those 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 services, our business has grown from a
pure Internet infrastructure developer to a total communications infrastructure
software and services provider.

certain HRM and BI assets valued at approximately $9 million from Pacific
Software (China) Limited, a privately held, medium-sized software solutions
company based in Hong Kong, and from its affiliate, New Century Pacific
Software (Beijing) Limited, a wholly-foreign-owned enterprise based in Beijing,
China. We expect that this acquisition will help us to expand into the HRM and
BI software markets, and will expose us to customers in other industries,
outside of our traditional telecommunications customer base.

Industry Background

According to China's Ministry of Information Industry, or MII, in 2003 China's
fixed-line phone subscribers increased by 23% to 263 million and wireless phone
users increased by approximately 30% to 268 million. During that period, total
revenue generated by the telecommunications sector reached approximately $55.54
billion, up 13.9% from the previous year. China's telecommunications sector
continues to serve as a growth engine for the country's overall economy, in
which GDP grew at a rate of 9.1% in 2003, according to the Ministry of Finance
of China. The following table sets forth certain information relating to
China's economic growth and the telecommunications industry in China as of the
dates indicated:

Compound Annual
As of December 31, Growth Rate
-------------------------- ---------------
2000 2001 2002 2003 (2000-2003)
----- ----- ----- ----- ---------------

China's population (in millions)......... 1,267 1,276 1,286 1,303 1.3%
China's GDP per capita (RMB)............. 7,081 7,543 7,930 8,300 4.7%
Fixed-line Telephone
Access lines in service (in millions). 144.8 180.4 214.4 263.3 22.1%
Penetration rate /(1)/................ 11.4% 14.1% 16.7% 21.2% 23.0%
Wireless Telephone
Subscribers (in millions)............. 84.5 144.8 206.6 268.7 47.1%
Penetration rate /(1)/................ 6.7% 11.3% 16.1% 20.9% 46.1%
Internet
Users (in millions)................... 22.5 33.7 59.1 79.5 52.3%
Penetration rate /(1)/................ 1.8% 2.6% 4.6% 6.2% 51.0%

--------
(1) Determined by dividing the number of subscribers or users by the total
population of China.
Sources: Data in respect of China's population and GDP per capita are derived
from information published by the National Statistical Bureau of
China; data in respect of mobile subscribers are derived from
information published by the Ministry of Information Industry; data in
respect of Internet users are derived from information published by
China Internet Network Information Center.

China's government has set aggressive goals for the future growth of China's
telecommunications industry. According to the 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. 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.

Over the past several years, the telecommunications industry in China has gone
through several restructurings. These restructurings have been accompanied by
industry deregulation and rapid growth in the market for telecommunications
services. Prior to a major industry restructuring in 1999, the
telecommunications market in China was dominated by the predecessor company of
China Telecom. In 1999, the predecessor company of China Telecom was divided
into the four companies, focusing on fixed line, mobile telephony, satellite
communications and paging, respectively. In May 2002, the telecommunications
industry was further restructured with the split of China Telecom into two
independent companies. China Netcom Group was formed by merging the
telecommunications assets of China Telecom in ten northern provinces of China
with China

Netcom Corporation Ltd., or China Netcom, and Jitong Communication Co., Ltd.
The southern division of the original China Telecom continues to operate under
the China Telecom name.

At the end of 2003, there were five major licensed telecommunications operators
in China. China Telecom, China Netcom Group, China Unicom and China Railway
Communications Corporation, or China Railcom, provide fixed-line services,
while China Mobile and China Unicom are licensed to provide wireless services.
China Satellite Communications Corporation, or China Satcom, the sixth licensed
telecommunications operator in China, has smaller operations and specializes in
satellite communications. All six operators are Internet service providers. In
terms of total income in 2003, China Mobile held 37.4% of the market in China,
followed by China Telecom with 31.1% and China Netcom Group with 16.6%. China
Unicom ranked fourth with a market share of 13.4% while remaining operators
together held the remaining 1.5%, according to MII.

With the introduction of more competition, telecommunications service providers
are becoming more conscious of the return on their infrastructure investments.
With the rapidly increasing number of subscribers and the restructuring of
China's telecommunications industry, the competitive focus of carriers is
moving from pricing to quality and product differentiation, while their
investment focus is moving from network construction to operation support
systems that help increase service quality and customer satisfaction, and
reduce response time to market demands and trends.

According to MII, overall capital expenditure in the telecommunications sector
increased by 8.6% to $26.8 billion in 2003. We anticipate the expenditure level
in 2004 to be at the same level as 2003, while the focus of the expenditure
will be on data, value-added service platforms and support networks such as
BOSS, CRM and billing, which are all solutions we offer.

Market Opportunities

China's telecommunications industry is expected to grow at a rate of 14% in
2004, according to MII. The number of fixed-line users is expected to reach 290
million, and the number of mobile phone users is expected to reach 320 million
in 2004, according to MII. In the services area, China is expected to have
approximately 60 million users of Personal Handy-Phone System, or PHS, 16.7
million subscribers of code division multiple access, or CDMA, mobile services,
10 million users of broadband and 100 million users of the Internet in 2004. At
the same time, China's large state-owned enterprises are expected to increase
their investment in human resources management and business intelligence
software and solutions, according to the China Center for Information Industry
Development, or CCID.

We believe that the principal market opportunities for us include the following:

Telecommunications business and operation support systems (BSS/OSS). With
increased competition in China's telecommunications industry, China's
telecommunications carriers are shifting their focus from capacity expansion to
operation efficiency. As a result, we believe a well-developed BSS/OSS system
for customer relations management will be the core competence and investment
focus for carriers. We expect China's major telecommunications carriers to
restructure their existing technology-oriented and network-based operational
support systems and increase their investments in their customer-oriented and
service-based BSS/OSS systems.

Value-added telecommunications services. Gartner Group, an independent
research firm, predicts that revenues from traditional voice service will
maintain a growth rate of 7% from 2004 to 2006. In the next two years,
value-added telecommunications services are expected to be the main driving
force in the development of China's telecommunications industry. Mobile data
services are expected to grow at an annual rate of 96%, while Internet services
are expected to maintain an annual growth rate of 38%. Investment in
value-added services of the four largest telecommunications operators in China
are expected to reach an annual growth rate of 78% in the next two years.
Because of the diversity of services and technologies, investment in
value-added services is expected to focus on interconnection among the
operators and billing mechanisms for various services.

Network construction, network optimization and network maintenance. Although
network construction for the major telecommunications operators in China has
largely been completed, the restructurings of China Telecom and China Netcom
and the development of value-added services have brought new requirements for
sophisticated functions on those networks. In particular, the increasing use of
broadband presents opportunities for network optimization. In addition,
outsourcing of network maintenance has become another growing market as
telecommunications operators shift their investment focus from networks to
services.

Human Resources Management (HRM) and Business Intelligence (BI). HRM and BI
software is a developing market globally. According to a recent IDC research
report on HRM systems, global enterprise expenditure on human resources
services is expected to reach $103.3 billion by 2007 and the global market for
BI software solutions is expected to grow at an average annual rate of 27% to
2005. CCID predicts that more than 60% of Chinese enterprises will invest in
HRM systems in the next two years, and 16% of Chinese enterprises will
implement HRM programs in 2004. According to IDC, China's HRM market will reach
a scale of $100-150 million by 2005. Facing more and more market competition,
many enterprises in China have adopted the strategy of utilizing thorough
analysis of data regarding customers, markets and products to reduce
operational costs and to increase profits, making BI a promising and growing
market.

Our Strategy

Our vision is to be the leading company providing world-class software and
solutions to high profile customers in telecommunications and enterprise
solutions markets.

Through the implementation of our business strategies since 2000, we have
successfully transformed ourselves from a systems integrator of Internet
networks to a total customer solutions provider of software and network
services. Our strategy is to provide high quality software products and IT
service for our customers to help them achieve sustainable development. The key
aspects of our strategy include the following:

The escorting plan. We hold the leading positions in the markets for
construction of BSS/OSS systems and Internet networks in China, which we
believe are two of the most important areas for the future development of
telecommunications operators. To further strengthen our leading position, and
to better support telecommunications operators, in 2003 we announced what we
refer to as our "escorting plan" for telecommunications operators. Through our
escorting plan, we aim to build strong partnerships with telecommunications
operators so as to better understand their requirements and to provide them
with their most valued products and services. This, in turn, will bring us
better opportunities to market our products and services.

New Service Provider (SP). Based on our software products and professional
services, and our close relationships with telecommunications operators, we
plan to establish a new business model with telecommunications operators to
develop the market for value-added telecommunications services in China. Since
the end of 2003, we have undertaken experimental programs with
telecommunications operators, and have established a new business unit, called
New Services, to address this market.

Enterprise market strategy. In December 2003, AsiaInfo acquired the HRM and BI
software businesses of Pacific Software and integrated the acquired assets into
a new business unit, Enterprise Information Solutions, or EIS. The current
strategy of EIS is to develop and expand its HRM and BI businesses in the
market for large enterprises in China, and to promote our strength in software,
technology and services in that market.

Focus on high value information technology professional services. We focus 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. We believe the service components
of our telecommunications solutions will become increasingly important as
telecommunications networks become more complex and more customized. As such,
we intend to continue to develop our services business to include provision of
professional maintenance and support services to our existing customers.

Attract and retain highly qualified personnel. We intend to continue our
strategy to attract and retain the best and most qualified personnel in China's
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 international exposure. We believe that we have
been able to attract and retain qualified personnel by offering attractive
compensation packages, a challenging and rewarding work environment, and the
opportunity to work for a leading company in China.

Our Competitive Strengths

Through ten years of development, we have become the largest telecommunications
software and solutions provider in China. The key factors that contribute to
our strong competitive position are:

The leading provider of telecom BSS/OSS solutions. We are the leading provider
for China Mobile's operation support systems. We developed one of the largest
telecommunications customer management systems in the world for Zhejiang
Mobile, a subsidiary of China Mobile. Our successful work for China Mobile
provides us with a solid position to support other telecommunications operators
in their BSS/OSS systems construction.

The leader in Internet related markets. We are a leader in designing and
implementing China's Internet infrastructure. We built first-class Internet
backbones and provincial access networks, as well as user management systems
and email systems, for China Mobile, China Telecom, China Netcom and China
Unicom. As development of IP based value-added telecommunications services are
becoming telecommunications operators' most important business strategy, we
anticipate that the systems we constructed will help us to gain an advantageous
market position.

Large-scale software development. Our software products, such as those for
online billing solutions, e-mail solutions, business operation support systems
solutions and CRM solutions, are capable of handling more than ten million
telecommunications services users. Our large-scale software development
capabilities will further help us to ensure efficiency and profitability in
future development.

Customer-centric and cost-effective project management capability. Our project
delivery time with key customers usually lasts between three to six months, and
at times may last over a year. We believe customer satisfaction is essential to
preserve customer loyalty. As such, we remain in close contact with our
customers to meet their needs and demands during the course of these projects.
Through experience and time, we have developed a unique project management
system to achieve maximum customer satisfaction in a cost-effective manner. We
believe our effective project management system distinguishes us from our
competitors in China.

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

Products and Solutions

We leverage our core strengths in information technology software and services
into product and solution offerings to leading telecommunications service
providers, as well as major enterprises in the power and transportation markets
in China. Our offerings include seven categories of software products, each of
which is given the name "Open" because the software installed is designed with
open architecture to facilitate further development and customization for
specific purposes. We integrate a combination of these products, together with
our services, into solutions according to individual customer needs.

AIOpenBOSS

AIOpenBOSS provides a flexible, expandable operation support platform for
convergent billing solutions for mobile operators. AIOpenBOSS supports the
business of mobile operators by providing a full line of integrated solutions
including billing, account processing, operations management, customer
services, settlements, as well as system monitoring and disaster recovery
management. AIOpenBoss is capable of being developed into a full-service
operations support system based on its core convergent billing function.
Software products under this category include AsiaInfo Online Billing System,
AsiaInfo Convergent Billing System, AI-BS Mobile Business Operating Support
System and AsiaInfo Integrated Settlement System.

AIOpenCRM

AIOpenCRM is a leading customer relationship management solutions suite we
launched for Chinese telecommunications operators. AIOpenCRM is an efficient
system for operators to improve customer service quality and customer
satisfaction. Our suite of customer relationship management solutions allows
wireless and fixed-line telecommunications operators to improve customer
service and establish strong customer relationships. Our AIOpenCRM products
include solutions for AsiaInfo Customer Care and Relationship Management System
and AsiaInfo Order Management System.

AIOpenBI

The core of the AIOpenBI solution is a carrier-class operating analysis &
decision support system platform. With embedded technology such as data
warehousing, online analytical process and data mining, AIOpenBI 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. Our main product under AIOpenBI is
called AIOmniVision.

AIOpenXpert

AIOpenXpert, AsiaInfo's network management product suite, includes network
access and backbone infrastructure design and implementation for
telecommunications and Internet service providers. Our main product under
AIOpenXpert is call AINetXpert. AIOpenXpert supports a wide array of network
technologies and generally involves 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 a 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.

.. Network implementation. We install 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 developing customized
network and services management applications. We believe that our expertise
in integrating new systems without disrupting our customers' ongoing
business operations adds significant value and reduces risks.

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

AIOpenAPP

We design and provide applications for Internet access, Internet protocol
telephony and virtual private networks and 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.
Software products within our AIOpenAPP solutions include AsiaInfo Mail Center
(AIMC), AsiaInfo Unified Messaging System (AIUM), AsiaInfo Internet Short
Messaging Gateway (AIISMG) and AsiaInfo VisionXpert (AIVX).

AsiaInfo Mail Center (AIMC). Our flagship online messaging software, AIMC, is
an integral part of our service application offerings. AIMC is carrier-scale
messaging software designed to support electronic mail systems for the full
range of email service providers, 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 are among the key customers for AIMC. To meet the demand for
more efficient and secure electronic message exchanges, AIMC provides
innovative functions and anti-spam control. The wireless application protocol,
or WAP, and short messaging system, or SMS, functions allow the end user to
access email at any time with a mobile connection. AIMC also enhances user
experience with its stream-based video mail function.

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.

AsiaInfo Internet Short Messaging Gateway (AIISMG). AIISMG is a business
support platform for value-added short messaging services. AIISMG is the only
one-layer short messaging gateway used by China Mobile (which facilitated more
than 80 billion short messages in 2002) to achieve single-point access and
provincial roaming within China. Furthermore, AIISMG supports multi-protocols
to enable short messages transported between different carriers and different
mobile networks, including digital mobile (global system for mobile
communications, or GSM), CDMA, personal handy phone system, or PHS, and third
generation, or 3G networks.

AsiaInfo VisionXpert (AIVX). AIVX is a support system for video-conferencing
operations, providing the following functions:

.. Conference management--scheduling user participation in conferences and
booking meeting times and venues;

.. Resource management--carrying out deployment strategies over system
resources, supporting products of different manufactures and providing
inter-operator development and redundancy design;

.. User management--managing users data and user' rights, and matching users
and terminals;

.. Billing management--collecting billing records, generating billing
messages, answering billing inquiries and performing bill payment function.

AIOpenEIS

EIS refers to Enterprise Information Solutions, and the main product under
AIOpenEIS is Human Resources Management (HRM) Systems, which provides
enterprises with a highly functional and efficient computerized system that
enables the accurate, timely and standardized capturing, storage, analysis and
maintenance of all HR-related information. Our HRM solution is also capable of
facilitating all key HR management functions, from basic data collection,
filing, analysis and reporting, to performance review and salary/incentives
management, to

organization development management. In particular, the HRM solution allows
China's large enterprises, especially those former or existing state-owned
enterprises, to comply with governmental requirements on human resources
management and requirements of domestic labor laws on pension, housing and
insurance. It also supports the management of career promotion systems for
skilled workers based on numerous state-administered tests.

AIOpenPRM

AIOpenPRM is a system we recently developed that calculates, manages and
reconciles payment for intercarrier network access, including settlement of
roaming charges between mobile operators, as well as management of agreements
and settlements between operators and their business partners. "PRM" refers to
"partnership relationship management". AIOpenPRM solution also provides support
to telecommunications operators in their services to large enterprise customers
and high-end individual customers, as well as their relationship management
with third-party sales channels. Our main product under AIOpenPRM is called
AIBCBS. As of the date of this report, AIOpenPRM has recently become available
for sale and we have not yet entered into any customer agreements for AIOpenPRM.

Services

An integral part of our total customer solutions business is providing
customers with professional IT services including network planning, design and
optimization, as well as technical training, while gradually outsourcing lower
end services, such as hardware installation. In direct response to our
customers' needs, we have recently expanded our services business to include
the provision of professional maintenance and support services. This service
component of our business will become increasingly important, particularly as
telecom networks become more complex and Chinese carriers pay more attention to
improving their efficiency.

