Edgar Filing: ASIAINFO-LINKAGE, INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

¨	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-LINKAGE, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

752506390

(State or other jurisdiction of

incorporation or organization)

(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)

+8610 8216 6688

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock as of August 4, 2010 was 74,171,779.

ASIAINFO-LINKAGE, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2010

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements (unaudited)	3

a)	Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2010 and 2009	3

b)	Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	4

c)	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009	5

d)	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three months and six months ended June 30, 2010	6

e)	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION		37

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 5.	Other Information	39

Item 6.	Exhibits	39

SIGNATURE		40

EXHIBIT INDEX		41

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ASIAINFO-LINKAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(In thousands, except share and per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenues:
Software products and solutions	$	59,120		$	47,151		$	116,871		$	89,588
Service		6,385			5,931			10,289			10,930
Third-party hardware		1,359			5,486			3,169			9,026

Total revenues		66,864			58,568			130,329			109,544

Cost of revenues:
Software products and solutions		23,082			22,609			43,851			40,823
Service		2,757			1,967			4,712			3,897
Third-party hardware		1,304			5,210			3,030			8,526

Total cost of revenues		27,143			29,786			51,593			53,246

Gross profit		39,721			28,782			78,736			56,298

Operating expenses:
Sales and marketing		10,807			9,929			21,120			20,466
General and administrative		4,598			3,652			13,258			7,218
Research and development		9,776			8,792			18,772			16,007

Total operating expenses		25,181			22,373			53,150			43,691

Income from operations		14,540			6,409			25,586			12,607

Other income
Interest income		741			534			1,402			1,158
Dividend income		250			3			254			174
Gain from sales of short-term investments		472			1,210			472			1,210
Other income (expenses), net		(50	)		9			(50	)		(14	)

Total other income, net		1,413			1,756			2,078			2,528

Income before provision for income taxes		15,953			8,165			27,664			15,135
Provision for income taxes		2,482			962			4,271			2,147

Net income		13,471			7,203			23,393			12,988

Less: Net loss attributable to noncontrolling interest		(435	)		(2	)		(858	)		(7	)

Net income attributable to AsiaInfo-Linkage, Inc.	$	13,906			7,205			24,251		$	12,995

Earnings per share:
Net income attributable to AsiaInfo-Linkage, Inc. common stockholders:
Basic	$	0.29		$	0.16		$	0.51		$	0.30

Diluted	$	0.29		$	0.16		$	0.50		$	0.29

Weighted average shares used in computation:
Basic		47,328,078			44,586,996			47,277,978			44,048,268

Diluted		48,325,405			45,917,056			48,264,122			45,554,547

See accompanying notes to condensed consolidated financial statements.

ASIAINFO-LINKAGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In thousands, except share amounts)


	June 30, 2010			December 31, 2009
ASSETS
Current Assets:
Cash and cash equivalents	$	224,040		$	238,553
Restricted cash		5,924			5,540
Short-term investments – held-to-maturity securities		14,726			13,716
Short-term investments – available-for-sale securities		29,433			27,674
Accounts receivable (net of allowances of $4,794 and $2,619 as of June 30, 2010 and December 31, 2009, respectively)		120,861			129,646
Inventories, net		8,496			9,535
Other receivables		3,326			2,841
Deferred income tax assets – current		2,968			2,968
Prepaid expenses and other current assets		6,860			5,679

Total current assets		416,634			436,152

Long-term investments		4,696			4,696
Property and equipment, net		2,991			2,989
Other acquired intangible assets, net		4,788			3,818
Deferred income tax assets – non-current		2,161			2,161
Goodwill		29,139			22,262
Prepaid land use right and other long-term prepayment		10,189			9,699

Total assets	$	470,598		$	481,777

LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	51,379		$	76,019
Accrued expenses		25,552			21,793
Deferred revenue		31,448			45,547
Accrued employee benefits		29,797			39,403
Other payables		6,552			6,187
Income taxes payable		1,955			2,862
Other taxes payable		7,678			7,620
Deferred income tax liabilities – current		1,818			1,340

Total current liabilities		156,179			200,771

Unrecognized tax benefits – non-current		3,205			3,052
Other long-term liabilities		163			163

Total liabilities		159,547			203,986

Redeemable noncontrolling interest		2,180			1,122
Equity:
AsiaInfo-Linkage, Inc. stockholders’ equity
Common stock (100,000,000 shares authorized; $0.01 par value; 50,335,443 shares and 50,115,821 shares issued as of June 30, 2010 and December 31, 2009, respectively; 47,335,443 shares and 47,115,821 shares outstanding as of June 30, 2010 and December 31, 2009, respectively)		503			501
Additional paid-in capital		252,377			244,838
Treasury stock, at cost (3,000,000 shares and 3,000,000 shares as of June 30, 2010 and December 31, 2009, respectively)		(27,749	)		(27,749	)
Retained earnings		39,450			15,199
Statutory reserve		22,306			22,306
Accumulated other comprehensive income		21,184			20,212

Total AsiaInfo-Linkage, Inc. stockholders’ equity		308,071			275,307

Noncontrolling interest		800			1,362

Total equity		308,871			276,669

Total liabilities and equity	$	470,598		$	481,777

See accompanying notes to condensed consolidated financial statements.

ASIAINFO-LINKAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In thousands, except share amounts)


	Six months Ended June 30,
	2010			2009
Cash flows from operating activities:
Net income	$	23,393		$	12,988
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of property and equipment		839			657
Share-based compensation expenses		3,906			5,040
Amortization of other acquired intangible assets		871			629
Gain on disposal of property and equipment		(6	)		(5	)
Gain from sales of available-for-sale securities		(472	)		(1,210	)
Provision for bad debt		2,175			492
Acquisition related costs		—			(12	)
Changes in operating assets and liabilities:
Accounts receivable		7,585			(51,706	)
Inventories		1,039			4,845
Other receivables		(373	)		(378	)
Prepaid expenses and other current assets		(1,520	)		800
Prepaid land use right and other long-term prepayment		(434	)		—
Accounts payable		(24,791	)		40,499
Accrued expenses		3,032			1,489
Deferred revenue		(14,490	)		(13,154	)
Accrued employee benefits		(10,006	)		(3,876	)
Other payables		32			2,310
Other taxes payable		(2,377	)		(403	)
Income taxes payable		(50	)		452

Net cash used in operating activities		(11,647	)		(543	)

Cash flows from investing activities:
(Increase) decrease in restricted cash		(384	)		656
Purchases of available-for-sale securities		(2,919	)		—
Purchases of held-to-maturity securities		(14,654	)		(10,555	)
Proceeds from sales of available-for-sale securities		1,937			6,211
Proceeds from maturity of held to maturity securities		13,726			—
Purchases of property and equipment		(635	)		(510	)
Proceeds from disposal of property and equipment		6			5
Purchase of businesses, net of cash acquired		(4,334	)		(872	)
Long-term equity investment		—			(25	)

Net cash used in investing activities		(7,257	)		(5,090	)

Cash flows from financing activities:
Proceeds from exercise of stock options		3,634			10,967

Net cash provided by financing activities		3,634			10,967

Effect of exchange rate changes on cash and cash equivalents		757			17

Net (decrease) increase in cash and cash equivalents		(14,513	)		5,351

Cash and cash equivalents at beginning of period		238,553			172,119

Cash and cash equivalents at end of period	$	224,040		$	177,470

See accompanying notes to condensed consolidated financial statements.

