LEARNING TO LIVE WITH BIG BROTHER.

Four hours into a congressional hearing on American technology companies' willingness to comply with Chinese laws that stifle political dissent, Rep. Tom Lantos peered down at the witness table and one by one berated four of America's corporate darlings: Cisco Systems, Microsoft, Yahoo! and Google. "Can you say in English that you are ashamed of your actions?" asked the California Democrat, a Holocaust survivor, who compared their actions to American companies that did business with Nazi Germany. "I simply do not understand how your corporate leadership sleeps at night," Lantos said.

One by one, the lawyers responded that their companies are in a bind: How can they serve the second-largest Internet market--some 111 million users and rapidly growing--while also maintaining their corporate ideals? Google's philosophy, after all, is, "Don't be evil." The companies say that although they're buttressing the most advanced online censorship system in the world, dubbed the Great Firewall of China, their presence is still beneficial to Chinese users. "Ultimately, we must ask, 'Would the Chinese citizen be better off without our services?'" said Jack Krumholtz, Microsoft's associate general counsel.

Censorship. China bans "subversive" material--including pornography, criticism of the government, and sensitive topics like Tibet and Taiwan independence--from the country's computer networks. The government tracks every Internet service provider, and anyone operating a bulletin board system or producing journalism must keep records of all content. Internet cafes, for example, maintain logs of which Web pages a user views; in 2004, the country closed 47,000 unlicensed Internet cafes. It is a crime in China--which has an estimated 30,000 Web police to monitor Internet traffic--to defame government agencies, divulge state secrets, or promote separatist movements. Forty-nine Chinese cyberdissidents and 32 journalists and broadcasters are currently in jail, according to Reporters Without Borders.

With its conventional search-engine service bogged down with filters, Google decided last month to launch a Chinese version of its search engine that censors millions of Web pages. For example, a search for "Tiananmen Square" on Google.cn just returns pictures of the square, whereas a search on the conventional version returns pictures of the crackdown on student protesters in 1989. (Google.cn contains a disclaimer that some information is filtered.) "We faced a difficult choice: Compromise our mission by failing to serve our users in China or compromise our mission by entering China," said Elliot Schrage, Google's vice president for global communications.

Microsoft has also acquiesced to Chinese laws, eliminating words such as democracy and human rights from its blog-hosting service, which has more than 3.5 million Chinese users. Cisco Systems sells China the networking hardware that enables the country to filter politically sensitive content; the company says, however, that it doesn't specifically customize its products for China. And Yahoo! in 2004 turned over to the Chinese government the personal E-mail address of Shi Tao, a Chinese editor who had sent notes to friends overseas about the government's media restrictions on the 15th anniversary of the Tiananmen Square crackdown; the editor is now serving a 10-year prison term. Chinese officials defended their policies last week, alleging that they are no different from western countries that restrict some illegal or harmful information from websites. (In France and Germany, Google restricts Nazi-related content.)

Money talks. As China's economy expands, the government is spending to increase its influence in Washington and to improve its image in the West. The Chinese Embassy has beefed up its congressional affairs division and boosted its paid lobbying over the past two years, according to Joshua Eisenman, a fellow in Asia studies at the American Foreign Policy Council think tank. Since 2004, for instance, Beijing has paid the legal and lobbying powerhouse Hogan & Hartson just over $500,000, according to financial disclosure records. Last July, the Chinese Embassy hired the firm Patton Boggs on a $22,000 monthly retainer to help deal with Congress. The firm Jones Day reported receiving about $1.2 million from the embassy since 1997 to lobby federal agencies and congressional members on issues including human rights, trade, sanctions, and the currency exchange rate.

The next issue Chinese officials and technology companies will face is a bill restricting business with countries that censor online material. Rep. Chris Smith, the New Jersey Republican who chaired last week's hearing, introduced legislation that would require U.S. companies to locate their computer hardware outside China, create a basic code of conduct for Internet companies doing business in repressive countries, curtail tech exports to countries with censorship policies, and create a State Department office of Internet freedom. The State Department announced such a task force last week.

The technology companies say it is essential that the government play a role in the issue. Some experts argue that the companies support stricter U.S. regulations because that shifts the burden of negotiation to the government. Iowa Republican Rep. Jim Leach, while asserting at the hearing that Google's actions had made it a "functionary of the Chinese government," said Congress nevertheless should move slowly. "In the long run," he said, "Internet companies are involved in more opening up than any other kind of company."

PHOTO (COLOR): ONLINE. Chinese authorities censor content and monitor activities at Internet cafes.

PHOTO (COLOR): GOOGLE LITE? Company officials faced questions about complying with China's repressive laws.

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By Silla Brush

With Danielle Knight and Bay Fang