Strategic Acquisitions and Alliances

From time to time 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 strategic investments have included 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 in February of 2002 for a combination of cash and shares of our common
stock valued at a total of approximately $51.4 million.

In December 2003, we acquired certain human resources management and business
intelligence assets valued at approximately $9 million from Pacific Software
(China) Limited, a privately held, medium-sized software solutions company
based in Hong Kong, and from its affiliate New Century Pacific Software
(Beijing) Limited, a wholly-foreign-owned enterprises based in Beijing, China.
The acquisition has expanded our business into the fast-growing human resources
management and business intelligence market, allowing significant
cross-marketing of our expertise in software management and development outside
our traditional telecommunications industry client base.

Pricing

We currently price our projects on the following basis:

.. Third party hardware procurement. We sell hardware as part of our total
solutions and price hardware together with the total contract price as a
fixed-fee. To minimize exposure to hardware risk, we source equipment from
hardware vendors against letters of credit from our customers.

.. Software sales. We price our software products (except for AIOmniVision
and AINetXpert) based on the number of user licenses which our customers
purchase from us. We price AIOmniVision based on modules, functions and
requirements for follow-on services, and price AINetXpert based on the
number of networks we monitor using the software. 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. 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.

.. Services. We price our services internally on an estimated time and
material basis. Services included in a solution offering are charged to
customers as a percentage of the total contract amount while professional
maintenance and support services are charged separately, usually on an
annual basis.

Contracts for our projects are generally subject to competitive bidding
processes.

Technology

We have developed core competencies in various advanced technologies that are
used in our products and solutions. By utilizing technologies such as
multi-tier architecture, object-oriented techniques, data mining and open
application program interfaces, we are able to provide our customers with the
flexibility required in a highly competitive, dynamic environment.

Our business and operation support system solution (AIOpenBOSS) is a flexible,
expandable, and scalable operation support platform with multi-tier
architecture. As a modularized software product, it has the following technical
features:

.. an architecture adaptable to various compatible commercial middleware.

.. a unified rating engine providing flexible pricing mechanisms.

.. dynamic component modules that can be modified separately when a new
product is introduced and updated without any system down time.

.. memory database technologies allowing high performance for rating and
billing activities.

.. a real-time accounting system satisfying more sophisticated business
requirements.

Our analytical customer relationship management software (AIOpenCRM), solution
uses data-warehousing technology, offering decision support and execution
services. It has the following technical features:

.. data mining and online application and processing analysis capabilities
enhanced by the flexibility of data-warehouse modelling technologies.

.. flexible and reliable scripting technologies independent of operating
system and database.

.. dynamic component modules that can be modified separately when a new
product is introduced and updated without any system down time.

.. proprietary extract, transfer and load (ETS) technologies.

The architecture of our partnership relations management software (AIOpenPRM)
has three layers: the access layer, service layer, and data layer. The
multi-tier design technology provides flexibility, scalability, and high
performance. To facilitate the flexible configuration and integration with
other systems, the following technologies are adopted:

.. The Workflow Management System (WFMS) performs execution and monitoring by
breaking down work activities into well-defined tasks, roles, rules and
processes to improve the production organization and working efficiency.
This technology allows operators to reconfigure the business process to
improve service quality and flexibility.

.. Bus-oriented architecture and implementation of communications crossing
application systems allow centralized and integrated connection among
various modules.

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. We upgrade our existing software products to enhance scalability
and performance and provide added features and functions.

The focus of our network services 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.

Customers

Our customers currently consist primarily of Chinese telecommunications service
providers, including China Mobile, China Unicom, China Netcom Group and China
Telecom. For the year ended December 31, 2003, China Mobile accounted for
approximately 45% of our revenues net of hardware costs, while China Unicom
accounted for approximately 25%, China Telecom and China Netcom Group each
accounted for approximately 12% and other customers accounted for 6%. Our
customer base is changing and diversifying as the overall China
telecommunications market deregulates. For more information on 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 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 telephony service provider in China,
with over 176 million wireless voice service subscribers, and 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 99% of its rural areas.

China Unicom. China Unicom was established in 1994 and is China's second
largest mobile operator, providing services to over 92 million mobile customers
through its digital mobile (GSM) network and since January 2002, its second
generation, or 2G, CDMA network. In 2003, China Unicom had 90.6 million
subscribers and is targeting to achieve 107 million subscribers by the end of
2004. China Unicom also provides a wide array of services, including long
distance telephone services, local telephone services, Internet and data
communications services, paging services, communications value-added services
and other communications services. In 2003, China Unicom established joint
ventures with Qualcomm and SK Telecom to promote its CDMA business. In the same
year, its CDMA-IX system formally began operation. By the end of 2003, China
Unicom's CDMA users had reached 19 million.

China Netcom Group. China Netcom was originally formed in 1999 to provide
nationwide Internet broadband access and integrated telecommunications
services. As part of the industry reorganization, China Netcom merged with the
northern division of China Telecom and Jitong Communication, and the combined
business now operates under the China Netcom Group name. In 2003, China Netcom
completed its organizational restructuring and established the China Netcom
Group, which consists of three main entities, CNC North (responsible for CNC's
operations in northern China), CNC South (responsible for CNC's operations in
southern China), and CNC International (responsible for CNC's toll switch
business with international operators).

China Telecom. China Telecom is the leading provider of fixed-line telephone,
data and Internet and leased line services in four of the most economically
developed regions in China. Before the restructurings of the telecommunications
industry in China that began in 1999, China Telecom, together with its various
provincial subsidiaries, constituted our largest customer, accounting for
almost all of our revenues in 1997 and 1998. As part of the industry
reorganization completed in May 2002, the northern division of China Telecom
(comprising ten provinces) merged with China Netcom and Jitong Communication to
form China Netcom Group. The southern division (comprising twenty-one
provinces) continues to operate under the China Telecom name.

Customers in the Enterprise Market

Through our acquisition of HRM and BI assets from Pacific Software, we have
recently gained exposure to customers outside of our traditional
telecommunications base. CCID predicts that more than 60% of Chinese
enterprises will invest in HRM systems during the next two years, and 16% of
Chinese enterprises will implement HRM programs in 2004. According to IDC,
China's HRM market will reach a scale of $100-150

million by 2005. Facing increased competition, many enterprises have adopted a
strategy of utilizing thorough analysis of data regarding customers, markets
and products to reduce operational costs and to increase profits. Large-scale
state-owned enterprises are the target customer base of our HRM and BI
solutions business. Our key customers in this market primarily include Air
China International Corporation, or Air China, and China Petrochemical
Corporation, or Sinopec.

Air China. On October 11th, 2002, under the guideline of the System Reform
Program for Chinese Civil Aviation Industry approved by the State Council,
China National Aviation Holding Company was formally founded, consisting of Air
China, China National Aviation Company and China Southwest Airlines. On October
28th, 2002, the new Air China was formed by consolidating the air
transportation assets of the three companies. According to Air China, it has
total asset of 50.89 billion RMB, total traffic volume of 5.17 ton kilometers
and 23,000 staff. It operates 386 routes including 64 international and 322
domestic routes and offers 3,300 scheduled services weekly. It has extensive
sales and operations networks throughout China and in major cities around the
world.

Sinopec. Sinopec is a leading energy and chemical company in China. Its scope
of business covers exploration, development, production and marketing of crude
oil and natural gas, oil refining and marketing, production and sales of
petrochemicals, chemical fibers, chemical fertilizers, and other chemicals,
storage and pipeline transportation of crude oil and natural gas, import and
export of its products, as well as research and development of related
technologies. With one million employees, Sinopec is China's largest producer
and seller of oil products, its largest supplier of major petrochemical
products, and its second largest crude oil producer.

Sales and Marketing

Sales

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.

In July 2003, we restructured our business units to create one point of sales
contact for each major customer. Today our sales organizations are structured
into four strategic customer accounts, namely China Telecom, China Mobile,
China Netcom and China Unicom, to provide more integrated solutions and
services. These accounts sell our solutions and services to the respective
customers and manage our long-term relationship with them. We also have direct
sales personnel in regional offices in Beijing, Shanghai, Chengdu and
Guangzhou. As a result, we believe we have increased our organizational
efficiency and improved the quality of our services to our clients.

Marketing

Through our organizational restructuring in July 2003, we consolidated our
marketing personnel and established the department of Marketing and Strategy,
focusing on corporate strategy planning, strategic alliance development, market
analysis and software product development planning.

In addition to our department of Marketing and Strategy, 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

Our main domestic competitors in China are Digital China, Linkage, Neusoft, and
Wholewise. Our international competitors include multinational companies such
as IBM Global Services, HP Services, Oracle, Sibel, Convergys and SAP, who are
establishing more active presences in the IT services market for China's
telecommunications industry. In addition, top international consulting
companies such as PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst &
Young, Accenture, and KPMG, have also entered China's IT services market.

In the human resources management and business intelligence software sector,
our competitors include large international information technology companies
such as SAP, Oracle, IBM and People Soft, as well as domestic players such as
UFSoft.

We believe that we have competitive advantages in our product and service
segments due to our technology leadership, combined international and China
expertise, high performance, scalable and flexible software, customer-centric
and cost effective project management capability, and established customer
relationships. Our competitors, some of whom have greater financial, technical
and human resources than we have, 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 IT
industry, and the products and services we offer are not currently subject to
extensive government regulations. The telecommunications industry in which most
of our customers operate, however, is subject to extensive 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 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. In
particular, the Telecommunications Regulations set out in clear terms the
framework for operational licensing, network 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 has positively impacted our business because, with the
decline in telecommunications and Internet services fees, China's Internet
population and tele-density have grown, which in turn has generated more demand
for our products and services. For example, the number of Internet users in
China increased to 79.5 million in 2003 due in part to the decrease in Internet
access fees. 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. The new regulations, known as the Provisions on the
Administration of Foreign-Invested Telecommunications Enterprises, or the
Provisions, were the result of China's accession to the WTO. Under the
Provisions, foreign investors will ultimately be permitted to own up to

49% of basic telecommunications businesses (with the exception of wireless
paging businesses) in China, and up to 50% of value-added telecommunications
businesses (which include Internet service providers and Internet content
providers) and wireless paging businesses.

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. 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 confidentiality
arrangements and copyright and trademark registrations. We have filed five
trademark applications with the United States Patent and Trademark Office,
three of which have been passed on to registration and two 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, all
of which have been passed to registration. We have also completed the
registration of the copyrights for 107 versions of our software products with
the State Copyright Bureau in China. 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.

We enter into confidentiality agreements with most of 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. 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.

A portion of our business involves the development and customization of
software applications for customers. We generally retain significant ownership
or rights to use and market such software for other customer projects, where
possible. However, our customers sometimes retain co-ownership and rights to
use the applications, processes, and intellectual property so developed. In
some cases, we may have no right or only limited rights to reuse or provide
these developments in projects involving other customers. To the extent that we
are unable to negotiate contracts which permit us to reuse source-codes and
methodologies, or to the extent that we have conflicts with our customers
regarding our ability to do so, we may be unable to provide similar solutions
to our other customers.

Employees

We have over 800 employees. 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 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 employee stock option plans that include vesting provisions designed to
encourage long-term employment.

Our Code of Ethics

In 1999 we adopted a code of ethics, or Code, which applies to all of our
employees. In 2003, we conducted a thorough review and updating of the Code in
connection with the implementation of rules relating to codes of ethics under
the U.S. Sarbanes-Oxley Act of 2002. A copy of the Code and a brief description
of any amendments to or waivers from the Code relating to any of our principal
executive officers or senior financial officers is posted on our website at
www.asiainfo.com.

SEC Reports Available on Website

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, are available on our
website at www.asiainfo.com, when such reports are available on the Securities
and Exchange Commission website.

ITEM 2. Properties

Our principal development facilities and administrative offices currently
occupy approximately 7,300 square meters in a 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. Our sales and marketing offices occupy
approximately 1,800 square meters in a building located in the Beijing
financial street area. The lease has a term of three years, which expires in
February 2007. In addition, we have regional field support offices in various
cities in China, namely Shanghai, Guangzhou, Chengdu, Hangzhou, Nanjing 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 officers and directors and the underwriters of our
initial public offering, or IPO. The lawsuit alleged violations of the federal
securities laws and was docketed in the United States District Court for the
Southern District of New York as Hassan v. AsiaInfo Holdings, Inc., et al. The
lawsuit alleged, 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 to their purchasing shares in our IPO. The lawsuit
further claimed 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. On July 15, 2002, together with the other issuer defendants,
we filed a collective motion to dismiss the consolidated, amended complaints
against the issuers on various legal grounds common to all or most of the
issuer defendants. The underwriters also filed separate motions to dismiss the
claims against them. On October 9, 2002, the court dismissed without prejudice
all claims against the individual defendants in the litigation. The dismissals
were based on stipulations signed by those defendants and the plaintiffs'
representatives. On February 19, 2003, the court issued its ruling on the
motions to dismiss filed by the underwriter and issuer defendants. In that
ruling the court granted in part

and denied in part those motions. As to the claims brought against us under the
anti-fraud provisions of the securities laws, the court dismissed all such
claims without prejudice. As to the claims brought under the registration
provisions of the securities laws, which do not require that intent to defraud
be pleaded, the court denied the motion to dismiss such claims as to us and as
to substantially all of the other issuer defendants. The court also denied the
underwriter defendants' motion to dismiss in all respects.

In June 2003, based on a decision made by a special independent committee of
our board of directors, we elected to participate in a proposed settlement
agreement with the plaintiffs in this litigation. If ultimately approved by the
court, this proposed settlement would result in a dismissal, with prejudice, of
all claims in the litigation against us and against any of the other issuer
defendants who elect to participate in the proposed settlement, together with
the current or former officers and directors of participating issuers who were
named as individual defendants. The proposed settlement does not provide for
the resolution of any claims against the underwriter defendants, and the
litigation against those defendants is continuing. The proposed settlement
provides that the class members in the class action cases brought against the
participating issuer defendants will be guaranteed a recovery of $1 billion by
insurers of the participating issuer defendants. If recoveries totaling $1
billion or more are obtained by the class members from the underwriter
defendants, however, the monetary obligations to the class members under the
proposed settlement will be satisfied. In addition, all participating issuer
defendants will be required to assign to the class members certain claims that
we may have against the underwriters.

The proposed settlement contemplates that any amounts necessary to fund the
settlement or settlement-related expenses would come from participating
issuers' directors and officers liability insurance policy proceeds as opposed
to funds of the participating issuer defendants themselves. A participating
issuer defendant could be required to contribute to the costs of the settlement
if that issuer's insurance coverage were insufficient to pay that issuer's
allocable share of the settlement costs. We expect that our insurance proceeds
will be sufficient for these purposes and that we will not otherwise be
required to contribute to the proposed settlement. Consummation of the proposed
settlement is conditioned upon, among other things, negotiating, executing, and
filing with the court final settlement documents, and final approval by the
court. If the proposed settlement described above is not consummated, we intend
to continue to defend the litigation vigorously. Moreover, if the proposed
settlement is not consummated, 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 would
also cover the defense and potential exposure in the suit. While we cannot
guarantee the outcome of these proceedings, we believe that the final result of
these actions will have no material effect on our consolidated financial
condition, results of operations or cash flows.

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.

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 sales prices per share
of the common stock as reported on the Nasdaq National Market.

High Low
----- -----

2003:
Fourth Quarter. 7.9 6.15
Third Quarter.. 12.12 6.01
Second Quarter. 8.69 4.00
First Quarter.. 8.23 3.00
2002:
Fourth Quarter. 8.90 2.04
Third Quarter.. 13.78 3.22
Second Quarter. 13.88 9.80
First Quarter.. 24.25 10.66

As of March 1, 2004, we had approximately 161 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 foreseeable
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 principal 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.

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
Operation" beginning on page 20 of this report. The selected consolidated
balance sheet data and statements of operations data in the table below have
been derived from our audited consolidated financial statements. Historical
results are not necessarily indicative of results to be expected in the future.