ASIAINFO-LINKAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (unaudited)

(In thousands, except share amounts)


	AsiaInfo-Linkage, Inc. Stockholders
	Common Stock								Retained				Accumulated
	Outstanding Shares	Amount		Additional Paid-in Capital		Treasury Stock			earnings (Accumulated Deficit)		Statutory Reserve		Other Comprehensive Income			Noncontrolling Interest			Total Equity			Comprehensive Income
Balance at January 1, 2010	47,115,821	$	501	$	244,838	$	(27,749	)	$	15,199	$	22,306	$	20,212		$	1,362		$	276,669
Net income (loss)	—		—		—		—			10,345		—		—			(423	)		9,922			9,922
Net loss attributable to redeemable noncontrolling interest	—		—		—		—			—		—		—			93			93
Other comprehensive income:
Foreign currency translation adjustments	—		—		—		—			—		—		51			—			51			51
Net unrealized gain on available-for-sale investments, net of tax effects of $(194)	—		—		—		—			—		—		607			—			607			607

Comprehensive income	—		—		—		—			—		—		—			—			—		$	10,580

Stock option exercises	183,479		2		3,518		—			—		—		—			—			3,520
Restricted stock units vesting	17,622		—		—		—			—		—		—			—			—
Share-based compensation (restricted stock units)	—		—		201		—			—		—		—			—			201
Share-based compensation (performance-based restricted stock units)	—		—		1,770		—			—		—		—			—			1,770

Balance at March 31, 2010	47,316,922	$	503	$	250,327	$	(27,749	)	$	25,544	$	22,306	$	20,870		$	1,032		$	292,833

Net income (loss)	—		—		—		—			13,906		—		—			(435	)		13,471			13,471
Net loss attributable to redeemable noncontrolling interest	—		—		—		—			—		—		—			203			203
Other comprehensive income:
Foreign currency translation adjustments	—		—		—		—			—		—		1,073			—			1,073			1,073
Transfer to statements of operations of realized gain on available-for-sale investments, net of tax effects of $35	—		—		—		—			—		—		(437	)		—			(437	)		(437	)
Net unrealized loss on available-for-sale investments, net of tax effects of $47	—		—		—		—			—		—		(322	)		—			(322	)		(322	)

Comprehensive income	—		—		—		—			—		—		—			—			—		$	13,785

Stock option exercises	15,721		—		115		—			—		—		—			—			115
Restricted stock units vesting	2,800		—		—		—			—		—		—			—			—
Share-based compensation (restricted stock units)	—		—		242		—			—		—		—			—			242
Share-based compensation (performance-based restricted stock units)	—		—		1,693		—			—		—		—			—			1,693

Balance at June 30, 2010	47,335,443	$	503	$	252,377	$	(27,749	)	$	39,450	$	22,306	$	21,184		$	800		$	308,871

See accompanying notes to condensed consolidated financial statements.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(In thousands, except share and per share amounts)

1. BASIS OF PREPARATION

On July 1, 2010, AsiaInfo Holdings, Inc. (“AsiaInfo”) completed its combination with IT software and solutions provider Linkage Technologies International Holdings Limited (“Linkage”) and was renamed “AsiaInfo-Linkage, Inc.” (“AsiaInfo-Linkage”). Please note that second quarter 2010 and prior consolidated financial statements for AsiaInfo-Linkage reflect the standalone operating results and financial position of AsiaInfo and its consolidated subsidiaries and variable interest entities “VIEs”. Starting in the third quarter of 2010, AsiaInfo-Linkage will consolidate Linkage and its consolidated subsidiaries’ operating results and financial position. Please refer to Note 25 for detailed information regarding this acquisition.

(a) The accompanying unaudited condensed consolidated financial statements include the accounts of AsiaInfo-Linkage, Inc., its subsidiaries, and its VIEs (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by US GAAP for completing annual financial statements. However, management believes that the disclosures are adequate to ensure the information presented is not misleading. US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based its assumptions and estimates on the facts and circumstances existing as of June 30, 2010, final amounts may differ from these estimates.

In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s audited financial statements on Form 10-K for the fiscal year ended December 31, 2009, as amended. The results of operations for the interim periods presented are not indicative of the operating results to be expected for any subsequent interim period or for the Company’s fiscal year ending December 31, 2010.

AsiaInfo-Linkage, Inc. uses the United States (“U.S.”) dollar as its reporting currency and functional currency. The financial records of the Company’s People’s Republic of China (“PRC”) subsidiaries and VIEs are maintained in Renminbi (“RMB”), their functional currency and the currency of the PRC. Their balance sheets are translated into U.S. dollars based on the exchange rate quoted by the People’s Bank of China as of the balance sheet date. Their statements of operations are translated using a weighted average exchange rate for the period. Translation adjustments are reflected in accumulated other comprehensive income in stockholders’ equity.

The RMB is not freely convertible into U.S. dollars or other currencies. All foreign exchange transactions involving RMB must take place through the People’s Bank of China or other institutions authorized to buy and sell foreign currencies. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the People’s Bank of China.

None of the assets of the Company’s consolidated VIEs can be used only to settle obligations of these VIEs. As of June 30, 2010 and December 31, 2009, respectively, there was $18,917 and $20,542 of liabilities of the Company’s consolidated VIEs for which creditors (or beneficial interest holders) did not have recourse to the general credit of AsiaInfo-Linkage or its subsidiaries.

(b) The accompanying unaudited condensed consolidated financial statements have been prepared using the same accounting policies as used in the preparation of the Company’s consolidated financial statements on Form 10-K for the fiscal year ended December 31, 2009, as amended except for the following additional accounting policies:

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

(1) Newly Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued an authoritative pronouncement that changes how a company determines whether an entity should be consolidated when such entity is insufficiently capitalized or is not controlled by the company through voting (or similar rights). The determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design and the company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The pronouncement retains the scope of previously issued pronouncements but added entities previously considered qualifying special purpose entities, since the concept of these entities was eliminated by the FASB. The pronouncement is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The adoption of this pronouncement did not have a significant impact on the Company’s financial position or results of operations.

In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this pronouncement did not have a significant impact on the Company’s financial position or results of operations.

(2) Recently Issued Accounting Pronouncements Not Yet Adopted

In September 2009, the FASB issued an authoritative pronouncement regarding revenue arrangements with multiple deliverables. This pronouncement was issued in response to practice concerns related to accounting for revenue arrangements with multiple deliverables under the existing pronouncement. Although the new pronouncement retains the criteria from the existing pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the separation criterion under the existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. The new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date or retrospectively for all periods presented. Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. The Company is in the process of evaluating the effect of adoption of this pronouncement.

