"As I understand it, the law is vague and broad, and it covers areas such as military information, economic information and science and technology," he said.

When Callahan repeated in his testimony that Yahoo employees in China were bound to comply with "lawful orders" or face jail themselves, Lantos challenged his wording. "Why do you insist on using the phrase, 'lawful orders?'" he said. "These are the demands of a police state."

Yang said the actions of Congress leave companies like Yahoo in a difficult position. Congress in the 1990s normalized trade relations with China and encouraged U.S. companies to do business there as a way to open up the closed government.

"We continue to believe that engagement with China is the better course and that disengagement would not further the goal of a more open and informed society in China," Callahan added.

Yahoo is taking several steps to prevent similar things from happening again, Yang said. It is working with other Internet companies to create an industry code of conduct for operating in foreign countries with laws that run counter to U.S. values, he said.

Several lawmakers suggested they wouldn't trust an industry-led code of conduct.

Lantos opened the hearing by introducing Shi's mother, who sat behind Yang while he testified. Yang turned and bowed to her as Lantos introduced her.

Representative Brad Sherman, a California Democrat, called on Yahoo to establish a large fund to help Chinese dissidents. "Anything else is an insincere bow," he said.

While Representative Dana Rohrabacher, a California Republican, called Yahoo's cooperation with China "repugnant," Representative Robert Wexler, a Florida Democrat, said Congress should look at its own actions in supporting repressive regimes.

Congress pours hundreds of millions of dollars in aid into Pakistan, which this week is cracking down on protesters, Wexler noted. The U.S. government has close ties with Saudi Arabia, and it has encouraged U.S. companies to do business in China, he added.

"There's a level of complicity, yes with Yahoo, but also with this government," he said. "I would respectfully suggest that if we delve into these issues ... let's talk about the role of the United States government and whether we legitimately do or do not inhibit freedom or democracy."