Years Ended December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ---------- ---------- ---------- ----------
(Amounts in thousands of U.S. dollars except share and per share data)

Consolidated Statements of Operations Data:
Revenues:
Network solutions....................... $ 84,686 88,253 161,131 158,696 53,786
Software revenue........................ 31,488 33,013 27,875 17,367 6,494
----------- ---------- ---------- ---------- ----------
Total revenues...................... 116,174 121,266 189,006 176,063 60,280
----------- ---------- ---------- ---------- ----------
Cost of revenues:
Network solutions....................... 67,675 67,839 129,712 141,668 41,959
Software revenue........................ 14,546 13,161 3,821 3,030 4
----------- ---------- ---------- ---------- ----------
Total cost of revenues.............. 82,221 81,000 133,533 144,698 41,963
----------- ---------- ---------- ---------- ----------
Gross profit............................... 33,953 40,266 55,473 31,365 18,317
----------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing..................... 11,340 14,680 21,768 19,734 8,768
General and administrative/(1)/......... 10,827 9,907 14,905 12,893 8,167
Research and development................ 9,130 8,503 7,304 5,974 2,838
Amortization of deferred stock
compensation.......................... 105 407 1,144 2,209 3,508
In-process research and development..... 169 350 -- -- --
Amortization of acquired intangible
assets................................ 209 1,749 -- -- --
Impairment of goodwill and acquired
intangible assets..................... 30,221 -- -- -- --
----------- ---------- ---------- ---------- ----------
Total operating expenses............ 62,001 35,596 45,121 40,810 23,281
----------- ---------- ---------- ---------- ----------
(Loss) income from operations.............. (28,048) 4,670 10,352 (9,445) (4,964)
Other income (expenses):
Interest income......................... 1,576 2,272 7,135 7,919 827
Interest expense........................ (3) (114) (969) (1,032) (618)
Other income (expense), net............. (133) (708) (59) (22) 143
Total other income, net.................... 1,440 1,450 6,107 6,865 352
(Loss) income before income taxes, minority
interests and equity in loss of affiliate (26,608) 6,120 16,459 (2,580) (4,612)
Income tax benefit expenses............. (978) 824 3,444 218 383
(Loss) income before minority interests. (25,630) 5,296 13,015 (2,798) (4,995)
Minority interests in (income) loss of
consolidated subsidiaries............. (12) 75 (396) 32 84
Equity in loss of affiliate............. (2,477) (2,465) (885) -- (35)
----------- ---------- ---------- ---------- ----------
Net (loss) income.......................... $ (28,119) 2,906 11,734 (2,766) (4,946)
=========== ========== ========== ========== ==========
Net (loss) income per share:
Basic................................... $ (0.63) 0.07 0.28 (0.07) (0.34)
=========== ========== ========== ========== ==========
Diluted/(2)/............................ $ (0.63) 0.06 0.26 (0.07) (0.34)
=========== ========== ========== ========== ==========
Shares used in computation
Basic................................... 44,459,010 43,583,420 41,525,159 37,239,649 14,630,145
=========== ========== ========== ========== ==========
Diluted/(2)/............................ 44,459,010 45,961,545 45,924,724 37,239,649 14,630,145
=========== ========== ========== ========== ==========

As of December 31,
---------------------------------------
2003 2002 2001 2000 1999
-------- ------- ------- ------- ------
(amounts in thousands of US$)

Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $119,395 115,153 110,635 48,834 25,404
Total current assets............................ 219,480 215,094 232,836 254,190 64,773
Total assets.................................... 240,022 263,430 245,860 264,003 71,427
Total liabilities (excluding minority interests) 53,365 52,955 60,460 95,206 31,639
Total stockholders' equity...................... 186,657 210,158 184,790 168,609 39,788

--------
(1) In 2002, we adopted Statement of Financial Accounting Standards No.142,
"Goodwill and Other Intangible Assets," and as a result we discontinued
amortization of goodwill on January 1, 2002 (see note 2 to our consolidated
financial statements included in this report).
(2) In 2003, 2000 and 1999 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 2002 and 2001, we 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 12 to our consolidated financial statements
included in this report 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 high-quality software and solutions in China. We
provide total customer solutions to some of China's largest companies, and help
our customers to increase their business value in fast-growing and evolving
markets. In the telecommunications market, our software products and network
services enable our customers to build, maintain, operate, manage and
continuously improve their communications infrastructure. Our largest customers
are the major telecommunications carriers in China and their provincial
subsidiaries, such as China Telecommunications Corporation, or China Telecom,
China Network Communications Group Corporation, or China Netcom Group, China
Mobile Communications Corporation, or China Mobile, and China United
Telecommunications Corporation, or China Unicom. Recently, through our
acquisition of a human resources management, or HRM, and business intelligence,
or BI, software business, we have gained exposure to new customers in
industries such as transportation, power and iron and steel.

We believe that there are opportunities for us to expand into new business
areas and to continue to grow our business both organically and through
acquisitions. On December 4, 2003, we completed our acquisition of certain HRM
and BI assets valued at approximately $9 million from Pacific Software (China)
Limited, a privately held, medium-sized software solutions company based in
Hong Kong, and from its affiliate, New Century Pacific Software (Beijing)
Limited, a wholly-foreign-owned enterprise based in Beijing, China. We expect
that the acquisition will help us to expand into the HRM and BI software
markets, and expose us to customers in other industries, outside of our
traditional telecommunications customer base.

Reliance on key customers. 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
Group. Sales to China Telecom and its subsidiaries amounted to approximately
9%, 21% and 31% of total revenues in 2003, 2002 and 2001, respectively. Sales
to China Unicom and its subsidiaries amounted to approximately 38%, 22% and 45%
of total revenues in 2003, 2002 and 2001, respectively. Sales to China Netcom
Group and its subsidiaries amounted to approximately 13%, 6% and 9% of total
revenues in 2003, 2002 and 2001, respectively. Sales to China Mobile and its
subsidiaries amounted to approximately 38%, 42%

and 10% of total revenues in 2003, 2002 and 2001, respectively. The sum of our
top five receivable balances represented 96% and 95% of the total receivable
balances for the years ended December 31, 2003 and 2002, respectively. We have
expanded our customer base recently through the acquisition of an HRM and BI
software business with customers in sectors such as transportation and energy.
However, our operating results are still dependent on our large customers in
the telecommunications sector, and the loss of any of those customers could
have a material adverse impact on us.

Impact of goodwill impairments. In connection with our acquisition of Bonson
Information Technology Holdings Limited, we paid the former shareholders of
that company $32.76 million (net of acquisition costs) in cash and 1,031,686
shares of our common stock (which were valued at approximately $18 million at
the time the acquisition was announced). During the first quarter of 2003, we
completed an annual impairment test as required by Statement of Financial
Accounting Standard ("SFAS") No.142 and recorded a non-cash impairment charge
of $29.84 million relating to the goodwill and acquired intangible assets
attributable to our acquisition of Bonson. In December 2003, we conducted an
impairment test in connection with our investment in Intrinsic Technology
Holdings, Inc., in which we hold a minority stake, and recorded a charge of
$2.2 million. Although we do not presently anticipate any further impairment
charges, any future deterioration of market conditions or other changes may
require us to record additional impairment charges in the future, which would
impact our net income (loss).

Impact of SARS outbreak. The outbreak of Severe Acute Respiratory Syndrome, or
SARS, is believed to have started in Guangdong Province, China in late 2002 and
to have later spread to Beijing. The SARS outbreak impacted our second quarter
2003 revenues by disrupting travel throughout China and causing delays in
service delivery to our customers. In addition, the outbreak of SARS
interrupted our collection efforts, causing our days sales outstanding to
increase to 219 days at the end of the second quarter of 2003. Although the
spread of SARS in China has been contained and our business activities resumed
normal operations during the third quarter of 2003, the medical community
worldwide has not fully understood the origin of SARS and has not found a
well-recognized effective treatment for SARS. As a consequence, the potential
long-term effects of SARS on economic growth in China are still unknown. Since
January 5, 2004, a small number of new SARS cases have been reported in China.
Any future worsening of the SARS epidemic could have an adverse impact on our
business.

Revenues

We report our revenues on the basis of the two principal types of revenues
derived from our business: network solutions revenues and software revenues.

Network solutions revenue. Network solutions revenue consists of hardware
sales for equipment procured by us on behalf of our customers from hardware
vendors, as well as services for network 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 hire us for our professional services.

Software revenue. Software revenues include two types of revenues: software
license revenue and software services revenue. Software license revenue
consists of fees received from customers for licenses or sublicenses to use our
software products as well as third party software products in perpetuity,
typically up to a specified maximum number of users. In most cases, our
customers must purchase additional user licenses from us when the number of
users exceeds the specified maximum. Our software license revenue also includes
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 services revenue consists of revenue from software
installation, customization, training and other services.

Net revenues. Although we report our 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 and, where efficient, 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 on this basis and reconciles our net revenues to our total
revenues:

Years Ended December 31,
--------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- ------
(amount in thousands of US$)

Network solutions net of hardware costs. 25,982 31,720 43,516 27,211 18,727
Software revenue........................ 31,488 33,013 27,875 17,367 6,494
------- ------- ------- ------- ------
Total revenues net of hardware costs. 57,470 64,733 71,391 44,578 25,221
Total hardware costs.................... 58,704 56,533 117,615 131,485 35,059
------- ------- ------- ------- ------
Total revenues....................... 116,174 121,266 189,006 176,063 60,280
======= ======= ======= ======= ======

The information on revenues net of hardware costs in the above table is a
non-GAAP financial measures within the meaning of Item 10 of Regulation S-K
under the Securities Exchange Act of 1934, as amended. We have provided a
reconciliation of this non-GAAP financial measure to the most directly
comparable GAAP financial measure, total gross revenues. We believe that the
presentation of this non-GAAP measure provides useful information for investors
regarding our regular financial performance. Our management uses this measure
for the same purpose. The presentation of this additional information is not
meant to be considered in isolation or as a substitute for our financial
results prepared in accordance with GAAP.

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 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 0.5% 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 costs. Software costs consist primarily of three components:

.. packaging and written manual expenses for our proprietary software products;

.. compensation and travel expenses for the professionals involved in
modifying, customizing or installing our software products and in providing
consultation, training and support services; and

.. software license fees paid to third-party software providers for the right
to sublicense their products to our customers as part of our solutions
offerings.

The costs associated with designing and modifying the formulation of our
proprietary software are classified as research and development expenses as
incurred.

Operating Expenses

Operating expenses are comprised of sales and marketing expenses, research and
development expenses, general and administrative expenses, and amortization
expenses for intangible assets and deferred stock compensation

and impairment of goodwill and acquired intangible assets. Compensation
expenses consistently comprise a significant portion of our total operating
expenses.

Sales and marketing expenses include compensation expenses for employees in our
sales and marketing departments, third party advertising expenses, as well as
sales commissions and sales agency fees.

Research and development expenses relate to the development of new software and
the modification of the formulation existing software. We expense such costs as
they are incurred.

Taxes

Except for certain hardware procurement and resale transactions, we conduct
substantially all of our business through our Chinese subsidiaries, which are
generally subject to a 30% state corporate income tax and a 3% local income tax.

Under the income tax laws of China, foreign invested enterprises, or FIEs,
satisfying certain criteria can enjoy preferential tax treatment. Our
subsidiaries, AsiaInfo Technologies, AsiaInfo Management and AsiaInfo
Technologies (Chengdu), Inc., are FIEs and enjoy certain preferential tax
treatments in China. Please refer to Note 11 to our consolidated financial
statements included in this report for details of the respective preferential
treatments for each of these subsidiaries.

The unified Chinese corporate income tax laws for domestic enterprises and FIEs
will likely take effect in 2005. It is anticipated that these unified tax laws
will eliminate various preferential tax provisions in China. However, such
unified tax laws should not affect the preferential tax treatments granted to
FIEs in the previous years.

Sales of hardware procured in China are subject to a 17% value added tax. Most
of our sales of hardware procured outside China are made through our U.S.
parent company, AsiaInfo Holdings, Inc. and thus are not subject to the value
added tax. We effectively pass value-added taxes on hardware sales through to
our customers and do not include them in revenues reported in our financial
statements. In addition, companies that develop their own software and have the
software registered with the relevant authorities in China are generally
entitled to a value added tax refund. If the net amount of the value added tax
payable exceeds 3% of software sales, the excess portion of the value added tax
is refundable immediately. This policy is effective until 2010.

We are also subject to U.S. income taxes on revenues generated in the United
States, including revenues from our limited hardware procurement activities
through our U.S. parent company, AsiaInfo Holdings, Inc., and interest income
earned in the United States.

Foreign Exchange

A majority 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 software and service components of our business are denominated
in Renminbi. The value of our shares will be affected by the foreign exchange
rate between 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, an increase in the value of the Renminbi may require us
to exchange more U.S. dollars into Renminbi to meet the working capital
requirements of our subsidiaries in China. Depreciation of the value of the
U.S. dollar will also reduce the value of the cash we hold in U.S. dollars,
which we may use for purposes of future acquisitions or other business
expansion. We actively monitor our exposure to these risks and adjust our cash
position in the Renminbi and the U.S. dollar when we believe such adjustments
will reduce risks. For example, in February 2004 we exchanged approximately $28
million cash in U.S. dollar into Renminbi.

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 other intangible assets, 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 from 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.

Revenue recognition. We generally charge a fixed price for all of our projects
and recognize revenue based on the percentage of completion of the project.
Software revenues from customer orders requiring significant production,
modifications, or customization of the software are recognized over the
installation and customization period. We use labor costs and direct project
expenses to determine the stage of completion, except for revenue associated
with the procurement of hardware, which we recognize upon delivery of the
hardware to the customer. Since a large part of the cost of certain projects,
particularly network solutions projects, often relates to hardware, the timing
of hardware delivery can cause our quarterly gross revenue and inventory level
to fluctuate significantly. However, those fluctuations do not significantly
affect our gross profits because hardware-related revenues generally
approximate the costs of the hardware. Recognized revenues and profit are
subject to adjustments in current periods as the contract progresses to
completion. Accordingly, any changes in our estimates 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 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.

Goodwill and other intangible assets. We make assumptions regarding estimated
future cash flows and other factors to determine the fair value of goodwill and
other intangible assets. 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 and other intangible assets is less than its
recorded amount. As required under SFAS No.142, during the first quarter of
2003 we completed an annual goodwill impairment test and recorded a non-cash
impairment charge of $30.2 million relating to the goodwill and acquired
intangible assets primarily attributable to our acquisition of Bonson in
February of 2002. The impairment resulted primarily from the industry-wide
equity devaluations of the past year. Continued deterioration of market
conditions may require us to record additional impairment charges in the future.

Consolidated Results Of Operations

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues. Total revenues, including hardware pass-through, decreased 4% to
$116.2 million in 2003, from $121.3 million in 2002. Revenues net of hardware
costs decreased approximately 11% to $57.5 million in 2003. Software revenue
was $31.5 million, representing a 5% decrease from $33 million in 2002. Network
solution revenue net of hardware cost was $26.0 million, representing an 18%
decrease from $31.7 million in 2002.

The decrease in our total revenues was primarily attributable to the business
slowdown caused by the SARS outbreak in 2003, as well as our continued focus on
providing software solutions (which effectively reduces our revenues from
hardware pass through). Looking forward, we anticipate that our net revenues
will increase 15 to 21% in 2004, driven by the growth we anticipate in revenues
from our software solutions, including revenues related to the HRM and BI
business we acquired in December 2003.

Cost of revenues. Our cost of revenues was $82.2 million in 2003, remaining at
approximately the same level as 2002 due to the fixed nature of our
compensation expenses.

Gross profit. Gross profit decreased 16% in 2003 to $34.0 million. Gross
profit as a percentage of gross revenues, or gross margin, decreased to 29% in
2003, as compared to 33% in 2002. Gross profit as a percentage of net revenues
decreased to 59% in 2003, as compared to 62% in 2002. These decreases in
margins were primarily attributable to the fixed nature of the compensation
expenses that form a significant aspect of our costs of revenues.

Operating expenses. Total operating expenses increased 74% to $62.0 million in
2003, from $35.6 million in 2002, primarily as a result of our recording the
impairment charges discussed below.

Sales and marketing expenses decreased 23% to $11.3 million in 2003, from $14.7
million in 2002. This decrease was partially attributable to our consolidation
of sales operations and our increased sales efficiency as a result of our
operations restructure effective July 1, 2003 that focuses our business
operation on specific customers rather than product lines. Instead of selling
our products and services through the two former strategic business units,
Communications Solutions and Operation Support Systems Solutions, we now have
one point of sales contact for each of our major customers, streamlining the
relationships and interactions with our customers.

General and administrative expenses increased 9% to $10.8 million in 2003, from
$9.9 million in 2002, largely as a result of increased bad debt expenses in the
amount of $1.6 million.

Research and development expenses increased 7% to $9.1 million in 2003, from
$8.5 million in 2002, due to our continued focus on developing new software
products and solutions for China's telecommunications carriers. We intend to
continue to increase our investment in research and development to introduce
new products and services in a timely manner to our customers.

In 2003, we conducted impairment tests regarding the goodwill recorded in our
acquisition of Bonson in 2002. Based on these tests, we recorded approximately
$29.84 million in impairment charges in connection with our acquisition of
Bonson.