In September 2009, the FASB issued an authoritative pronouncement regarding software revenue recognition for arrangements with multiple deliverables. The pronouncement addresses how consideration should be allocated to different units of accounting and removes the previous criterion that entities must use objective and reliable evidence of fair value in separately accounting for deliverables. The pronouncement provides that products containing both software and non-software components that function together to deliver the product’s essential functionality are excluded from the scope of current revenue recognition guidance for software products. The pronouncement includes factors that entities should consider when determining whether the software and non-software components function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date, or retrospectively for all periods presented. Early application is permitted. However, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. The Company is in the process of evaluating the effect of adoption of this pronouncement.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

In March 2010, FASB issued an authoritative pronouncement regarding the effect of denominating the exercise price of a share-based payment awards in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity’s functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. The Company does not believe the adoption of this pronouncement will significantly impact the financial position or results of operations of the Company.

In April 2010, the FASB issued an authoritative pronouncement regarding the milestone method of revenue recognition. The scope of this pronouncement is limited to arrangements that include milestones relating to research or development deliverables. The pronouncement specifies criteria that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The criteria apply to milestones in arrangements within the scope of this pronouncement regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronouncement will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Affected entities can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. The Company is in the process of evaluating the effect of adoption of this pronouncement.

2. FINANCIAL INSTRUMENTS

Financial instruments consist of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, other receivables, accounts payable, accrued expenses, other payables, income taxes payable, other taxes payable and long-term investments in equity securities of unquoted companies.

Short-term investments are classified as available-for-sale securities, held-to-maturity securities and trading securities, as discussed in Note 4.

The fair values of long-term investments, which are carried at cost, are not readily determinable.

The carrying values of other financial instruments approximate their fair values due to the short-term nature of these instruments. The Company does not use derivative instruments to manage risks.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

3. 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 remaining maturities of three months or less when purchased. The following table provides additional information concerning the breakdown of the Company’s cash and cash equivalents:


	As of June 30, 2010		As of December 31, 2009
Cash	$	81,591	$	128,213
Cash equivalents:
Money market fund		134,350		92,473
Seven-day notice deposits		2,209		12,009
Others		5,890		5,858

Total cash and cash equivalents	$	224,040	$	238,553

4. SHORT-TERM INVESTMENTS

Short-term investments are classified as held-to-maturity securities, available-for-sale securities and trading securities.

As of June 30, 2010 and December 31, 2009, the Company’s held-to-maturity securities consist of term deposits carried at cost of $14,726 and $13,716, respectively. The term deposits are either not allowed to be redeemed early or are subject to penalty for early redemption before their maturity. The carrying amounts of the held-to-maturity securities approximate their fair values due to their short-term nature. As of June 30, 2010 and December 31, 2009, the Company did not hold trading securities.

The following table provides additional information concerning the Company’s available-for-sale securities, which consist principally of bond funds, balance funds, stock funds and corporate stocks issued by major financial institutions.


	As of June 30, 2010									As of December 31, 2009
	Cost		Gross unrealized gains		Gross unrealized losses			Fair value		Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Bond funds	$	16,904	$	1,954	$	—		$	18,858	$	16,812	$	1,334	$	—	$	18,146
Balance funds		2,946		94		(99	)		2,941		1,465		118		—		1,583
Stock funds		5,847		1,567		—			7,414		5,815		1,895		—		7,710
Corporate stocks		215		5		—			220		215		20		—		235

Total	$	25,912	$	3,620	$	(99	)	$	29,433	$	24,307	$	3,367	$	—	$	27,674

Where applicable, the Company uses quoted prices in active markets for identical assets (Level 1 investments) to determine the fair value of trading and available-for-sale securities. If quoted prices in active markets for identical assets are not available to determine fair value, then the Company uses quoted prices for similar assets or inputs other than the quoted prices that are observable either directly or indirectly, which are included in Level 2 investments. The Company did not have Level 2 investments as of June 30, 2010. The Company’s Level 3 investments other than derivatives primarily include investments in certain mutual funds without quoted prices as of the date of reporting. The Company values its Level 3 investments using the quoted market price as of the most recent priced day prior to the date of reporting because the Company believes the fair value of the investments would not have materially changed between the pricing date and the date of reporting.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

The available-for-sale securities measured and recorded at fair value as of June 30, 2010 and December 31, 2009 were as follows:


	As of June 30, 2010
	Fair Value Measurements at the Reporting Date Using
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Balance
Bond funds	$	18,858	$	—	$	—	$	18,858
Balance funds		—		—		2,941		2,941
Stock funds		—		—		7,414		7,414
Corporate stocks		220		—		—		220

Total	$	19,078	$	—	$	10,355	$	29,433


	As of December 31, 2009
	Fair Value Measurements at the Reporting Date Using
	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Balance
Bond funds	$	18,146	$	—	$	—	$	18,146
Balanced funds		—		—		1,583		1,583
Stock funds		—		—		7,710		7,710
Corporate stocks		235		—		—		235

Total	$	18,381	$	—	$	9,293	$	27,674

The following table presents changes in Level 3 stock funds measured on a recurring basis for the six-month period ended June 30, 2010:


	Six Months Ended June 30, 2010
	2010
Beginning balance at January 1, 2010	$	9,293
Purchases		2,946
Redemption		(1,465	)
Realized gain		(472	)
Unrealized gain		(12	)
Exchange difference		65

Ending balance at June 30, 2010	$	10,355

The following table provides additional information on the realized gains of the Company during the three-month and six-month periods ended June 30, 2010. For purpose of determining gross realized gains, the cost of securities sold is based on specific identification.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)



	Three Months Ended June 30,
	2010						2009
	Proceeds		Costs		Gains		Proceeds		Costs		Gains
Available-for-sale securities	$	1,937	$	1,465	$	472	$	6,211	$	5,001	$	1,210
Trading securities		—		—		—		—		—		—

Total	$	1,937	$	1,465	$	472	$	6,211	$	5,001	$	1,210


	Six Months Ended June 30,
	2010						2009
	Proceeds		Costs		Gains		Proceeds		Costs		Gains
Available-for-sale securities	$	1,937	$	1,465	$	472	$	6,211	$	5,001	$	1,210
Trading securities		—		—		—		—		—		—

Total	$	1,937	$	1,465	$	472	$	6,211	$	5,001	$	1,210

The Company reported no impairment losses for its short-term investments for the three and six months ended June 30, 2010 and 2009, respectively.

5. ACCOUNTS RECEIVABLE

Accounts receivable balances included both billed and unbilled amounts. Revenue recognized in excess of billings is recorded as unbilled receivables. All billed and unbilled amounts are expected to be collected within one year. Accounts receivable balances included bank acceptance drafts receivable and commercial acceptance drafts receivable. These bank acceptance drafts and commercial acceptance drafts were non-interest bearing and were due within six months of issuance.