Equity in loss of affiliates. Equity in loss of affiliate in 2003 of
approximately $2.5 million represented an impairment charge related to our
investment in, as well as our proportionate share of losses incurred by,
Intrinsic Holdings, in which we hold a minority stake. We recorded an
impairment charge of approximately $2.2 million in connection with our
investment in Intrinsic based on an impairment test conducted in the fourth
quarter of 2003.

Net income (loss). Our net loss was $28.1 million in 2003, or a loss of $0.63
per share on a fully-diluted basis, as compared to net income of $2.9 million
in 2002, or income of $0.06 per share on a fully diluted basis. The impairment
charges from our acquisition of Bonson and our investment in Intrinsic,
described above, reduced our earnings in 2003 by $0.72 per share. We expect net
income in 2004 to be between $5.0 million to $7.0 million or $0.12 to $0.16 per
basic share.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues. Total revenues, including hardware pass-through, decreased 36% to
$121.3 million in 2002, from $189 million in 2001. Revenues net of hardware
costs decreased approximately 9% to $64.7 million in 2002. Network solutions
revenues net of hardware costs were $33 million in 2002, a 24% decrease from
the previous year. Software solutions revenues were $31.7 million in 2002,
representing 49% of total revenues net of hardware costs and a 14% increase
over software solutions revenues from the previous year.

The decrease in total revenues was primarily attributable to a shift in our
customer's focus from increasing network capacity to increasing network
productivity through the provision of more advanced applications, as well as
our shift in focus to high-end systems integration projects involving less
hardware pass-through revenue. The decrease in net revenues was attributable to
the prolonged telecommunications industry restructuring in China resulting in
an estimated 20% decrease of total capital expenditure in 2002 on the part of
telecommunications carriers in China.

Cost of revenues. Our cost of revenues decreased 39% to $81 million in 2002,
partially as a result of more customers purchasing hardware directly from
hardware vendors. Our cost of revenues net of hardware costs increased 54% to
$24.5 million in 2002 while our revenues net of hardware cost decreased 9%.
This was primarily due to the increased number of employees in our (former)
BSS/OSS Solutions business unit and lower margins on hardware pass-through.

Gross profit. Gross profit decreased 27% in 2002 to $40.3 million. Gross
profit as a percentage of gross revenues, or gross margin, increased to 33% in
2002, as compared to 29% in 2001. The increase in gross margin is primarily
attributable to the smaller amount of low margin hardware pass-through revenue
recognized in 2002. Gross profit as a percentage of net revenues decreased to
62% in 2002, as compared to 78% in 2001, primarily due to the increased number
of employees in our (former) BSS/OSS Solutions business unit and lower margins
on hardware pass-through.

Operating expenses. Total operating expenses decreased 21% to $35.6 million in
2002, from $45.1 million in 2001. These decreases resulted from cost cutting
measures implemented during the year, including a 10% headcount decrease and a
10% salary cut for employees at the manager level and above.

Sales and marketing expenses decreased 33% to $14.7 million in 2002, from $21.8
million in 2001. This decrease was partially attributable to the integration of
our sales teams within our (former) Communications Solutions business unit, the
integration of Bonson's sales team into our (former) BSS/OSS Solutions business
unit, reductions in staff, reduced efforts in international and channel sales,
and tighter control of our marketing expenses.

General and administrative expenses decreased 34% to $9.9 million in 2002, from
$14.9 million in 2001.

Research and development expenses increased 16% to $8.5 million in 2002, from
$7.3 million in 2001, due to our continued focus on developing new software
products and solutions for China's telecommunications carriers.

We recognized a charge of $1.7 million for amortization of intangible assets in
2002 related to our acquisition of Bonson.

Other income (expenses). Other income (expenses), consisting primarily of net
interest income and expense, decreased from income of approximately $6.1
million in 2001 to income of $1.5 million in 2002, partially due to a decrease
in interest rates and our having less cash on our balance sheet as a result of
our acquisition of Bonson. The decrease was also due to our recording a
provision of $0.75 million against a promissory note receivable the collection
of which we determined to be not reasonably assured.

Minority interest. In 2002, minority interest of $0.08 million represented the
portion of our loss 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. Equity in loss of affiliate in 2002 of
approximately $2.5 million included our proportionate share of the loss
incurred by Intrinsic, in which we held a 14.25% equity interest, as well as an
impairment charge of approximately $2.0 million we recorded in connection with
that investment.

Net income (loss). Net income decreased 75% to $2.9 million in 2002, or $0.06
per share on a fully diluted basis, from $11.7 million, or $0.26 per share on a
fully diluted basis in 2001. Bonson contributed 35% of total net income in 2002.

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, 2003 and 2002. 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.

Three Months Ended
-----------------------------------------------------------------------------------------
December 31, September 30, June 30, March 31, December 31, September 30, June 30,
2003 2003 2003 2003 2002 2002 2002
------------ ------------- ---------- ---------- ------------ ------------- ----------
(Amounts in thousands of U.S. dollars)

Consolidated Statements of
Operations Data:
Revenues:
Network solutions................ 21,081 19,543 20,562 23,500 16,353 23,171 27,486
Software revenue................. 9,531 8,441 6,342 7,174 7,246 9,400 9,073
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues.................. 30,612 27,984 26,904 30,674 23,599 32,571 36,559
Total cost of revenues............. 21,362 17,988 19,702 23,169 16,158 24,071 23,522
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit....................... 9,250 9,996 7,202 7,505 7,441 8,500 13,037
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.............. 3,075 2,820 2,930 2,515 3,220 3,082 4,809
General and administrative....... 2,428 3,116 2,966 2,317 2,171 2,719 1,472
Research and development......... 1,882 2,037 2,666 2,545 1,797 2,097 2,345
Amortization of deferred stock
compensation expense............ -- -- 37 68 76 82 97
In-process research and
development..................... 169 -- -- -- -- -- --
Amortization of acquired
intangible assets............... 81 41 40 47 477 477 477
Impairment of goodwill and
acquired intangible assets...... -- -- -- 30,221 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses........... 7,635 8,014 8,639 37,713 7,741 8,457 9,200
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... 1,615 1,982 (1,437) (30,208) (300) 43 3,837
Other income (expenses):
Interest income.................. 394 362 366 454 515 523 500
Interest expense................. (1) -- (1) (1) (39) (1) (30)
Other (expense) income, net...... (100) (1) (31) (1) (752) 6 37
Total other income (expenses),
net............................... 293 361 334 452 (276) 528 507
Income (loss) before income taxes,
minority interests and equity in
loss of affiliate................. 1,908 2,343 (1,103) (29,756) (576) 571 4,344
Income tax (benefit) expense..... (20) -- (134) (824) (46) 74 529
Income (loss) before minority
interests......................... 1,928 2,343 (969) (28,932) (530) 497 3,815
Minority interests in (income) loss
of consolidated subsidiaries...... -- -- (12) -- 12 73 (45)
Equity in loss of affiliate........ (2,196) (94) (72) (115) (2,082) (102) (154)
Net (loss) income.................. (268) 2,249 (1,053) 29,047 2,600 468 3,616
Net (loss) income per share
Basic............................ (0.01) 0.05 (0.02) (0.66) (0.06) 0.01 0.08
Diluted.......................... (0.01) 0.05 (0.02) (0.66) (0.06) 0.01 0.08
Shares used in computing per
share amounts
Basic............................ 44,846,989 44,521,025 44,261,401 44,206,625 44,170,750 44,081,170 43,629,646
Diluted.......................... 44,846,989 46,971,126 44,261,401 44,206,625 44,170,750 44,835,907 44,554,057
Segment information
Network solutions net of
hardware costs.................. 6,624 7,399 6,414 5,545 6,114 5,287 10,539
Software revenue................. 9,531 8,441 6,342 7,174 7,246 9,400 9,073
Total revenues net of hardware
costs............................. 16,155 15,840 12,756 12,719 13,360 14,687 19,612
Total cost of sales net of hardware
costs............................. 6,905 5,844 5,554 5,214 5,919 6,187 6,575
Gross profit....................... 9,250 9,996 7,202 7,505 7,441 8,500 13,037

------------
March 31,
2002
-----------

Consolidated Statements of
Operations Data:
Revenues:
Network solutions................ 21,243
Software revenue................. 7,294
-----------
Total revenues.................. 28,537
Total cost of revenues............. 17,249
-----------
Gross profit....................... 11,288
-----------
Operating expenses:
Sales and marketing.............. 3,569
General and administrative....... 3,545
Research and development......... 2,264
Amortization of deferred stock
compensation expense............ 152
In-process research and
development..................... 350
Amortization of acquired
intangible assets............... 318
Impairment of goodwill and
acquired intangible assets...... --
-----------
Total operating expenses........... 10,198
-----------
Income (loss) from operations...... 1,090
Other income (expenses):
Interest income.................. 734
Interest expense................. (44)
Other (expense) income, net...... 1
Total other income (expenses),
net............................... 691
Income (loss) before income taxes,
minority interests and equity in
loss of affiliate................. 1,781
Income tax (benefit) expense..... 267
Income (loss) before minority
interests......................... 1,514
Minority interests in (income) loss
of consolidated subsidiaries...... 35
Equity in loss of affiliate........ (127)
Net (loss) income.................. 1,422
Net (loss) income per share
Basic............................ 0.03
Diluted.......................... 0.03
Shares used in computing per
share amounts
Basic............................ 44,430,509
Diluted.......................... 45,884,452
Segment information
Network solutions net of
hardware costs.................. 9,780
Software revenue................. 7,294
Total revenues net of hardware
costs............................. $ 17,074
Total cost of sales net of hardware
costs............................. $ 5,786
Gross profit....................... $ 11,288

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 equity
securities, our initial public offering in March of 2000 and, to a limited
extent, bank loans.

Our accounts receivable balance at December 31, 2003 was $51.9 million,
consisting of $20 million in billed receivables and $31.9 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 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 10-20% 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 December 31, 2003, our days sales outstanding were 161 days, as compared to
177 days as of the end of the third quarter. Our billed receivables were 62
days sales outstanding and our unbilled receivables were 99 days sales
outstanding. The lower days sales outstanding was attributable to our increased
collection efficiency.

As of December 31, 2003, we had short-term credit facilities for working
capital purposes totaling $40.54 million, expiring in December 29, 2005, which
were secured by bank deposits of $14 million. The unused portion of these
facilities was $28.76 million, with $11.78 million having been used as security
for issuing standby letters of credit and notes payable to hardware suppliers
and customers. Additional bank deposits of $0.83 million were used for issuing
standby letters of credit and bank acceptance drafts as of December 31, 2003.
One of our subsidiaries, AsiaInfo Management, has outstanding borrowings of
$0.06 million in RMB, for which its assets are pledged as security. The loan to
AsiaInfo Management bears interest at a rate of 4.8% per annum and is repayable
within one year. Bank deposits pledged as security for our bank loans and
short-term credit facilities totaled $14.83 million as of December 31, 2003,
and are presented as restricted cash in our consolidated balance sheets.

As of December 31, 2003, we were committed under certain operating leases,
requiring annual minimum rentals of approximately $2.12 million, $0.89 million
and $0.53 million in 2004, 2005 and 2006, respectively.

We ended the year with a cash position of $147.44 million, of which $13.22
million was in short term investments, $14.83 million was in restricted cash
and $119.39 million was in cash and cash equivalents. Restricted cash consists
of $14 million used to secure our $40.54 million credit facility, $0.39 million
used as security for issuing standby letters of credit and bank acceptance
drafts and $0.44 million held by AsiaInfo Management and pledged as security
for bank guarantees. Our short-term investments feature fixed income, liquidity
and low risk. The cash equivalents include investments in cash management
accounts to enhance our interest income.

Our inventory position at the end of 2003 was approximately $3 million, down
$7.7 million as compared to the beginning of the year. This decrease was
attributable our strategy of increasing our focus on our software solutions
business, which typically does not involve hardware pass through.

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 2004. 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. If we do need to raise additional funds, we expect to raise those
funds 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.

Off-Balance Sheet Arrangements

As of December 31, 2003, we have not entered into any off-balance sheet
arrangements with any individuals or entities.

Tabular Disclosure of Contractual Obligations

The following table presents a breakdown of our outstanding contractual
obligations by maturity as of December 31, 2003:

Payment due by period
-------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
--------- --------- --------- --------- ---------

Contractual Obligations
Operating Lease Obligations 3,533,000 2,119,000 1,414,000 N/A N/A

Accounting Pronouncements Recently Adopted

Recent Accounting Pronouncements

Our adoption of the following recently issued accounting pronouncements did not
have a material impact on our financial position, cash flows or results of
operations. We have reflected all disclosure requirements of these
pronouncements in our financial statements.

.. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities."

.. Financial Accounting Standards Board ("FASB") Interpretation Number, (FIN)
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees
of Indebtedness of Others."

.. Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables."

.. SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." As allowed by SFAS No. 148, we have elected to continue to
utilize the accounting method prescribed by Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees."

.. SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," for instruments entered
into or modified after May 31, 2003.

We have not yet adopted the following recently issued accounting pronouncements
because they are not yet applicable in part or in total; however, we do not
expect their adoption to have a material effect on our financial position, cash
flows or results of operations.

.. FIN No. 46, "Consolidation of Variable Interest Entities", applicable
December 31, 2004.

.. SFAS No. 150, applicable January 1, 2004 for instruments existing at May
31, 2003 and not subsequently modified.

Certain Risks That May Affect 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 telecommunications
infrastructure and budgetary policies, particularly the allocation of funds to
sustain the growth of the telecommunications industry in China.

Most 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 National Development and Reform Commission of China.
As a result, the growth of our business is heavily dependent on government
policies for telecommunications and Internet infrastructure. Insufficient
government allocation of funds to sustain the growth of China's
telecommunications 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 has merged with China Netcom and Jitong
Communication, and has been renamed China Network Communications Group
Corporation, or China Netcom Group, while the southern division operates under
the China Telecom name. As a result of the restructuring, new orders for
telecommunications infrastructure expansion and improvement projects have
decreased over the past several quarters, adversely affecting our backlog and
our net revenue. Although we expect that the restructuring will have a positive
impact on growth in the telecommunications industry in China in the long-term,
continued delays in capital expenditure projects could continue to negatively
affect our growth in the near-term. In addition, similar restructurings of this
nature could cause our operating results to vary unexpectedly from quarter to
quarter in the future.

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 Group. China Mobile
accounted for 38% of our revenues in 2003. 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. Our recent
acquisition of the human resources management and business intelligence assets
of Pacific Software is part of our strategy to further diversify our business
and, therefore, gradually reduce such concentration risk in the future.
However, in the near term, the expected revenue to be generated by our business
outside the telecommunications industry is still limited compared to our
overall revenues. Moreover, we cannot provide any assurance that a material
proportion of our revenues will be derived from other industries in the future.

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.

A large part of the contract amount of our projects usually relates to hardware
procurement. Since we recognize most of the revenues relating to hardware plus
a portion of services and software revenues at the time of hardware delivery,
the timing of hardware delivery can cause our quarterly gross 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 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.

We have sustained losses in prior years and may incur slower earnings growth,
earnings declines or net losses in the future.

Although we had net income in 1998, 2001 and 2002, we sustained net losses in
1999, 2000 and 2003. 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.

Our high level of fixed costs, as well as increased competition in the software
market, could result in reduced operating margins.

We maintain a relatively stable work force of software and network engineers
engaged in all phases of planning and executing projects on behalf of our
customers. As a result, our operating costs are relatively fixed from quarter
to quarter, regardless of fluctuations in our revenues. In recent periods, this
has resulted in our gross profit decreasing as a percentage of our net
revenues. For example, during the second quarter of 2003 our revenues were
impacted by the outbreak of SARS and our gross profit as a percentage of net
revenue decreased to 56% as compared to 66% in the comparable period of 2002.
Future fluctuations in our net revenues could result in similar decreases in
our operating margins. In addition, enhanced competition in the software market
and other markets in which we operate could result in reduced prices, which,
together with our relatively fixed operating costs, could also result in
reduced operating margins.

Business acquisitions we undertake may be challenging, and we may realize
losses on our investments.

In February of 2002, as a key component of our business and growth strategy, we
acquired Bonson, a leading provider of operation support system solutions in
China. On December 4, 2003, we completed our acquisition of certain human
resources management and business intelligence assets valued at approximately
$9 million from Pacific Software (China) Limited, a privately held,
medium-sized software solutions company based in Hong Kong, and from its
affiliate, New Century Pacific Software (Beijing) Limited, a
wholly-foreign-owned enterprise

based in Beijing, China. 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 and dilutive issuances of our common stock. 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 any 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.

Asset impairment reviews may result in future periodic write-downs.