In recent periods the Company has begun to generate service revenues by acting as a sales agent for International Business Machines Corporation (“IBM”) or its distributors for certain products sold to China Mobile and its provincial subsidiaries (the “IBM Arrangement”). The components of the Company’s accounts receivable as of June 30, 2010 and December 31, 2009, including amounts attributable to the IBM Arrangement, were as follows:


	June 30, 2010								December 31, 2009
	IBM Arrangement		Non-IBM Arrangement			Total			IBM Arrangement		Non-IBM Arrangement			Total
Billed accounts receivable	$	8,935	$	43,331		$	52,266		$	21,985	$	36,064		$	58,049
Unbilled accounts receivable		19,039		52,503			71,542			35,700		37,212			72,912
Bank acceptance drafts		—		1,335			1,335			—		15			15
Commercial acceptance drafts		—		512			512			—		1,289			1,289
Less: accounts receivable allowance		—		(4,794	)		(4,794	)		—		(2,619	)		(2,619	)

Total accounts receivable, net	$	27,974		92,887		$	120,861		$	57,685	$	71,961		$	129,646

6. INVENTORIES, NET

The components of inventories, net as of June 30, 2010 and December 31, 2009 were as follows:


	June 30, 2010		December 31, 2009
Raw materials	$	949	$	806
Finished goods		7,547		8,729

Total	$	8,496	$	9,535

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

7. LONG-TERM INVESTMENTS

On September 12, 2008, the Company acquired 2,170,000 redeemable convertible Series B Preferred Shares of C-Platform Corporation (“C-Platform”), for a total cash consideration of $4,696, including $52 in transaction costs. The total consideration had been paid as of March 31, 2009. Following the transaction, the Company owned approximately 19.9% of C-Platform’s issued and outstanding share capital, or 17% of C-Platform’s share capital on a fully-diluted basis. Since the Company does not have the ability to exercise significant influence over the operating and financial policies of C-Platform, the Company uses the cost method of accounting to record its investment in C-Platform. C-Platform is a Cayman Islands company, which, through its subsidiaries in China, provides data operating services, a form of value-added telecommunications services, to telecommunications operators in China.

No impairment losses were recognized in 2009 or in the three and six months ended June 30, 2010.

8. ACQUISITION

On May 1, 2010, the Company, through a subsidiary of the Company, consummated the acquisition of 80% equity interest of Hangzhou Zhongbo Software Technology Co., Ltd. (“Hangzhou Zhongbo”) for an aggregate purchase price of $7,068 in cash. Goodwill acquired through this acquisition was $6,833. Hangzhou Zhongbo provides IT solutions to broadcasting operators in China.

9. GOODWILL

The changes in the carrying amount of goodwill by reporting segments during the six months ended June 30, 2010 were as follows:


	As of June 30, 2010
	AsiaInfo Technologies			Lenovo- AsiaInfo			Total
Gross amount:
Beginning balance at January 1, 2010	$	46,102		$	21,395		$	67,497
Goodwill recognized in acquisition of Hangzhou Zhongbo		6,833			—			6,833
Exchange differences		41			3			44

Ending balance at June 30, 2010:		52,976			21,398			74,374

Accumulated impairment loss:
Beginning balance at January 1, 2010:		(26,380	)		(18,855	)		(45,235	)
Charge for the year		—			—			—
Exchange differences		—			—			—

Ending balance at June 30, 2010:		(26,380	)		(18,855	)		(45,235	)

Goodwill, net	$	26,596		$	2,543		$	29,139

10. OTHER ACQUIRED INTANGIBLE ASSETS, NET

The changes in the carrying amounts of the components of other acquired intangible assets, net as of June 30, 2010 and December 31, 2009 were as follows:


	June 30, 2010									December 31, 2009
	Gross carrying amount		Accumulated amortization			Foreign exchange difference		Net carrying amount		Gross carrying amount		Accumulated amortization			Foreign exchange difference		Net carrying amount
Core technologies	$	2,331	$	(2,331	)	$	—	$	—	$	2,331	$	(2,321	)	$	—	$	10
Trade names		341		(324	)		—		17		341		(309	)		—		32
Contract backlogs		2,974		(2,495	)		12		491		2,451		(2,463	)		12		—
Customer lists		131		(134	)		12		9		131		(119	)		12		24
Customer relationships		3,557		(2,242	)		285		1,600		2,739		(1,901	)		280		1,118
Distribution network		870		(870	)		—		—		870		(870	)		—		—
Software		1,758		(1,605	)		156		309		1,758		(1,457	)		154		455
Non-compete agreements		938		(239	)		24		723		446		(188	)		23		281
Corporate business agency agreement		2,037		(398	)		—		1,639		2,037		(139	)		—		1,898

	$	14,937	$	(10,638	)	$	489	$	4,788	$	13,104	$	(9,767	)	$	481	$	3,818

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

The future amortization expenses for the net carrying amount of intangible assets with definite lives as of June 30, 2010 are expected to be as follows:


2010	$	1,003
2011		1,478
2012		1,142
2013		654
2014		511

	$	4,788

11. PREPAID LAND USE RIGHT AND OTHER LONG-TERM PREPAYMENT

The Company has commenced the process to obtain land use rights for a piece of land in Beijing, on which the Company plans to construct a building for use as its new corporate headquarters. In October 2009, the Company entered into an agreement with Zhongguancun Software Park Development Co., Ltd. (“ZSPD”), pursuant to which ZSPD agreed to develop the land in preparation for construction of the building, for an aggregate consideration of approximately $10,777. In connection with the agreement, the Company will be eligible to enter into a land transfer agreement with relevant PRC government authorities in order to obtain land use rights with respect to such land. As of June 30, 2010, the Company had paid approximately $9,699 pursuant to the agreement with ZSPD, with the remaining amount payable in the remainder of 2010. The Company has recorded the $9,699 as prepaid land use right and other long-term prepayment on its consolidated balance sheets as of June 30, 2010. The Company expects to report land use rights and other long-term prepayments at cost less accumulated amortization and to amortize the cost of the land use rights and other long-term prepayments on a straight-line basis over the term of the land use rights and other long-term prepayments to be amortized, which is expected to be 50 years.

12. COMPREHENSIVE INCOME

The components of comprehensive income during the three and six months ended June 30, 2010 and 2009 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net income	$	13,471		$	7,203		$	23,393		$	12,988
Transfer to statements of operation of realized gain on available-for-sale investments net of tax effects of $35 and $350, $35 and $350 for the three and six months ended June 30, 2010 and 2009, respectively		(437	)		(860	)		(437	)		(860	)
Net unrealized (loss) gain on available-for-sale investments, net of tax effects of $47 and $77, $(147) and $(501) for the three and six months ended June 30, 2010 and 2009, respectively		(322	)		770			285			1,950


Change in cumulative foreign currency translation adjustment		1,073			69			1,124			(28	)

Comprehensive income		13,785			7,182			24,365			14,050

Comprehensive loss attributable to noncontrolling interest		(435	)		(2	)		(858	)		(7	)

Comprehensive income attributable to AsiaInfo-Linkage, Inc.	$	14,220		$	7,184		$	25,223		$	14,057

13. CREDIT FACILITIES

As of June 30, 2010, the Company had short-term credit facilities for working capital purposes totaling $32,088 expiring in March 2011. As of June 30, 2010, the credit facilities were secured by bank deposits of $5,009 and credit facilities of $6,446 were pledged as security for issuing standby letters of credit and accounts payable to hardware suppliers and customers. As of June 30, 2010, unused short-term credit facilities were $25,642. In addition, the Company had standby letters of credit and bank acceptance drafts as of June 30, 2010, which were collateralized by bank deposits of $915. Total bank deposits pledged as security for credit facilities, standby letters of credit, and bank acceptance drafts totaled $5,924 as of June 30, 2010 and were presented as restricted cash in the consolidated balance sheets. As of December 31, 2009, the Company had total short-term credit facilities totaling $31,968, which will expire in December 2010 and were secured by bank deposits of $5,000.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

14. ACCOUNTS PAYABLE

Accounts payable included bank acceptance drafts payable of $3,123 and $1,932 and commercial acceptances payable of nil and $426 as of June 30, 2010 and December 31, 2009, respectively. These bank acceptance drafts and commercial acceptances were non-interest bearing and were due within six months of issuance.

As of June 30, 2010 and December 31, 2009, the Company’s accounts payable balance related to its sales agency arrangement with IBM was approximately $36,720 and $62,121, respectively, under which the Company is contractually obligated to pay its vendor only when the customer, China Mobile, pays the Company.

15. VALUE-ADDED TAXES REBATE

Revenue from software products and solutions included the benefit of the rebate of value-added taxes on sales of software and services received from the Chinese tax authorities as part of the PRC government’s policy of encouraging software development in the PRC. The rebate totaled $5,521 and $3,822 for the six months ended June 30, 2010 and 2009, respectively.

16. INCOME TAXES

The Company is subject to U.S. federal and state income taxes and the Company’s subsidiaries and VIEs incorporated in the PRC are subject to PRC income taxes.

Reconciliation between the provision for income taxes computed by applying the U.S. federal tax rate to income before income taxes and the actual provision for income taxes is as follows:


	Six months Ended June 30,
	2010		2009
U.S. federal rate	35	%	35	%
Difference between statutory rate and foreign effective tax rate	(28	)	(28	)
Subpart F income inclusion and other dividend income	4		1
Share-based compensation	2		5
Other permanent differences	2		1

	15	%	14	%

Aggregate undistributed earnings of approximately $80,664 at June 30, 2010 of the Company’s PRC subsidiaries and VIEs that are available for distribution to the Company are considered to be indefinitely reinvested under US GAAP and, accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to AsiaInfo-Linkage, Inc. Additionally, the Chinese tax authorities have clarified that distributions made out of pre-January 1, 2008 retained earnings would not be subject to the withholding tax. The Company has not quantified the deferred income tax liability that would arise if earnings in the six months ended June 30, 2010 were to be distributed or were determined to be no longer permanently reinvested.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. There is no ongoing examination by any taxing authority at this time. The Hong Kong Inland Revenue Department has concluded its examination of our Hong Kong subsidiary’s tax filings tax years and no adjustment was made as a result of the examination. The Company’s various tax years from 2000 to 2009 remain open in these taxing jurisdictions.

17. SHARE-BASED COMPENSATION

2002 Stock Option Plan and the Prior Plans

Under the Company’s 2002 Stock Option Plan (the “2002 Plan”), the Company was authorized to grant options for the purchase of up to 4,500,000 shares of common stock to employees, directors and consultants at prices not less than the fair market value on the date of grant for incentive stock options and nonqualified options. Shares as to which an option is granted under the 2002 Plan but remains unexercised at the expiration, forfeiture or other termination of such option may be the subject of the grant of further options. Prior to adopting 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 “Option Plans”).

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

The vesting periods of the options under the Option Plans are determined based on the individual stock option agreements. Options granted prior to 1998 generally vest and become exercisable over three years at an equal annual rate. Exercise terms of options granted in 1998, 1999, 2000 and 2002 are substantially similar to those of options granted prior to 1998 except that the vesting and exercise periods are generally over four one-year cliffs at an annual rate of 20%, 20%, 30% and 30% for the 1999 plan, generally over four years at an annual rate of 25% for the 2000 plan, and are generally no more than four years at an annual rate of 25% for the 2002 Plan.

Activities for the Option Plans are summarized as follows:


	Number of shares		Weighted average exercise price per share		Aggregate Intrinsic Value
Outstanding, January 1, 2010	1,064,605		$	11.51
Granted	—			—
Forfeited	(39,900	)		25.57
Exercised	(262,971	)		20.82

Outstanding, March 31, 2010	761,734			7.56	$	14,516

Granted	—			—
Forfeited	—			—
Exercised	(15,721	)		7.28

Outstanding, June 30, 2010	746,013			7.57	$	10,791

Vested and expected to vest, June 30, 2010	746,013			7.57		10,791
Exercisable, June 30, 2010	746,013		$	7.57	$	10,791

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $21.86 of the Company’s common stock on the last trading day (June 30, 2010).

The total intrinsic value of options exercised for each of the three months ended June 30, 2010 and 2009 was $325 and $15,255, respectively; and for each of the six months ended June 30, 2010 and 2009 was $1,424 and $16,685, respectively.

As of June 30, 2010, there was no unrecognized share-based compensation cost relating to share options.

2005 Stock Incentive Plan – restricted stock units (RSUs)

Under the Company’s 2005 Stock Incentive Plan (the “2005 Plan”), the Company may grant participants restricted stock awards, stock options, or other types of equity incentives. The number of shares authorized for issuance is (a) 600,000 shares plus (b) any authorized shares of the Company’s common stock that, as of April 21, 2005, were available for issuance under the 2002 Plan, or that thereafter become available for issuance under the 2002 Plan in accordance with its terms.

A restricted stock unit (“RSU”) is an agreement to issue stock at the time when the award vests. These units are vested on an annual basis equally over four years, 25% on each anniversary of the grant date. The fair value of each RSU is measured on the grant date based on the market price of the stock on the grant date. The Company also has the right, in its sole discretion, to pay cash in lieu of the issuance of vested shares of common stock. No such cash payment right was exercised by the Company.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

RSUs as of June 30, 2010 and changes during the three months ended June 30, 2010 were as follows:


	Number of shares		Weighted average grant date fair value
Restricted stock units unvested at January 1, 2010	101,800		$	11.26
Granted	86,600			25.43
Vested	(17,622	)		9.59
Forfeited	—			—

Restricted stock units unvested at March 31, 2010	170,778		$	18.62

Granted	—			—
Vested	(2,800	)		17.31
Forfeited	(3,000	)		20.70

Restricted stock units unvested at June 30, 2010	164,978		$	18.60

Total intrinsic value of RSUs vested for each of the three months ended June 30, 2010 and 2009 was $66 and $5.5, respectively; and for each of the six months ended June 30, 2010 and 2009 was $566 and $5.5, respectively.

As of June 30, 2010, there was $2,641 in unrecognized share-based compensation cost related to RSUs, which is expected to be recognized in the Company’s consolidated statements of operations over a weighted-average vesting period of 1.68 years. To the extent the actual forfeiture rate is different from the original estimate, the actual share-based compensation related to these awards may be different from the expectation.