Effective January 1, 2002, we adopted SFAS No. 142 which requires us, among
other things, to review goodwill and intangible assets for impairment annually.
In connection with our business acquisitions, we make assumptions regarding
estimated future cash flows and other factors to determine the fair value of
goodwill and intangible assets. In assessing the related useful lives of those
assets, we have to make assumptions regarding their fair value, our
recoverability of those assets and our ability to successfully develop and
ultimately commercialize acquired technology. If those assumptions change in
the future when we conduct our periodic reviews in accordance with applicable
accounting standards, we may be required to record impairment charges.

We recorded a non-cash impairment charge of $30.2 million as a result of an
independent valuation during the first quarter of 2003 of the goodwill and
acquired intangible assets mainly attributable to our acquisition of Bonson in
February 2002. In December 2003 we recorded an impairment charge of US$2.2
million related to our investment in Intrinsic. There is no assurance that
future reviews will not result in further write-downs to goodwill and other
intangible assets.

Severe acute respiratory syndrome may have an impact on our business

The outbreak of Severe Acute Respiratory Syndrome, or SARS, is believed to have
started in Guangdong Province, China in late 2002 and to have later spread to
Beijing. The SARS outbreak impacted our second quarter revenues by disrupting
travel throughout China and causing serious delays in service delivery to our
customers. The outbreak also interrupted our collection efforts, causing
accounts receivable and days sales outstanding to increase. Although the spread
of SARS in China appears to have been contained and our business activities
resumed normal operations throughout the third and fourth quarters of 2003, the
medical community worldwide has not fully understood the origin of SARS and has
not found a well-recognized effective treatment for SARS. As a consequence, the
potential long-term effects of SARS on economic growth in China are still
unknown. Since January 5, 2004, a small number of new SARS cases have been
reported in China. Any worsening of the SARS epidemic could have an adverse
impact on our business.

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. 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.

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 services on a fixed-price, fixed-time basis which exposes us to
risks associated with cost overruns and delays.

We sell most of our services 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.

We may become less competitive if we are unable to develop or acquire new
products, or enhancements to our existing products, that are marketable on a
timely and cost-effective basis.

Our future operating results will depend, to a significant extent, upon our
ability to enhance our existing products and services and to introduce new
products and services to meet the requirements of our customers in a rapidly
developing and evolving market. For example, we continually develop new
services and software products for our customers in the telecommunications
market. If we do not enhance our existing products and services or introduce
new successful products and services in a timely manner, our products and
services may become obsolete, and our revenues and operating results may
suffer. Moreover, unexpected technical, operational, distribution or other
problems could delay or prevent the introduction of any products or services
that we may plan to introduce in the future. 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 confidentiality
arrangements and copyright and trademark registrations. 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 certain of our software products, although we have not applied for
copyright protection elsewhere (including the United States). Despite these
precautions, the legal regime protecting intellectual

property rights in China is weak. Moreover, Bonson, which we acquired in
February, 2002, had never registered copyrights for its software products prior
to the acquisition. 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.

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 most of 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
certain of our officers and directors.

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

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

.. enforce against those 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 those payments
from Renminbi into foreign currencies.

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 those 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 those 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 are denominated in Renminbi.
The value of 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, an increase in the value of the Renminbi may require us
to exchange more U.S. dollars into Renminbi to meet the working capital
requirements of our subsidiaries in China. Depreciation of the value of the
U.S. dollar will also reduce the value of the cash we hold in U.S. dollars,
which we may use for purposes of future acquisitions or other business
expansion.

The markets in which we sell our services and products are competitive and we
may not be able to compete effectively.

Our competitors, some of whom have greater financial, technical and human
resources than we have, 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.
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.

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 investments relating to China and Asia, as well
as developments in the telecommunications industry. 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
software companies and which have often been unrelated to the operating
performance of those 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 are currently involved
in this type of litigation as a result of allegedly improper allocation
procedures relating to the sale of our common stock in connection with our
initial public offering in March of 2000. For more information on that
litigation, please see the discussion under the heading "Item 3. Legal
Proceedings" in Part I of this report. Litigation is often expensive and
diverts management's attention and resources, which could materially and
adversely affect our business.

Future sales of shares by 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.

A small number of shareholders, including Warburg-Pincus Ventures, and their
affiliates, as well as Edward Tian, one of our directors, James Ding, our
Chairman, and several of our other directors and officers control approximately
50% 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 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, such an 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
nine-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
2006; 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 in 2005. 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 "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; and an "interested
stockholder" includes any person that is the owner of 15% or more of our
outstanding voting stock or is an affiliate or associate of ours.

Our change of control severance agreements with executive officers may
discourage a change of control

Recently we have entered into change of control severance agreements with
several of our executive officers. These agreements provide, among other
things, that the executive officers would be entitled to various benefits upon
the occurrence of either a covered termination (as defined therein) or a change
of control (as defined therein), including payment of one year of base salary
and bonus, immediate vesting of 50% of any outstanding unvested stock options
held by the executive officer and provisions of medical benefits and housing
allowance. The potential obligations to pay the executive officers the above
amounts may discourage a potential acquiror from effecting a change of control.

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.

We are exposed to exchange rate risk in connection with the relative value of
the U.S. dollar and the Renminbi. 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 and
software components of our business are denominated in Renminbi. We 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.

The value of our shares will be affected by the foreign exchange rate between
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, an increase in the value of the Renminbi may require us to
exchange more U.S. dollars into Renminbi to meet the working capital
requirements of our subsidiaries in China. Depreciation of the value of the
U.S. dollar will also reduce the value of the cash we hold in U.S. dollars,
which we may use for purposes of future acquisitions or business expansion. We
actively monitor our exposure to these risks and adjust our cash position in
the Renminbi and the U.S. dollar when we believe such adjustments will reduce
our risk. For example, in February 2004 we exchanged approximately $28 million
cash in U.S. dollar into Renminbi.

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, 2003. 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 short-term investments. As there are no significant
market price movements, such investments are held at cost. As of December 31,
2003, a hypothetical 10% immediate increase or decrease in interest rates would
increase our annual interest expense by approximately $300 or decrease our
annual interest income by approximately $157,600, 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.

ITEM 9A. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this annual report, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934,
as amended. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent to the
date of our evaluation.

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 entitled "Proposal No. 1: Election of
Directors--Nominees for Class II Directors" and "Management--Executive
Officers" contained in our definitive proxy statement with respect to our 2004
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 entitled "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 entitled "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 entitled "Certain Relationships and
Related Transactions" contained in our Proxy Statement.

ITEM 14. Principal Accountant Fees and Services

Information concerning principal accountant fees and services is incorporated
by reference to the sections entitled "Audit Fees", "Audit-Related Fees", "Tax
Fees", "All Other Fees" and "Audit Committee's Pre-Approval Policies and
Procedures" contained in our Proxy Statement.

ITEM 15. Exhibits, Financial Statement Schedule, 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 furnished a Current Report on Form 8-K on January 20, 2004 relating to
our earnings announcement for the year ended December 31, 2003 and a Current
Report on Form 8-K on February 13, 2004 relating to certain presentation
slides delivered by our management to investors on February 16, 2004.

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

Exhibit
Number Description Exhibits
------- --------------------

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 2002 Stock Option Plan, approved and adopted as of April 18, 2003****
10.2 Lease of AsiaInfo's headquarters at 6 Zhongguancun South Street, Beijing, China, dated August 31,
1999*
10.3 Agreement for the Establishment of a Limited Liability Company (Guangdong Wangying
Communications Technology Company Limited) and Capital Contribution**
10.4 Employment Agreement between AsiaInfo Holdings, Inc. and Xingsheng Zhang dated January 27,
2003/#/
10.5 Change of Control Severance Agreement between AsiaInfo Holdings, Inc. and Xingsheng Zhang
dated May 30, 2003/#/
10.6 Master Executive Employment Agreement between AsiaInfo Holdings, Inc. and Ying Han dated
May 30, 2003/#/
10.7 Change of Control Severance Agreement between AsiaInfo Holdings, Inc. and Ying Han dated May
30, 2003/#/
10.8 Master Executive Employment Agreement between AsiaInfo Holdings, Inc. and James Li dated May
30, 2003/#/

Exhibit
Number Description Exhibits
------- --------------------

10.9 Change of Control Severance Agreement between AsiaInfo Holdings, Inc. and James Li dated May
30, 2003/#/
11.1 Statement regarding computation of per share earnings (included in note 9 to condensed 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)
31.1 Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith)
31.2 Certification of Principal Financial Officer required by Rules 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002

--------
* Incorporated by reference to our Registration Statement on Form S-1
(No.333-93199).
** 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.
**** Incorporated by reference to our Proxy Statement for the 2003 Annual
Meeting of Stockholders filed on March 21, 2003.
/#/ Incorporated by reference to our Quarterly Report on Form 10-Q filed on
August 14, 2003.

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 15, 2004.

ASIAINFO HOLDINGS, INC.

By: /s/ Ying Han
-----------------------------
Name: Ying Han
Title: Chief Financial Officer (duly
authorized officer and
Principal financial 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.

Signature Title Date
--------- ----- ----

/s/ James Ding Board Member and Chairman of March 15, 2004
----------------------------- the Board
James Ding

/s/ Xingsheng Zhang Board Member, President and March 15, 2004
----------------------------- Chief Executive Officer
Xingsheng Zhang (principal executive officer)

/s/ Ying Han Executive Vice President and March 15, 2004
----------------------------- Chief Financial Officer
Ying Han (principal financial officer
and principal accounting
officer)

/s/ Michael Zhao Board Member March 15, 2004
-----------------------------
Michael Zhao

/s/ Alan Bickell Board Member March 15, 2004
-----------------------------
Alan Bickell

/s/ Weiying Zhang Board Member March 15, 2004
-----------------------------
Weiying Zhang

/s/ Tao Long Board Member March 15, 2004
-----------------------------
Tao Long

/s/ Chang Sun Board Member March 15, 2004
-----------------------------
Chang Sun

/s/ Edward Tian Board Member March 15, 2004
-----------------------------
Edward Tian

/s/ Ying Wu Board Member March 15, 2004
-----------------------------
Ying Wu

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent auditors' report................................................................. F-2
Consolidated balance sheets as of December 31, 2003 and 2002................................. F-3
Consolidated statements of operations for the years ended December 31, 2003, 2002 and 2001... F-4
Consolidated statements of stockholders' equity and comprehensive income (loss) for the years
ended December 31, 2003, 2002 and 2001..................................................... F-5
Consolidated statements of cash flows for the years ended December 31, 2003, 2002 and 2001... F-6 to F-7
Notes to consolidated financial statements................................................... F-8 to F-27

F-1

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. (the "Company") and its subsidiaries as of December 31, 2003 and
2002, 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, 2003. 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 present fairly, in all
material respects, the financial position of the Company and its subsidiaries
at December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States
of America.

As described in Note 3 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No.142, "Goodwill
and Other Intangible Assets," effective January 1, 2002.

/s/ Deloitte Touche Tohmatsu
Hong Kong
January 20, 2004

F-2

ASIAINFO HOLDINGS, INC.

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

December 31,
------------------
2003 2002
-------- --------

ASSETS
Current Assets:
Cash and cash equivalents....................................................... $119,395 $115,153
Restricted cash................................................................. 14,827 14,458
Short-term investments.......................................................... 13,218 11,260
Notes receivable................................................................ 3,832 64
Accounts receivable (net of allowances of $3,095 in 2003 and $1,133 in 2002).... 51,923 49,373
Inventories..................................................................... 3,235 10,934
Other receivables............................................................... 8,528 8,758
Deferred income taxes--current.................................................. 1,842 1,653
Prepaid expenses and other current assets....................................... 2,680 3,441
-------- --------
Total current assets........................................................ 219,480 215,094
Property and equipment-net...................................................... 2,348 4,046
Goodwill........................................................................ 15,368 37,255
Other acquired intangible assets-net............................................ 2,341 4,031
Investment in affiliate......................................................... 331 2,808
Deferred income taxes........................................................... 154 196
-------- --------
Total Assets................................................................ $240,022 $263,430
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank loans........................................................... $ 60 $ 60
Notes payable................................................................... 2,609 2,447
Accounts payable................................................................ 13,945 19,261
Accrued expenses................................................................ 12,822 13,226
Deferred revenue................................................................ 11,738 5,056
Accrued employee benefits....................................................... 5,971 5,083
Other payables.................................................................. 2,776 2,483
Other taxes payable............................................................. 2,212 2,579
Income taxes payable............................................................ 1,232 2,760
-------- --------
Total current liabilities................................................... 53,365 52,955
-------- --------
Minority interest.................................................................. -- 317

Commitments and contingencies (Note 14)
Stockholders' Equity:
Common stock, 100,000,000 shares authorized, $0.01 par value, shares issued and
outstanding: 2003: 45,112,278; 2002: 44,193,474............................... 451 442
Additional paid-in capital...................................................... 205,154 200,649
Deferred stock compensation..................................................... -- (105)
(Accumulated deficit) Retained earnings......................................... (19,009) 9,110
Accumulated other comprehensive income.......................................... 61 62
-------- --------
Total stockholders' equity.................................................. 186,657 210,158
-------- --------
Total Liabilities and Stockholders' Equity.................................. $240,022 $263,430
======== ========

See notes to consolidated financial statements.

F-3

ASIAINFO HOLDINGS, INC.

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

Years Ended December 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------

Revenues:
Network solutions............................................... $ 84,686 $ 88,253 $ 161,131
Software revenue................................................ 31,488 33,013 27,875
----------- ----------- -----------
Total revenues..................................................... 116,174 121,266 189,006
----------- ----------- -----------
Cost of revenues:
Network solutions............................................... 67,675 67,839 129,712
Software revenue................................................ 14,546 13,161 3,821
----------- ----------- -----------
Total cost of revenues.......................................... 82,221 81,000 133,533
----------- ----------- -----------
Gross profit....................................................... 33,953 40,266 55,473
----------- ----------- -----------
Operating expenses:
Sales and marketing (excluding stock-based compensation:
2003: $43; 2002: $95; 2001: $380)............................. 11,340 14,680 21,768
General and administrative (excluding stock-based
compensation: 2003: $51; 2002: $242; 2001: $584).............. 10,827 9,907 14,905
Research and development (excluding stock-based
compensation: 2003: $11; 2002: $70; 2001: $180)............... 9,130 8,503 7,304
In-process research and development............................. 169 350 --
Impairment of goodwill and acquired intangible assets........... 30,221 -- --
Amortization of deferred stock compensation..................... 105 407 1,144
Amortization of acquired intangible assets...................... 209 1,749 --
----------- ----------- -----------
Total operating expenses.................................... 62,001 35,596 45,121
----------- ----------- -----------
(Loss) income from operations...................................... (28,048) 4,670 10,352
----------- ----------- -----------
Other income (expense):
Bank interest income............................................ 1,576 2,272 7,135
Bank interest expense........................................... (3) (114) (969)
Other expense, net.............................................. (133) (708) (59)
----------- ----------- -----------
Total other income, net............................................ 1,440 1,450 6,107
----------- ----------- -----------
(Loss) income before income taxes, minority interests and equity in
loss of affiliate................................................ (26,608) 6,120 16,459
Income tax (benefit) expense....................................... (978) 824 3,444
----------- ----------- -----------
(Loss) income before minority interests and equity in loss of
affiliate........................................................ (25,630) 5,296 13,015
Minority interests in (income) loss of consolidated subsidiaries... (12) 75 (396)
Equity in loss of affiliate........................................ (2,477) (2,465) (885)
----------- ----------- -----------
Net (loss) income.................................................. $ (28,119) $ 2,906 $ 11,734
=========== =========== ===========
Net (loss) income per share:
Basic....................................................... $ (0.63) $ 0.07 $ 0.28
=========== =========== ===========
Diluted..................................................... $ (0.63) $ 0.06 $ 0.26
=========== =========== ===========
Shares used in computation:
Basic....................................................... 44,459,010 43,583,420 41,525,159
=========== =========== ===========
Diluted..................................................... 44,459,010 45,961,545 45,924,724
=========== =========== ===========

See notes to consolidated financial statements.

F-4

ASIAINFO HOLDINGS, INC.

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

(Accumulated Accumulated
Common Stock Additional Deferred Deficit) Other
----------------- Paid-in Stock Retained Comprehensive
Shares Amount Capital Compensation Earnings Income
---------- ------ ---------- ------------ ------------ -------------

Balance at January 1, 2001........................... 40,822,940 $408 $175,370 $(1,656) $ (5,530) $17
Comprehensive income:
Net income........................................ -- -- -- -- 11,734 --
Other comprehensive income, net of tax:
Foreign currency translation adjustments....... -- -- -- -- -- 11

Comprehensive income........................