2008 Stock Incentive Plan

On February 25, 2008, the Board of Directors of the Company authorized the 2008 Stock Incentive Plan, as amended (the “2008 Plan”). The 2008 Plan was subsequently approved by the Company’s stockholders at the 2008 annual meeting of stockholders. Under the 2008 Plan, the Company may grant participants restricted stock awards, stock options, or other types of equity incentives. The number of shares authorized for issuance is (a) 2,000,000 shares plus (b) any authorized shares of the Company’s common stock that, as of February 25, 2008, were available for issuance under the 2005 Plan, or that thereafter become available for issuance under the 2005 Plan in accordance with its terms.

As of June 30, 2010, 1,669,400 performance stock units (“PSUs”) were granted under the 2008 Plan. These awards will vest based on certain performance-based criteria, such as the Company’s operating margin annual growth rate, provided the award holder continues to be an employee of the Company at the time the performance goals are met. Each PSU represents a contingent right of the participant to receive a payment in respect of a share of the Company’s common stock, whether in shares, cash, or a combination thereof, subject to the terms and conditions of the participant’s PSU agreement. The Company also has the right, in its sole discretion, to pay cash in lieu of the issuance of vested shares of common stock. No such cash payment right was exercised by the Company.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

PSUs as of June 30, 2010 and changes during the six months ended June 30, 2010 were as follows:


	Number of shares		Weighted average grant date fair value
Performance-based restricted stock units unvested at January 1, 2010	1,081,413		$	13.17
Granted	—			—
Vested	—			—
Forfeited	(2,835	)		13.10

Performance-based restricted stock units unvested at March 31, 2010	1,078,578		$	13.17

Granted	—			—
Vested	—			—
Forfeited	(16,638	)		13.10

Performance-based restricted stock units unvested at June 30, 2010	1,061,940		$	13.17

Total intrinsic value of the PSUs granted under the 2008 Plan and vested for each of the six months ended June 30, 2010 and 2009 was nil and nil, respectively.

As of June 30, 2010, there was $1,748 in unrecognized share-based compensation cost related to the PSUs, which is expected to be recognized in the Company’s consolidated statements of operations over a weighted-average vesting period of 0.25 year. To the extent the actual forfeiture rate is different from the original estimate, the actual share-based compensation related to these awards may be different from the expectation.

The amount of share-based compensation attributable to cost of revenues, sales and marketing, general and administrative expenses, and research and development is included in those line items on the face of the Company’s consolidated statements of operations. For the three months and six months ended June 30, 2010 and 2009, share-based compensation expenses related to stock options, RSUs and PSUs were allocated as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Cost of revenues	$	480	$	1,102	$	1,000	$	1,395
Sales and marketing		566		1,099		1,112		1,450
General and administrative		604		1,067		1,223		1,427
Research and development		285		590		571		768

Total share-based compensation expense	$	1,935	$	3,858	$	3,906	$	5,040

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

18. EARNINGS PER SHARE

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Net income attributable to AsiaInfo-Linkage, Inc. common stockholders (numerator)	$	13,906	$	7,205	$	24,251	$	12,995
Shares (denominator)
Weighted average common stock outstanding
Basic		47,328,078		44,586,996		47,277,978		44,048,268
Dilutive effect of share-based compensation		997,327		1,330,060		986,144		1,506,279

Diluted		48,325,405		45,917,056		48,264,122		45,554,547

Earnings per share
Net income attributable to AsiaInfo-Linkage, Inc. common stockholders
Basic	$	0.29	$	0.16	$	0.51	$	0.30

Diluted	$	0.29	$	0.16	$	0.50	$	0.29

As of June 30, 2010 and 2009, the Company had 5,000 and 415,600 common stock options outstanding, respectively, that were excluded from the computation of diluted earnings per share (“EPS”), as their exercise prices exceeded the average market values in those periods. These options could potentially have a dilutive effect on the Company’s EPS in the future.

19. SEGMENT INFORMATION

Since October 2004, the Company has been organized as two business units, AsiaInfo Technologies, encompassing the Company’s traditional telecommunications business, and Lenovo-AsiaInfo, providing IT services, including security products and services, IT consulting, software customization, and business process outsourcing services, to the enterprise market in China. After disposing of certain non-core business lines during 2005 and 2006, Lenovo-AsiaInfo now focuses on IT security solutions for the small and medium-sized enterprise market in China. In accordance with the FASB guidance, the Company determined that each of these two business units represents an operating segment, of which discrete financial information is available and is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Each operating segment has three product lines: (1) software products and solutions, (2) services, and (3) third-party hardware.

The Company’s chief operating decision maker is the Company’s Business Committee, comprising the Company’s Chief Executive Officer, Chief Financial Officer and senior management team, who allocate resources and evaluate performance of segments based on the following table of condensed consolidated statements of operations and total assets. Accordingly, other items such as inter-segment sales, interest income (expense), income tax expenses (benefit), depreciation and amortization are not disclosed by segment, since such information is not used by the Company’s chief operating decision making group to assess the operating performance of individual segments.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

The following sets forth the condensed consolidated statements of operations and total assets for the Company’s operating segments based on the Company’s three major product lines:


	Three Months Ended June 30,
	2010							2009
	AsiaInfo Technologies		Lenovo- AsiaInfo			Total		AsiaInfo Technologies		Lenovo- AsiaInfo			Total
Revenues:
Software products and solutions	$	51,773	$	7,347		$	59,120	$	41,776	$	5,375		$	47,151
Service		6,288		97			6,385		5,883		48			5,931
Third-party hardware		1,237		122			1,359		5,039		447			5,486

Total revenues		59,298		7,566			66,864		52,698		5,870			58,568

Cost of revenues:
Software products and solutions		21,015		2,067			23,082		20,275		2,334			22,609
Service		2,668		89			2,757		1,892		75			1,967
Third-paty hardware		1,175		129			1,304		4,786		424			5,210

Total cost of revenues		24,858		2,285			27,143		26,953		2,833			29,786

Gross profit		34,440		5,281			39,721		25,745		3,037			28,782

Segment expenses:
Sales and marketing		7,300		3,507			10,807		7,569		2,360			9,929
General and administrative⁽¹⁾		722		140			862		727		(78	)		649
Research and development		8,384		1,392			9,776		7,787		1,005			8,792

Total segment expenses		16,406		5,039			21,445		16,083		3,287			19,370

Contribution profit (loss)	$	18,034	$	242		$	18,276	$	9,662	$	(250	)	$	9,412


	Six Months Ended June 30,
	2010							2009
	AsiaInfo Technologies		Lenovo- AsiaInfo			Total		AsiaInfo Technologies		Lenovo- AsiaInfo			Total
Revenues:
Software products and solutions	$	105,528	$	11,343		$	116,871	$	81,158	$	8,430		$	89,588
Service		10,122		167			10,289		10,730		200			10,930
Third-party hardware		2,891		278			3,169		7,963		1,063			9,026

Total revenues		118,541		11,788			130,329		99,851		9,693			109,544

Cost of revenues:
Software products and solutions		40,660		3,191			43,851		37,189		3,634			40,823
Service		4,579		133			4,712		3,740		157			3,897
Third-party hardware		2,746		284			3,030		7,564		962			8,526

Total cost of revenues		47,985		3,608			51,593		48,493		4,753			53,246

Gross profit		70,556		8,180			78,736		51,358		4,940			56,298

Segment expenses:
Sales and marketing		14,914		6,206			21,120		15,985		4,481			20,466
General and administrative⁽¹⁾		2,977		153			3,130		1,453		44			1,497
Research and development		15,972		2,800			18,772		14,082		1,925			16,007

Total segment expenses		33,863		9,159			43,022		31,520		6,450			37,970

Contribution profit (loss)	$	36,693	$	(979	)	$	35,714	$	19,838	$	(1,510	)	$	18,328

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)


	As of June 30, 2010						As of December 31, 2009
	AsiaInfo Technologies		Lenovo- AsiaInfo		Total		AsiaInfo Technologies		Lenovo- AsiaInfo		Total
Total assets⁽²⁾	$	413,852	$	56,746	$	470,598	$	423,237	$	58,540	$	481,777

⁽¹⁾

General and administrative expenses reported reflect only the direct controllable expenses of each business unit and do not include allocation of corporate general and administrative expenses. The credit amount in the Lenovo-AsiaInfo segment primarily reflects the results of certain bad debt provision reversals recorded in three months ended June 30, 2009.

⁽²⁾	Included in total assets are net accounts receivable of $119,168 and $1,693 for AsiaInfo Technologies and Lenovo-AsiaInfo, respectively, at June 30, 2010 and $125,445 and $4,201 for AsiaInfo Technologies and Lenovo-AsiaInfo, respectively, at December 31, 2009.

The following is a reconciliation of operating segment contribution profit to income before provision for income taxes:


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Total contribution profit for reportable segments	$	18,276		$	9,412		$	35,714		$	18,328
Corporate general and administrative expenses		(3,736	)		(3,003	)		(10,128	)		(5,721	)
Interest income		741			534			1,402			1,158
Gain from sales of short-term investments		472			1,210			472			1,210
Dividend income		250			3			254			174
Other income (expense), net		(50	)		9			(50	)		(14	)

Income before provision for income taxes	$	15,953		$	8,165		$	27,664		$	15,135

Since revenues net of cost of third-party hardware sales were reported to the chief operating decision maker, the Company also provides the following table, which reconciles revenues net of cost of third-party hardware sales to total revenues as presented in the Company’s consolidated statements of operations:


	Three Months Ended June 30,
	2010						2009
	AsiaInfo Technologies		Lenovo- AsiaInfo		Total		AsiaInfo Technologies		Lenovo- AsiaInfo		Total
Revenues, net of cost of third-party hardware sales	$	58,123	$	7,437	$	65,560	$	47,912	$	5,446	$	53,358
Third-party hardware cost		1,175		129		1,304		4,786		424		5,210

Total revenues	$	59,298	$	7,566	$	66,864	$	52,698	$	5,870	$	58,568


	Six Months Ended June 30,
	2010						2009
	AsiaInfo Technologies		Lenovo- AsiaInfo		Total		AsiaInfo Technologies		Lenovo- AsiaInfo		Total
Revenues, net of cost of third-party hardware sales	$	115,795	$	11,504	$	127,299	$	92,287	$	8,731	$	101,018
Third-party hardware cost		2,746		284		3,030		7,564		962		8,526

Total revenues	$	118,541	$	11,788	$	130,329	$	99,851	$	9,693	$	109,544

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

20. RELATED PARTY TRANSACTIONS

The Company entered into a series of contractual agreements with Lenovo in connection with the acquisition of Lenovo’s non-telecommunications IT services business in October 2004. In conjunction with that acquisition, the Company delivered 5,472,414 shares of its common stock to Lenovo. Among them, 648,769 shares were returned to the Company from an escrow account in February 2007. As of June 30, 2010, Lenovo owned approximately 7% of the Company’s outstanding common stock.

The following table provides a summary of the Company’s transactions with Lenovo during the three months and six months ended June 30, 2010 and 2009, respectively:


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Sales and marketing	$	10	$	14	$	25	$	28

Total operating expenses	$	10	$	14	$	25	$	28


	As of June 30, 2010				As of December 31, 2009
Balances with related parties:
Other receivables			$	2			$	—
Advances to suppliers				945				—

The Company entered into consulting agreements with Tom Manning, one of its directors, in January 2009 and February 2009, pursuant to which Mr. Manning agreed to provide certain management and consulting services to the Company. As of June 30, 2010, the Company paid approximately $443 to Mr. Manning pursuant to the agreements.

21. COMMITMENTS AND CONTINGENCIES

Product warranty – The Company’s product warranty accrual reflected management’s best estimate of probable liability under its product warranties. Management determines the warranty accrual based on historical experience and other currently available evidence. Product warranty accrual was recorded as a component of accrued expenses in the accompanying balance sheets.

Changes in the product warranty accrual for the six months ended June 30, 2010 were as follows:


	Six Months Ended June 30, 2010
Beginning balance at January 1, 2010	$	266
Current period provision		17
Expired warranty		(24	)
Foreign exchange difference		1

Ending balance at June 30, 2010	$	260

Litigation – In December 2001, a securities class action case was filed in New York City against the Company, certain of its officers and directors and the underwriters of the Company’s initial public offering (“IPO”). The lawsuit alleged violations of the U.S. federal securities laws and was docketed in the U.S. 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 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 of their purchasing shares in the Company’s IPO. The lawsuit further claimed that the alleged 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 (collectively, the “IPO Allocation 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.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

In April 2009, the Company and most of the other issuer defendants in the IPO Allocation Cases reached a definitive agreement with the plaintiffs and the underwriter defendants to settle the IPO Allocation Cases. The agreement was filed with the court in April 2009 and a final approval was granted by the court in October 2009. The final approval was subject to appeal until November 2009. Several objectors filed timely appeals and those appeals remain pending. If the settlement is approved, the Company expects any damages payable to the plaintiffs to be fully funded by its directors’ and officers’ liability insurance policies. If the litigation proceeds, the Company intends to continue to defend the litigation vigorously. Moreover, if the litigation proceeds, 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 its directors’ and officers’ liability insurance policies would also cover the defense and potential exposure in the suit.