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

Comprehensive income:
Net income........................................ -- -- -- -- 2,906 --
Other comprehensive income, net of tax:
Foreign currency translation adjustments....... -- -- -- -- -- 34

Comprehensive income........................

Issuance of common stock on acquisition of a business 1,031,686 11 17,992 -- -- --
Stock option exercises and other..................... 1,028,970 10 2,748 -- -- --
Income tax benefit from exercise of stock options.... -- -- 1,260 -- -- --
Amortization of deferred stock compensation.......... -- -- -- 407 -- --
---------- ---- -------- ------- -------- ---
Balance at December 31, 2002......................... 44,193,474 442 200,649 (105) 9,110 62

Comprehensive loss:
Net loss.......................................... -- -- -- -- (28,119) --
Other comprehensive income, net of tax:
Foreign currency translation adjustments....... -- -- -- -- -- (1)

Comprehensive loss..........................

Issuance of common stock on acquisition of a business 349,315 3 2,547 -- -- --
Stock option exercises............................... 507,267 5 1,220 -- -- --
Stock issued for services and other.................. 62,222 1 299 -- -- --
Income tax benefit from exercise of stock options.... -- -- 439 -- -- --
Amortization of deferred stock compensation.......... -- -- -- 105 -- --
---------- ---- -------- ------- -------- ---
Balance at December 31, 2003......................... 45,112,278 $451 $205,154 $ -- $(19,009) $61
========== ==== ======== ======= ======== ===

Total
Stockholders' Comprehensive
Equity Income (Loss)
------------- -------------

Balance at January 1, 2001........................... $168,609
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..................... 3,292
Amortization of deferred stock compensation.......... 1,144
--------
Balance at December 31, 2001......................... $184,790
========
Comprehensive income:
Net income........................................ 2,906 $ 2,906
Other comprehensive income, net of tax:
Foreign currency translation adjustments....... 34 34
--------
Comprehensive income........................ $ 2,940
========
Issuance of common stock on acquisition of a business 18,003
Stock option exercises and other..................... 2,758
Income tax benefit from exercise of stock options.... 1,260
Amortization of deferred stock compensation.......... 407
--------
Balance at December 31, 2002......................... 210,158
========
Comprehensive loss:
Net loss.......................................... (28,119) $(28,119)
Other comprehensive income, net of tax:
Foreign currency translation adjustments....... (1) (1)
--------
Comprehensive loss.......................... $(28,120)
========
Issuance of common stock on acquisition of a business 2,550
Stock option exercises............................... 1,225
Stock issued for services and other.................. 300
Income tax benefit from exercise of stock options.... 439
Amortization of deferred stock compensation.......... 105
--------
Balance at December 31, 2003......................... $186,657
========

See notes to consolidated financial statements.

F-5

ASIAINFO HOLDINGS, INC.

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

Years Ended December 31,
----------------------------
2003 2002 2001
-------- -------- --------

Cash flows from operating activities:
Net (loss) income...................................................... $(28,119) $ 2,906 $ 11,734
Adjustments to reconcile net (loss) income to net cash generated from
operating activities:
Depreciation........................................................... 1,950 2,936 2,232
Amortization of goodwill............................................... -- -- 1,083
Amortization of other acquired intangible assets....................... 209 1,749 --
Impairment of goodwill and other acquired intangible assets............ 30,221 -- --
In-process research and development.................................... 169 350 --
Amortization of deferred stock compensation............................ 105 407 1,144
Deferred income taxes.................................................. (147) (438) (1,571)
Minority interest in income (loss) of consolidated subsidiaries........ 12 (75) 396
Equity in loss of affiliate............................................ 2,477 2,465 885
Loss on disposal of property and equipment............................. 72 185 2
Provision for doubtful accounts........................................ 2,366 762 2,782
Stock issued for services and other.................................... 179 -- --
Provision for short-term investment.................................... 100 750 --
Changes in operating assets and liabilities net of effects of business
acquisition:
Restricted cash.................................................... (369) 3,544 13,258
Notes receivable................................................... (3,768) (64) --
Accounts receivable................................................ (4,858) 27,846 (13,896)
Inventories........................................................ 7,699 (8,523) 7,696
Other receivables.................................................. 213 (4,201) (1,025)
Prepaid expenses and other current assets.......................... 761 822 (825)
Notes payable...................................................... 162 2,447 --
Accounts payable................................................... (5,316) (6,865) (18,248)
Deferred revenue................................................... 6,682 (796) (8,222)
Other payables..................................................... (790) 652 91
Accrued employee benefits.......................................... 888 (4,557) (931)
Accrued expenses................................................... (404) 1,533 5,236
Income taxes payable............................................... (1,090) (723) 4,436
Other taxes payable................................................ (367) (1,030) 614
-------- -------- --------
Net cash generated from operating activities.............................. 9,037 22,082 6,871
-------- -------- --------
Cash flows from investing activities:
(Increase) decrease in short-term investments.......................... (2,058) 15,174 83,215
Purchases of property and equipment.................................... (351) (1,004) (1,342)
Proceeds on disposal of property and equipment......................... 29 57 73
Increase in other receivable........................................... -- (3,572) (6,428)
Purchase of business................................................... (3,006) -- --
Purchase of businesses, net of cash acquired........................... (205) (26,063) --
Investment in affiliates............................................... -- -- (6,157)
-------- -------- --------
Net cash (used in) generated from investing activities.................... $ (5,591) $(15,408) $ 69,361
-------- -------- --------

F-6

ASIAINFO HOLDINGS, INC.

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

Years Ended December 31,
----------------------------
2003 2002 2001
-------- -------- --------

Cash flows from financing activities:
Increase in short-term bank loans................................. $ -- $ 2,984 $ 43,460
Repayment of short-term bank loans................................ -- (7,708) (61,185)
Proceeds on exercise of stock options............................. 1,225 2,758 3,292
Distribution to minority shareholder of consolidated subsidiaries. (427) (218) --
-------- -------- --------
Net cash generated from (used in) financing activities............... 798 (2,184) (14,433)
-------- -------- --------
Net increase in cash and cash equivalents............................ 4,244 4,490 61,799
Cash and cash equivalents at beginning of year....................... 115,153 110,635 48,834
Effect of exchange rate changes on cash and cash equivalents...... (2) 28 2
-------- -------- --------
Cash and cash equivalents at end of year............................. $119,395 $115,153 $110,635
======== ======== ========
Supplemental cash flow information:
Cash paid during the year:
Interest.......................................................... $ 3 $ 59 $ 937
======== ======== ========
Income taxes...................................................... $ 152 $ 1,519 $ 578
======== ======== ========

Non-cash investing activities:

In December 2003, the Company acquired certain assets from Pacific Software
(China) Limited for cash of $4,180, of which $266 represented acquisition
costs, and the issuance of 349,315 shares of common stock with a fair market
value at the time the acquisition was announced of approximately $2,550. Of the
cash amount, $3,006 was paid in December 2003. In connection with the
acquisition, the Company acquired tangible assets and intangible assets with a
fair value of $93 and $2,355, respectively.

In February 2002, the Company acquired 100% of the outstanding equity shares of
Bonson for cash of $33,387, of which $624 represented acquisition costs, and
the issuance of 1,031,686 shares of common stock with a fair market value at
the time the acquisition was announced of approximately $18,003. Of the cash
amount, $20,433 was paid on April 4, 2002 and the holdback of $105 was paid in
2003. In connection with the acquisition, the Company acquired tangible assets
with a fair value of $28,364 and assumed liabilities of $18,171.

See notes to consolidated financial statements.

F-7

ASIANFO HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2003, 2002 and 2001
(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 of America (the "US"). The Company principally
operates through the following directly owned subsidiaries, or their respective
subsidiaries: AsiaInfo Technologies (China), Inc. ("AsiaInfo Technologies")
(100% owned), incorporated in the People's Republic of China ("China" or the
"PRC"), Marsec System, Inc. ("Marsec System"), the former wholly-owned
subsidiary of Marsec Holdings, Inc. ("Marsec") (100% owned), and Bonson
Information Technology Holdings Limited, ("Bonson") (100% owned), both
incorporated in the Cayman Islands.

The Company and its subsidiaries are leading providers of network and software
solutions in China. The software products and network services of the Company
enable its customers to build, maintain, operate, manage and continuously
improve their communications infrastructure. The main customers of the Company
are the major telecommunications carriers in China and their provincial
subsidiaries.

The Company acts as a holding company and, through certain subsidiaries,
sources network-related equipment in the United States for sale to customers in
the PRC.

2. Summary of Significant Accounting Policies

Basis of presentation--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").

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 maturities of three months or less when
purchased.

Short-term investments--Short-term investments are classified as available for
sale and consist principally of certificates of deposit issued by major
financial institutions that have maturities of 6 to 12 months. As there are no
significant market price movements for such investments, they are held at cost
and accrued interest. There were no realized or unrealized gains or losses on
such investments as of December 31, 2003, 2002 and 2001.

Notes receivable--At December 31, 2003 and 2002, the balances of notes
receivable of $3,832 and $64, respectively, represented bank and commercial
acceptance drafts that are non-interest bearing and due within six months.

Inventories--Inventories are stated at the lower of cost, determined
principally by the specific identification method, or market price.

F-8

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

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

Goodwill--Beginning in 2002, with the adoption of SFAS 142, "Goodwill and Other
Intangible Assets," goodwill is no longer amortized, but instead tested for
impairment at least annually. Prior to 2002, goodwill was amortized using
straight-line method over its economic life of 5 years. Accumulated
amortization recorded through December 31, 2001 was $2,971. The latest goodwill
impairment tests were performed in the first and second quarter of 2003 for
Bonson and AI Zhejiang, respectively. Subsequently, the Company decided to
change the date of annual goodwill impairment test and perform all the goodwill
impairment tests during the fourth quarter of 2003. The change did not have a
material impact on the Company's financial position, results of operations or
cash flows.

Other acquired intangible assets, net--Other acquired intangible assets with
definite lives are capitalized and amortized on a straight-line basis over
their expected useful economic lives as summarized at Note 6. The Company
periodically evaluates the recoverability of these intangible assets and takes
into account events or circumstances that warrant revised estimates of useful
lives or that indicate that impairment exists.

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.

Revenue recognition--The Company's revenue is derived from the procurement of
hardware on behalf of customers, software license fees, and professional
services for systems design, planning, consulting, and system integration, and
is recognized based on the percentage of completion method. Revenues from
customer orders requiring significant production, modifications, or
customization of the software are recognized over the installation and
customization period. 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. Revenue from packaged software license fees through reseller
arrangements is recorded when the related products are shipped and installed.
Costs related to insignificant obligations for a period of up to one year,
which include telephone support, are accrued at the time the revenue is
recorded.

Software revenue includes the benefit of the rebate of value added taxes on
sales of software received from the Chinese tax authorities as part of the PRC
government's policy of encouragement of software development in the PRC. The
rebate was $1,805, $2,218 and $2,950 in 2003, 2002 and 2001, respectively.

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 $31,927 at December 31, 2003 and $28,767 at
December 31, 2002. Billings in excess of revenues recognized are recorded as
deferred revenue. Billings are rendered based on agreed milestones included in
the contracts with customers.

At December 31, 2003 and 2002, the balance of trade accounts receivable of
$19,996 and $20,606, respectively, represented amounts billed but not yet
collected. All billed and unbilled amounts are expected to be collected within
1 year.

F-9

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 (gains) losses of $(1) in 2003, $(2) in 2002, and $59 in
2001.

The financial records of the Company's PRC subsidiaries are maintained in
Renminbi, their 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.

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, 2003 was US$1.00 = RMB8.2767. 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 credits
and net operating losses available for carry-forwards and 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 assets will not be
realized.

Use of estimates--The preparation of financial statements in conformity with
U.S. 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 grants stock options to its employees.
The Company accounts for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," which requires the Company to record a compensation
charge for the excess of the fair value of the stock at the grant date or any
other measurement date over the amount an employee must pay to acquire the
stock. The compensation expense is recognized over the applicable service
period, which is usually the vesting period. The Company's disclosures are in
accordance with SFAS 148, "Accounting for Stock-Based Compensation--Transition
and Disclosure."

F-10

Had compensation cost for options granted and shares issued to employees under
the Company's stock option plans (the "Plans") been determined based on the
fair value at the grant and issue dates, as prescribed in SFAS No. 123,
"Accounting for Stock- Based Compensation," the Company's pro forma net loss
would have been as follows:

Years Ended December 31,
----------------------------
2003 2002 2001
-------- -------- --------

Net (loss) income as reported.................................. $(28,119) $ 2,906 $ 11,734
Add: Stock compensation as reported............................ 105 407 1,144
Less: Stock compensation determined using the fair value method (10,210) (18,018) (19,962)
-------- -------- --------
Pro forma loss................................................. $(38,224) $(14,705) $ (7,084)
======== ======== ========
Basic and diluted net (loss) income per share:
Basic, as reported.......................................... $ (0.63) $ 0.07 $ 0.28
======== ======== ========
Diluted, as reported........................................ $ (0.63) $ 0.06 $ 0.26
======== ======== ========
Basic and diluted--pro forma................................ $ (0.86) $ (0.34) $ (0.17)
======== ======== ========

The fair value of each option grant and share granted is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants and no dividends declared during the applicable
period.

Option Grants 2003 2002 2001
------------- ------- ------- -------

Average risk-free rate of return..... 4.2% 3.7% 4.4%
Weighted average expected option life 7 years 7 years 7 years
Volatility rate...................... 109% 103% 78%

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 (loss)--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, notes receivable, accounts payable, notes payable, other
payables and short-term bank loans are carried at cost that approximates fair
value due to the short-term nature of these instruments. The Company does not
use derivative investment to manage risks.

Accounting standards recently adopted--In June 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Such costs covered by
the statement include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operations, plant
closing, or other exit or disposal activity. SFAS No. 146 replaces the previous
accounting guidance provided by the Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination

F-11

Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002 and adoption of this
statement did not have a material impact on the Company's financial position,
results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." SFAS No. 148 amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to SFAS No. 123's fair value method of accounting for
stock-based employee compensation. Statement 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS No. 148 are applicable
to all companies with stock-based employee compensation, regardless of whether
they account for that compensation using the fair value method of SFAS No. 123
or the intrinsic value method of APB Opinion No. 25. As allowed by SFAS No.
123, the Company has elected to continue to utilize the accounting method
prescribed by APB Opinion No. 25 and has adopted the disclosure requirements of
SFAS No. 148 as of December 31, 2003.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
establishes standards for how an issuer classifies and measures certain
financial instruments. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Statement requires that certain financial instruments that, under previous
guidance, issuers could account for as equity, be classified as liabilities (or
assets in some circumstances) in statement of positions or consolidated balance
sheets, as appropriate. The financial instruments within the scope of this
Statement are: (i) mandatorily redeemable shares those that an issuer is
obligated to buy back in exchange for cash or other assets; (ii) financial
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets; and (iii) financial instruments that
embodies obligation that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a market
index, or varies inversely with the value of the issuer's shares (excluding
certain financial instruments indexed partly to the issuer's equity shares and
partly, but not predominantly, to something else). This Statement does not
apply to features embedded in a financial instrument that is not a derivative
in its entirety. The Statement also requires disclosures about alternative ways
of settling the instruments and the capital structure of entities, all of whose
shares are mandatorily redeemable. The adoption of SFAS No. 150 did not have a
material impact on the Company's financial position, cash flows or results of
operations.

In November 2002, the FASB issued Interpretation Number ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Other". This interpretation requires
certain disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN No. 45 are effective
for interim and annual periods ending after December 15, 2002 and have been
adopted in the financial statements. The initial recognition and initial
measurement requirements of FIN No. 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. The adoption of the
recognition and initial measurement requirements of FIN No. 45 did not have a
material impact on the Company's financial position, cash flows or results of
operations.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and
provides guidance on the identification of entities for which control is
achieved through means other than voting rights ("variable interest entities"
or "VIEs") and on the determination of when and which

F-12

business enterprise should consolidate the VIEs. This new model for
consolidation applies to an entity in which either: (1) the equity investors
(if any) lack one or more characteristics deemed essential to a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. FIN 46 was applicable for periods ended
December 15, 2003. In December 2003, the FASB issued FIN 46R which defers the
implementation date to the end of the first reporting period after March 15,
2004 unless the Company has a special purpose entity in which case the
provisions must be applied for fiscal years ended December 31, 2003. The
Company does not have a special purpose entity. Therefore, it will adopt the
provisions in December 2004.

In November 2002, the Emerging Issue Task Force ("EITF") reached a consensus on
Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple
Deliverables". EITF No. 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which the vendor will perform multiple revenue
generating activities. EITF No. 00-21 is effective for fiscal periods beginning
after June 15, 2003. The adoption of EITF No. 00-21 did not have a material
impact on the Company's financial position, cash flows or results of operations.

Reclassifications--Certain comparative figures have been reclassified to
conform with current year's presentation.

3. Accounting Change

Net income and earnings per share for 2001 adjusted to exclude goodwill
amortization expense (net of taxes) are as follows:

Year Ended
December 31,
2001
------------

Reported net income........................................................... $11,734
Add back: Goodwill amortization............................................... 1,083
Goodwill amortization recorded within equity in loss of affiliate..... 751
-------
Adjusted net income........................................................... 13,568
=======
Basic earnings per share:
Reported net income........................................................ 0.28
Goodwill amortization...................................................... 0.03
Goodwill amortization recorded within equity in loss of affiliate.......... 0.02
-------
Adjusted basic earnings per share.......................................... 0.33
=======
Diluted earnings per share:
Reported net income........................................................ 0.26
Goodwill amortization...................................................... 0.02
Goodwill amortization recorded within equity in loss of affiliate.......... 0.02
-------
Adjusted diluted earnings per share........................................ 0.30
=======

4. Acquisition

(a) On October 20, 2003 (the "date of acquisition"), the Company acquired
certain human resources management and business intelligence assets from
Pacific Software (China) Limited ("Pacific"), a software solutions company, in
exchange for cash of $4,180 and 349,315 shares of the Company's common stock
valued at $2,550. There is an additional contingent payment of $2,270 which is
payable by the Company upon attaining certain milestones which management
expects to occur in 2004. The value of the shares issued was determined based
on the average market price of the Company's common shares over the 5-day
period before and after the terms of the acquisition were agreed to and
announced. This acquisition was treated as a purchase and, accordingly, the
acquired assets were recorded at their fair market values at the date of
acquisition.

F-13

The aggregate purchase price of $6,730 has been allocated as follows:

Economic
Life
----------

Current assets.............. $ 58
Equipment................... 35
Completed technology........ 1,945 5 years
Contract backlog............ 326 2 years
Trade mark.................. 60 2 years
Customer list............... 24 5 years
In-process technology....... 169 None
Goodwill.................... 4,113 Indefinite
------
Net Assets Acquired..... $6,730
======

The Company recorded a charge of $169 at the date of acquisition in accordance
with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method," for purchased
in-process technology related to a development project that had not reached
technological feasibility, had no alternative future use, and for which
successful development was uncertain. The conclusion that the in-process
development effort, or any material sub-component, had no alternative future
use was reached in consultation with the Company's management and Pacific's
management.

The following unaudited pro forma information summarizes the results of
operations for the year ended December 31, 2003 and 2002 of the Company and
Pacific. It has been prepared on the assumption that the acquisitions occurred
as of January 1, 2002. The following pro forma financial information is not
necessarily indicative of the results that would have occurred had the
acquisition been completed at the beginning of the periods indicated, nor is it
indicative of future operating results:

Year Ended December 31,
------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)

Total revenue........................................................ $ 116,174 $ 121,266
Net (loss) income.................................................... (28,496) 2,319
Net (loss) income per share..........................................
--Basic........................................................... $ (0.64) $ 0.05
----------- -----------
--Diluted......................................................... $ (0.64) $ 0.05
----------- -----------
Shares used in calculation of net (loss) income per share (unaudited)
--Basic........................................................... 44,781,747 43,932,735
--Diluted......................................................... 44,781,747 46,310,860

The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles with definite lives, associated
with the acquisition. The charge for purchased in-process research and
development of $169 has been excluded from the pro forma results, as it is a
material non-recurring charge.

(b) On February 6, 2002 (the "date of acquisition"), the Company acquired all
of the outstanding common shares of Bonson, a provider of operations support
system solutions and other services in China. This acquisition was treated as a
purchase and, accordingly, the acquired assets were recorded at their fair
market values at the date of acquisition.

The aggregate purchase price was $51,390, including $32,763 in cash, $624 of
acquisition costs and common stock valued at $18,003. The value of the
1,031,686 common shares issued was determined based on the average market price
of the Company's common shares over the 5-day period before and after the terms
of the acquisition were agreed to and announced.

F-14

The aggregate purchase price of $51,390 has been allocated as follows:

Economic Life
-------------

Current assets.............. $ 27,517
Equipment................... 843
Deferred tax assets......... 4
Core technology............. 1,280 3.5 years
Trade name.................. 700 Indefinite
Contract backlog............ 2,700 2 years
Favorable lease............. 400 2.1 years
License..................... 700 Indefinite
In-process technology....... 350 None
Goodwill.................... 35,067 Indefinite
Current liabilities......... (17,737)
Deferred tax liabilities.... (434)
--------
Net assess required..... $ 51,390
========

The Company recorded a charge of $350 at the date of acquisition in accordance
with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method," for purchased
in-process technology related to a development project that had not reached
technological feasibility, had no alternative future use, and for which
successful development was uncertain. The conclusion that the in-process
development effort, or any material sub-component, had no alternative future
use was reached in consultation with the Company's management and Bonson's
management.

5. Property and Equipment, Net

December 31,
---------------
2003 2002
------- -------

Furniture, fixtures and electronic equipment... $ 6,236 $ 6,645
Motor vehicles................................. 329 460
Leasehold improvements......................... 2,499 2,340
Accounting software............................ 1,814 1,809
------- -------
10,878 11,254
Less: Accumulated depreciation and amortization 8,530 7,208
------- -------
Property and equipment, net.................... $ 2,348 $ 4,046
======= =======

6. Goodwill

As described in Note 4(a), the Company acquired Pacific which resulted in
goodwill of $4,113.

In 2003, the Company acquired the remaining equity interests from the minority
shareholders of Marsec which resulted in goodwill of $380.

In 2002, the Company acquired Bonson which resulted in goodwill of $35,067
(Note 4(b)).

In 1999, the Company acquired Zhejiang AsiaInfo Telecommunication Technology
Co., Ltd. which resulted in goodwill of $4,666 that had been amortized based on
the estimated economic life of 5 year until January 1,2002 when the Company
discontinued amortization of goodwill upon its adoption of SFAS No. 142 (see
Note 2). The carrying value of that goodwill on January 1, 2002 was $2,188,
which included amortization recorded through December 31, 2001 of $2,478.

F-15

During the quarter ended March 31, 2003, the Company completed the annual
impairment test for the goodwill and other acquired intangible assets of Bonson
and concluded that an impairment of $29,836 of the recorded goodwill and other
acquired intangible assets of Bonson was necessary due to the industry-wide
equity devaluation of the past year. Both an income (discounted cash flow)
approach and a market (guideline company) approach were employed to determine
the fair value of the net assets of Bonson. The fair value was then allocated
among all the assets of Bonson at their fair values, including previously
unrecognized intangible assets. The residual value after the allocation was
then compared to the carrying value of goodwill to determine the amount of
impairment loss. The impaired goodwill of $26,000 and other acquired intangible
assets of $3,836 are related to the Company's software revenue segment. After
the impairment is recorded, the remaining goodwill and other acquired
intangible assets of Bonson were $9,067 and $148, respectively.

There was an impairment charge recorded in the amount of $380 related to the
acquisition of the remaining equity interests of Marsec.

Subsequently, the Company decided to change the date of annual goodwill
impairment test and perform all the goodwill impairment tests during the fourth
quarter of every year as it is easier for the Company to engage and work with
third party valuation firm once a year for all the goodwill impairment tests.
Based on the impairment test performed during the fourth quarter of 2003,
impairment charge was not necessary.

7. Other Acquired Intangible Assets, Net

December 31,
-------------
2003 2002
------ ------

Core technology...................... $2,280 $1,280
Trade name........................... 60 700
Contract backlog..................... 1,574 2,700
Favorable lease...................... 361 400
Customer list........................ 24 --
License.............................. -- 700
------ ------
4,299 5,780
Less: Accumulated amortization....... 1,958 1,749
------ ------
Other acquired intangible assets, net $2,341 $4,031
====== ======

Amortization expense for the net carrying amount of intangible assets with
definite lives will be $614 in 2004, $579 in 2005 and $394 in 2006.

8. Investment in Affiliate

In April 2001, the Company invested $6,157 in Intrinsic Technology (Holdings),
Ltd. ("Intrinsic") for a 14.25% equity interest. Intrinsic and its wholly owned
subsidiaries are engaged in wireless Internet application and development. 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 of Directors. 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 that goodwill was five years based on its estimated
economic life. On January 1, 2002, the Company discontinued amortization of
goodwill upon its adoption of SFAS No. 142 (see Note 2).

The Company determined that their investment in Intrinsic had suffered an
other-than-temporary decline in value in December 2003 and 2002, respectively.
As a result, the Company reduced its carrying amount of that investment to its
estimated fair value by recording a charge of $2,150 and $2,000, which is
included in equity in loss of affiliates for the years ended December 31, 2003
and 2002, respectively. The share of loss is also included in equity in loss of
affiliates for the years ended December 31, 2003 and 2002 in the amount of $327
and $465, respectively. The Company's net investment in affiliate at December
31, 2003 and 2002 was $331 and $2,808, respectively.

F-16

9. Short-Term Bank Loans

As of December 31, 2003, the Company had total short-term credit facilities for
working capital purposes totaling $40,540 expiring by December 2005. The
facilities were secured by bank deposits of $14,000 as of December 31, 2003. At
December 31, 2003, unused short-term credit facilities were $28,759 and used
facilities totaled $11,781. The used facilities were pledged as security for
issuing standby letters of credit and notes payable to hardware suppliers and
customers. Additional bank deposits of $827 were used for issuing standby
letters of credit and bank acceptance drafts as of December 31, 2003. Bank
deposits pledged as security for these credit facilities totaled $14,827 as of
December 31, 2003 and are presented as restricted cash in the consolidated
balance sheets. As of December 31, 2002, the Company had total short-term
credit facilities totaling $20,000 which expired in October 2003.

In addition, as of December 31, 2003 and 2002, the Company had short-term
borrowings of $60 in RMB, the currency of the PRC, bearing an interest rate of
4.8% per annum and secured by AsiaInfo Management's assets.

10. Notes Payable

At December 31, 2003 and 2002, the balances of notes payable of $2,609 and
$2,447, respectively, represented commercial notes of $945 and $1,245, and bank
acceptance drafts of $1,664 and $1,202, respectively, that are non-interest
bearing and due within six months.

11. Other Taxes Payable

December 31,
-------------
2003 2002
------ ------

Individual income tax......... $1,150 $ 994
Business tax payable.......... 540 259
Value added taxes payable, net 522 1,326
------ ------
$2,212 $2,579
====== ======

The Company's PRC subsidiaries are subject to business tax at the rate of 5% on
other service revenues.

The Company is also required to withhold PRC individual income tax on
employees' payroll for remittance to the tax authorities.

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. Value added tax payable on revenues is computed net of
value added tax paid on purchases. In respect of revenue on software license,
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.

12. Income Taxes

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

Years Ended December 31,
-------------------------
2003 2002 2001
-------- ------ -------

United States $ (1,969) $ (477) $ 2,543
Foreign...... (24,639) 6,597 13,916
-------- ------ -------
$(26,608) $6,120 $16,459
======== ====== =======

F-17

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.

The provision for income taxes (benefit) expense consists of the following:

Years Ended December 31,
------------------------
2003 2002 2001
------- ------ -------

Current
United States:
Federal.................... $(1,138) $ 192 $ 4,006
State...................... (20) 15 212
Foreign........................ 325 1,055 797
------- ------ -------
Total current income taxes........ (831) 1,262 5,015
------- ------ -------
Deferred
United States:
Federal.................... 396 119 (1,931)
State...................... (1) 42 (94)
Foreign........................ (542) (599) 454
------- ------ -------
Total deferred income taxes....... (147) (438) (1,571)
------- ------ -------
Total income tax (benefit) expense $ (978) $ 824 $ 3,444
======= ====== =======

The components of deferred income tax assets (liabilities) are as follows:

December 31,
---------------
2003 2002
------- ------

Deferred tax assets (liabilities):
Allowances and reserves........... $ 2,072 $1,834
Depreciation...................... 272 236
Net operating loss carry forwards. 990 436
Acquired intangible assets........ 24 (327)
------- ------
Total gross deferred tax assets...... 3,358 2,179
Valuation allowance.................. (1,362) (330)
------- ------
Total net deferred tax assets........ $ 1,996 $1,849
======= ======

Deferred income taxes result principally from differences in the recognition of
certain assets and liabilities for tax and financial reporting purposes and the
tax effect of tax loss carry forwards. At December 31, 2003, tax loss carry
forwards amounted to approximately $2.2 million for federal and $0.7 million
for California, which will begin to expire in year 2023 and 2008, respectively.
A valuation allowance of $1,075 for tax losses generated in various tax
jurisdictions during 2003 has been established. An additional valuation
allowance of $287 has been established for the provision of short-term
investment as it is considered more likely than not that the relevant deferred
tax asset will not be realized.

Except for certain hardware procurement and resale transactions, the Company
conducts substantially all of its business through its PRC operating
subsidiaries. The PRC subsidiaries are generally subject to a 30% state
corporate income tax and a 3% local income tax.

Pursuant to the income tax laws of the PRC, foreign invested enterprises
meeting certain criteria set out by the relevant tax authorities can enjoy
various preferential tax treatments. AsiaInfo Technologies is registered and
operates in the Beijing Zhongguancun Science Park, and is classified as a "new
technology enterprise." The

F-18

effective income tax rate for "new technology enterprises" registered and
operating in the Beijing Zhongguancun Science Park is 15%, and there is an
exemption from local income tax as long as the enterprise holds the "new
technology enterprise" status. "New technology enterprises" are exempted from
Chinese state corporate income tax for three years, beginning with their first
year of operations, and are entitled to a 50% tax reduction at the rate of 7.5%
for the subsequent three years. The tax exemption 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 as an "advanced technology enterprise" for a
three-year period from January 1, 2001 to December 31, 2003, resulting in an
effective income tax rate of 10%. Beginning from January 1, 2004, as a "new
technology enterprise" set up in Beijing Zhongguancun Science Park, the
effective income tax rate for AsiaInfo Technologies is 15%. Under current law,
as long as AsiaInfo Technologies maintains the "new technology enterprise"
status, it will be exempted from Chinese local corporate income tax.

AsiaInfo Management is registered and operates in the High and New Technology
Industry Development Zone in Guangzhou, China, and is classified as a "high and
new technology enterprise." The effective income tax rate, subject to the
approval of the relevant tax authorities, for "high and new technology
enterprises" registered in High and New Technology Industry Development Zones
is 15%. "High and new technology enterprises" are also exempt from Chinese
state and local corporate income tax for two years, beginning with their first
profitable year of operations, and are entitled to a 50% tax reduction at the
rate of 7.5% for the subsequent three years. The tax exemption for AsiaInfo
Management expired on December 31, 2001 and the 50% tax reduction will expire
on December 31, 2004.

AsiaInfo Technologies (Chengdu), Inc., or AsiaInfo Chengdu, is registered in
the High and New Technology Industry Development Zone in Chengdu and is
classified as a "high and new technology enterprise." Subject to the approval
of the relevant tax authorities, "high and new technology enterprises"
registered in the Chengdu High and New Technology Industry Development Zone are
exempt from Chinese state and local corporate income tax for two years,
beginning with their first year of operations (which was year 2002 for AsiaInfo
Chengdu), and are entitled to a tax reduction at the rate of 15% in subsequent
years.

The Company is also subject to U.S. income taxes on revenues generated in the
United States, including revenues from its limited hardware procurement
activities and interest income earned in the United States.

Income tax of AsiaInfo Technologies in 2003, 2002 and 2001 was nil, $853 and
$797, respectively. In the absence of such income tax exemptions or
preferential tax treatment, income tax of nil in 2003, $2,092 in 2002 and $615
in 2001 would otherwise have been payable and the effect on net (loss) income
per share would be to increase basic and diluted loss per share or decrease
basic and diluted income per share by nil in 2003, $0.05 in 2002 and $0.01 in
2001, respectively.

Undistributed foreign earnings amounted to approximately $12,910 at December
31, 2003. 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 China, if any.

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

Years Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----

US federal statutory rate....................................... (35)% 35% 35%
Difference between statutory rate and foreign effective tax rate 31 (27) (20)
Amortization of goodwill........................................ -- -- 2
Other........................................................... -- 6 4
--- --- ---
(4)% 14% 21%
=== === ===

F-19

13. Net (loss) income per share

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

Years Ended December 31,
------------------------------------
2003 2002 2001
----------- ----------- -----------

Net (loss) income (numerator):
Net (loss) income
Basic and diluted...................... $ (28,119) $ 2,906 $ 11,734
=========== =========== ===========
Shares (denominator):
Weighted average common stock outstanding
Basic.................................. 44,459,010 43,583,420 41,525,159
Options................................ -- 2,378,125 4,399,565
----------- ----------- -----------
Diluted................................ 44,459,010 45,961,545 45,924,724
=========== =========== ===========
Net (loss) income per share:
Basic.................................. $ (0.63) $ 0.07 $ 0.28
=========== =========== ===========
Diluted................................ $ (0.63) $ 0.06 $ 0.26
=========== =========== ===========

In 2003, the Company had 9,657,883 outstanding common stock options shares that
could have potentially diluted basic earnings per share ("EPS") in the future,
but were excluded in the computation of diluted EPS in such period, as their
effect would have been antidilutive due to the net loss reported in the period.

In 2002 and 2001, the Company had 4,716,680 and 1,326,180 common stock options
outstanding, respectively, that could have potentially diluted EPS in the
future, but were excluded in the computation of diluted EPS in those periods,
as their exercise prices were above the average market values in such periods.

14. Commitments and Contingencies

Operating Leases--As of December 31, 2003, the Company was committed under
certain operating leases, requiring annual minimum rentals as follows:

2004 $2,119
2005 886
2006 528
------
$3,533
======

The leased properties are principally located in the PRC and are used for
administration and research and development purposes. The leases are renewable
subject to negotiation. Rental expense for the three years in the period ended
December 31, 2003 was $1,952, $2,314 and $2,190, respectively.

Letters of Credit--At December 31, 2003, the Company had outstanding standby
letters of credit to customers of $10,426, in which $10,045 were collateralized
by credit facilities and $381 were secured by bank deposit.

Product Warranty--The Company's product warranty accrual reflects management's
best estimate of probable liability under its product warranties. Management
determines the warranty based on historical experience and other currently
available evidence.

F-20

Changes in the product warranty accrual for the year ended December 31, 2003
and 2002 are as follows:

Years Ended December 31,
-------------------------
2003 2002
----- -----

Balance at beginning of year 2,229 1,273
Current year provision...... 449 1,142
Payments.................... (83) (186)
Provision reversal.......... (535) --
----- -----
Balance at end of year...... 2,060 2,229
===== =====

The reversal of warranties of $535 is related to projects of warranty period
that had expired during the year of 2003.

Litigation--On December 4, 2001, a securities class action case was filed in
New York City against the Company, certain of its current officers and
directors and the underwriters of the Company's initial public offering, or
IPO. The lawsuit alleged violations of the federal securities laws and was
docketed in the United States District Court for the Southern District of New
York, or the Court, as Hassan v. AsiaInfo Holdings, Inc., et al. The lawsuit
alleged, among other things, that the underwriters of the Company's IPO
improperly required their customers to pay the underwriters excessive
commissions and to agree to buy additional shares of the Company's common stock
in the aftermarket as conditions to their purchasing shares in the Company's
IPO. The lawsuit further claimed that these supposed practices of the
underwriters should have been disclosed in the Company's IPO prospectus and
registration statement. The suit seeks rescission of the plaintiffs' alleged
purchases of the Company's common stock as well as unspecified damages. In
addition to the case against the Company, 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 the Company have all been
transferred to a single federal district judge for purposes of case management.

On July 15, 2002, together with the other issuer defendants, the Company filed
a collective motion to dismiss the consolidated, amended complaints against the
issuers on various legal grounds common to all or most of the issuer
defendants. The underwriters also filed separate motions to dismiss the claims
against them. On October 9, 2002, the Court dismissed without prejudice all
claims against the individual defendants in the litigation. The dismissals were
based on stipulations signed by those defendants and the plaintiffs'
representatives. On February 19, 2003, the Court issued its ruling on the
motions to dismiss filed by the underwriter and issuer defendants. In that
ruling the Court granted in part and denied in part those motions. As to the
claims brought against the Company under the anti-fraud provisions of the
securities laws, the Court dismissed all such claims without prejudice. As to
the claims brought under the registration provisions of the securities laws,
which do not require that intent to defraud be pleaded, the Court denied the
motion to dismiss such claims as to the Company and as to substantially all of
the other issuer defendants. The Court also denied the underwriter defendants'
motion to dismiss in all respects.

In June 2003, the Company elected to participate in a proposed settlement
agreement with the plaintiffs in this litigation. If ultimately approved by the
Court, this proposed settlement would result in a dismissal, with prejudice, of
all claims in the litigation against the Company and against any of the other
issuer defendants who elect to participate in the proposed settlement, together
with the current or former officers and directors of participating issuers who
were named as individual defendants. The proposed settlement does not provide
for the resolution of any claims against the underwriter defendants, and the
litigation against those defendants is continuing. The proposed settlement
provides that the class members in the class action cases brought against the
participating issuer defendants will be guaranteed a recovery of $1 billion by
insurers of the participating issuer defendants. If recoveries totaling $1
billion or more are obtained by the class members from the underwriter
defendants, however, the monetary obligations to the class members under the
proposed settlement will be satisfied. In addition, all participating issuer
defendants will be required to assign to the class members certain claims that
the Company may have against the underwriters.

F-21

The proposed settlement contemplates that any amounts necessary to fund the
settlement or settlement-related expenses would come from participating
issuers' directors and officers liability insurance policy proceeds as opposed
to funds of the participating issuer defendants themselves. A participating
issuer defendant could be required to contribute to the costs of the settlement
if that issuer's insurance coverage were insufficient to pay that issuer's
allocable share of the settlement costs. The Company expects that its insurance
proceeds will be sufficient for these purposes and that it will not otherwise
be required to contribute to the proposed settlement. Consummation of the
proposed settlement is conditioned upon, among other things, negotiating,
executing, and filing with the Court final settlement documents, and final
approval by the Court. If the proposed settlement described above is not
consummated, the Company intends to continue to defend the litigation
vigorously. Moreover, if the proposed settlement is not consummated, the
Company 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 the
Company's directors' and officers' liability insurance policies would also
cover the defense and potential exposure in the suit. While the Company cannot
guarantee the outcome of these proceedings, the Company believes that the final
result of these actions will have no material effect on the Company's
consolidated financial condition, results of operations or cash flows.

15. 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 20% to 25.5% of the monthly basic salaries of the current
employees.

In addition, the Company is required by law to contribute approximately 16% to
27% of basic salaries of the PRC employees for staff welfare, housing, medical
and education benefits representing expense of $2,832, $1,806 and $3,443 for
2003, 2002 and 2001, respectively.

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, 2003 was
$780, $1,183 and $754, respectively.

16. Distribution of Profits

As stipulated by the relevant laws and regulations applicable to PRC 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 non-distributable reserves which
include a general reserve, an enterprise expansion reserve and an employee
welfare and bonus reserve. Wholly-foreign-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 employee welfare
and bonus reserve is determined by the Company's 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 employee 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 PRC law. Appropriations to general reserves by the Company's PRC
subsidiaries were $990 and $591 in 2003 and 2002, respectively. There were no
appropriations to reserves prior to 2001.

F-22

17. Certain Significant Risks and Uncertainties

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

The Company places its temporary cash investments with various financial
institutions in the PRC and the United States. At December 31, 2003 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 9%, 21%,
and 31% of total revenues in 2003, 2002, and 2001, respectively. In 2003, 2002
and 2001, no individual provincial entity represented more than 10% of total
revenues. Sales to China Unicom accounted for 38% of total revenue in 2003, 22%
of total revenues in 2002, 45% in 2001. Sales to China Netcom Corporation
accounted for 13% of total of revenue in 2003, 6% in 2002, and 9% in 2001.
Sales to China Mobile Corporation accounted for 38% of total revenue in 2003,
42% in 2002, and 10% in 2001.

Details of the amounts receivable from the customers with the largest
receivable balances at December 31, 2003 and 2002 are as follows:

Percentage of accounts
receivable December 31,
----------------------
2003 2002
---- ----

Five largest receivables balances 96% 95%

The Company maintains allowances for estimated potential bad debt losses and
revises its estimates of collectibility on a periodic basis. Activity in the
allowance for doubtful accounts is as follows:

Years Ended December 31,
-----------------------
2003 2002 2001
----- ----- ------

Balance at beginning of year 1,133 1,094 545
Bad debt expense............ 2,366 762 2,782
Write-offs and other........ (404) (723) (2,233)
----- ----- ------
Balance at end of year...... 3,095 1,133 1,094
===== ===== ======

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 telecommunications and 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 Company's business to suffer.

18. Stock Option Plans

General--Under the Company's 2002 Stock Option Plan, the Company may grant
options to purchase up to 4.5 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 2002 Stock Option Plan, the Company adopted
annual stock option plans for each of 1995, 1996, 1997, 1998, 1999 and 2000
(such plans, together with the 2002 Stock Option Plan, are referred to
hereinafter as the "Plans").

F-23

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, 2000 and 2002 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, and are generally
no more than five years from the date of grant for 2002 plan.

Option activity for the Plans is summarized as follows:

Outstanding Options
-----------------------------------------
Weighted average
Number of shares exercise price per share
---------------- ------------------------

Outstanding, January 1, 2001................... 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
Granted (weighted average fair value of $3.56) 3,346,917 4.27
Cancelled..................................... (741,550) 12.46
Exercised..................................... (1,028,970) 2.68
----------
Outstanding, December 31, 2002................. 9,885,565 8.14
Granted (weighted average fair value of $5.24) 2,289,590 6.02
Cancelled..................................... (2,010,005) 10.87
Exercised..................................... (507,267) 2.42
----------
Outstanding, December 31, 2003................. 9,657,883 7.37
==========

The exercise price of all options granted during the periods was equal to the
fair market value of the Company's common stock on the dates of grant. 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, 2003 is as
follows:

Options Outstanding as of Options Exercisable as of
December 31, 2003 December 31, 2003
------------------------------------------- --------------------------
Weighted average
remaining Weighted Weighted
Number contractual average Number average
Range of average exercise price outstanding life (yrs.) exercise price exercisable exercise price
------------------------------- ----------- ---------------- -------------- ----------- --------------

$0.01 to 1.25.......... 563,167 2.75 $ 1.09 563,167 $ 1.09
$1.50 to 2.50.......... 128,265 3.74 2.31 128,265 2.31
$2.75 to 3.00.......... 770,950 4.17 2.81 770,950 2.81
$3.35 to 4.22.......... 3,197,861 8.62 4.06 670,481 4.05
$6.51 to 7.36.......... 1,335,897 9.63 7.01 69,562 7.22
$7.59 to 7.75.......... 1,104,745 6.09 7.61 1,009,700 7.60
$8.00 to 9.63.......... 1,277,714 7.22 9.12 862,300 9.16
$10.00 to 19.63........ 486,164 6.93 12.54 372,004 12.59
$24.00 to 47.03........ 793,120 6.16 24.66 572,170 24.71
--------- ---- ------ --------- ------
Total.................. 9,657,883 7.24 $ 7.37 5,018,599 $ 8.11
========= =========

Total number of options exercisable and the weighted average exercise price
were 4,037,745 and 3,775,807, and $7.89 and $5.44, as of December 31, 2002 and
2001, respectively.

F-24

Deferred stock compensation--As discussed in Note 2, 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. Accordingly, the Company recorded
compensation expense of $105, $407 and $1,144 for the years ended December 31,
2003, 2002 and 2001, respectively.

19. Segment Information

During 2003, the Company reorganized its operations structure so that its
business operations focus on specific customers rather than product lines.
Instead of selling its products and services through its two former strategic
business units, Communications Solutions and Operation Support Systems
Solutions, the Company now has one point of sales contact for each of its major
customers, streamlining the relationships and interactions with its customers.

The new customer-based structure is designed to offer customers a "one window"
shopping solution for all of their needs, including all the business lines from
the Company such as network solutions, software license and services and
service applications solutions. The new structure benefits from cost
efficiencies gained from combined sales and marketing as well as research and
development staff and offer more integrated quality services to the Company's
customers. As a result, the financial reporting structure that the Company has
adopted is based on network solutions and software revenue.

Years Ended December 31,
-----------------------
2003 2002 2001
------- ------- -------

Revenues net of hardware costs:
Network solutions................... $25,982 $31,720 $43,516
Software revenue.................... 31,488 33,013 27,875
------- ------- -------
Total revenues net of hardware costs 57,470 64,733 71,391
Cost of sales net of hardware costs. 23,517 24,467 15,918
------- ------- -------
Gross profit........................ $33,953 $40,266 $55,473
======= ======= =======

The information of 2002 and 2001 has been reclassified to conform to the
current operating segments.

Reconciliation of Non-GAAP Measures

A reconciliation table of Total Revenues Net of Hardware Costs and Total
Revenues for the three years ended December 31, 2003 is as follows:

Years Ended December 31,
--------------------------
2003 2002 2001
-------- -------- --------

Total revenues net of hardware costs (a)
Network solutions....................... $ 25,982 $ 31,720 $ 43,516
Software revenue........................ 31,488 33,013 27,875
-------- -------- --------
$ 57,470 $ 64,733 $ 71,391
======== ======== ========
Total cost of hardware sales
Network solutions....................... $ 58,704 $ 56,533 $117,615
Software revenue........................ -- -- --
-------- -------- --------
$ 58,704 $ 56,533 $117,615
======== ======== ========
Total revenues
Network solutions....................... $ 84,686 $ 88,253 $161,131
Software revenue........................ 31,488 33,013 27,875
-------- -------- --------
$116,174 $121,266 $189,006
======== ======== ========

F-25

--------
(a) The Company believes that the presentation of this non-GAAP measure
provides useful information for investors regarding the Company's financial
performance. The presentation of this additional information is not meant
to be considered in isolation or as a substitute for the Company's
financial results prepared in accordance with GAAP.

For the years ended December 31, 2003, 2002 and 2001, 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 services. As of December 31, 2003, 2002 and 2001, 99% of the Company's
long-lived assets are located in the PRC.

20. Related Party Transactions

In the years ended December 31, 2003, 2002 and 2001, the Company entered into
network solutions and software revenue contracts with China Netcom Corporation
Ltd. ("China Netcom") with a total contract sum of approximately $16,578,
$10,108 and $9,300, respectively. Edward Tian, a Director and major shareholder
of the Company, is the Chief Executive Officer of China Netcom, as well as a
Vice President of China Netcom's parent company, China Netcom Communication
Group Corporation. Revenue recognized in 2003, 2002 and 2001 from such
contracts was approximately $14,888, $6,741 and $17,000, respectively. Accounts
receivable due from China Netcom as of December 31, 2003, 2002 and 2001 were
$6,045, $3,886 and $2,226, respectively.

On May 16, 2002, China Merchants Bank, Beijing Branch ("Merchants Bank")
entered into an agreement to provide a revolving credit facility to China
Netcom of up to approximately $9,061 in connection with China Netcom's past and
future purchases of network solutions from AsiaInfo Technologies. China Netcom
may draw on the facility to fund amounts that will become payable to AsiaInfo
Technologies under bankers' acceptances and the amount drawn down by China
Netcom was zero and approximately $2,055 as of December 31, 2003 and 2002,
respectively. AsiaInfo Technologies has guaranteed China Netcom's obligations
to Merchants Bank under the facility and agreed to pay principal and interest
on the drawn loan if China Netcom defaulted. The agreement expired on May 16,
2003.

On January 17, 2001, the Company purchased a convertible promissory note of
$750 from China PalmInfo Holdings Co., Ltd. ("China PalmInfo"). At the time of
the purchase, ChinaVest V, L.P., in which a former director of the Company is a
partner, also held a convertible promissory note of China PalmInfo of $500. A
provision of $750 was recorded for the promissory note during 2002.

F-26

21. Selected Quarterly Financial Data (Unaudited)

Selected quarterly financial data for the years ended December 31, 2003, 2002
and 2001 are presented in the following table.

Three Months Ended
------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Year Ended December 31, 2003
----------------------------

Revenues..................................... $30,612 $27,984 $26,904 $ 30,674
Gross profit................................. 9,250 9,996 7,202 7,505
Net (loss) income............................ (268) 2,249 (1,053) (29,047)
Net (loss) income per share--basic........... (0.01) 0.05 (0.02) (0.66)
--diluted................. (0.01) 0.05 (0.02) (0.66)

Year Ended December 31, 2002
----------------------------
Revenues..................................... $23,599 $32,571 $36,559 $ 28,537
Gross profit................................. 7,441 8,500 13,037 11,288
Net (loss) income............................ (2,600) 468 3,616 1,422
Net (loss) income per share--basic........... (0.06) 0.01 0.08 0.03
--diluted................. (0.06) 0.01 0.08 0.03

Year Ended December 31, 2001
----------------------------
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

F-27