In addition, in June 2007 the Company received a letter from a putative stockholder demanding that the Company investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), by the underwriters of the Company’s IPO and certain of the Company’s unidentified directors, officers and stockholders. In October 2007, the putative stockholder commenced a civil lawsuit in the U.S. District Court for the Western District of Washington against Morgan Stanley and Deutsche Bank, two of the lead underwriters of the Company’s IPO, alleging violations of Section 16(b) of the Exchange Act. The complaint alleges that the combined number of shares of the Company’s common stock beneficially owned by the lead underwriters and certain unnamed officers, directors and principal stockholders exceeded ten percent of the Company’s outstanding common stock from the date of the Company’s IPO in March 2000, for at least one year. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriters any “short-swing profits” obtained by them in violation of Section 16(b). None of the Company’s directors, officers or stockholders is named as defendants in this action, although the Company is named as a nominal defendant. In July 2008, the Company together with several other issuers who are also named as nominal defendants in the action filed a joint motion to dismiss the action. In March 2009, the court granted the motion, dismissing the complaint without prejudice on the ground that the plaintiff failed to make an adequate demand to the Company prior to filing the complaint. The plaintiff subsequently appealed the judgment to the Court of Appeals for the Ninth Circuit, and the underwriter defendants have filed certain cross-appeals. Briefing with respect to these appeals concluded in November 2009 and the appeals remain pending.

The Company intends to continue to defend vigorously the two litigation matters described above. While the Company cannot guarantee the outcome of these proceedings, the Company believes that the final results of these lawsuits will not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.

22. STOCK REPURCHASE PROGRAM

On September 11, 2007, the Company announced the authorization of a stock repurchase program under which the Company was entitled, from time to time for a period of four months, depending on market conditions, share price and other factors, to make one or more purchases, on the open market or in privately negotiated transactions, subject to availability, of up to 3,000,000 shares of its outstanding common stock. As of December 31, 2007, the Company repurchased 244,300 shares of its common stock at a total cost of $1,953 pursuant to this repurchase program.

On February 27, 2008, the Company’s Board of Directors authorized an extension to the 2007 share repurchase program through July 10, 2008. Under the extended program, the Company was authorized from time to time, depending on market conditions, share price and other factors make one or more purchases on the open market or in privately negotiated transactions, subject to availability, of up to 2,755,700 shares of its outstanding common stock. Any common stock repurchased by the Company became part of its treasury stock and may be retired or used by the Company to finance or execute acquisitions or other arrangements. As of July 10, 2008, the Company had repurchased 166,400 shares of its common stock at a total cost of $1,664 pursuant to this repurchase program.

On September 17, 2008, the Company announced a new stock repurchase program under which the Company was authorized to repurchase up to 3,000,000 shares of its outstanding common stock. As of December 31, 2008, the Company had repurchased 2,589,300 shares of its common stock at a total cost of $24,132.

No repurchases occurred in 2009 and in the six months ended June 30, 2010.

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

23. NONCONTROLLING INTEREST

(a) In September 2008, the Company established a new subsidiary, Shanghai Xinjia Science & Technology Co., Ltd (“AISH”) in Shanghai, with a total capital contribution of $732. The Company and Mr. Yao Yuan, the other shareholder of AISH, hold 90% and 10% of AISH’s share capital, respectively. AISH mainly provides software and services to telecommunication carriers in Shanghai.

(b) In October 2009, the Company acquired 60% of the share capital of SmartCall Holding Limited and the remaining 40% of the share capital was recorded as noncontrolling interest.

24. REDEEMABLE NONCONTROLLING INTEREST

(a) In September 2009, the Company formed AsiaInfo International Pte Ltd (“AIP”) with Alpha Growth International Pte Ltd, a company incorporated under the laws of Singapore (“AGI”), in Singapore. AIP has total issued and paid-up share capital of $4,000. The Company contributed $2,800 to AIP in cash, which represents 70% of AIP’s share capital. AGI contributed $1,200 to the AIP in cash, which represents 30% of AIP’s share capital. AIP serves as an exclusive agent to market and distribute the Company’s telecommunications software and service solutions in certain regions in Southeast Asia until December 2014 or such other date as the Company and AGI may mutually agree. The Company has consolidated AIP since its incorporation.

Pursuant to the agreement with AGI, the Company granted a put option to AGI to sell, while the Company received a call option from AGI to purchase, the 30% equity interest held by AGI. The options are exercisable within a 30 day-period from the date of issuing the audit report of AIP’s 2013 financial statements. The exercise prices for the call and the put options of the 30% equity interest held by AGI are the same and are determined by a formula based on the performance of AIP for years 2012 and 2013.

(b) As discussed in Note 8, on May 1, 2010, the Company, through a subsidiary of the Company, consummated the acquisition of 80% equity interest of Hangzhou Zhongbo for an aggregate purchase price of $7,068 in cash. Hangzhou Zhongbo provides IT solutions to broadcasting operators in China.

Pursuant to the agreement with Hangzhou Zhongbo, the Company granted a put option to Hangzhou Zhongbo to sell, while the Company received a call option from Hangzhou Zhongbo to purchase, the 20% equity interest held by Hangzhou Zhongbo. The options are exercisable after December 31, 2011. The exercise prices for the call and the put options of the 20% equity interest held by Hangzhou Zhongbo are the same and are determined by a formula based on the performance of Hangzhou Zhongbo for years 2010 and 2011.

These noncontrolling interests were recorded outside of the permanent equity on the consolidated balance sheets initially at the fair value of the noncontrolling interests as of the date of incorporation or the date of acquisition of these subsidiaries. Subsequently, each noncontrolling interest was carried at the higher of (1) the initial carrying amount, increased or decreased for the noncontrolling interest’s share of net income or loss or (2) the accreted amount to the expected redemption value. The change of the carrying amounts of the redeemable noncontrolling interest is recognized as net income attributable to noncontrolling interest in the consolidated statements of operations. For the three months ended March 31, 2010 and the three months ended June 30, 2010, the amounts charged to the net income attributable to noncontrolling interests were $93 and $203, respectively, which represents the noncontrolling interests’ share of net loss of these subsidiaries.


	Redeemable Noncontrolling Interest
Balance at December 31, 2009	$	1,122
Incorporation of new subsidiaries		—
Net loss		(93	)
Adjustment to redemption value		—

Balance at March 31, 2010	$	1,029
Acquisition of Hangzhou Zhongbo		1,354
Net loss		(203	)
Adjustment to redemption value		—

Balance at June 30, 2010	$	2,180

ASIAINFO-LINKAGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

(In thousands, except share and per share amounts)

25. SUBSEQUENT EVENTS

The Company evaluated events occurring after June 30, 2010 until the date the consolidated financial statements were issued.

On July 1, 2010, the Company completed its business combination with Linkage, a leading IT software and solutions provider in China. Pursuant to the Business Combination Agreement dated December 4, 2009, as supplemented on June 5, 2010 by the Supplemental Agreement (collectively, the “Combination Agreement”), the Company purchased from Linkage 100% of the outstanding share capital of Linkage’s wholly-owned subsidiary, Linkage Technologies, which carries out all of the operations of Linkage, for $60,000 in cash and 26,832,731 shares of the Company’s common stock. The aggregate market value of the common stock and the total consideration were $581,734 and $641,734 as of the date of acquisition. The transaction was accounted for as a business combination and purchase accounting was applied accordingly. The Company is in the process of performing the purchase price allocation.

Concurrently and in connection with the closing, the Company entered into an escrow agreement with Linkage, Mr. Sun as agent for the shareholders of Linkage, and The Bank of New York Mellon. Pursuant to the agreement, 10% of the Consideration (consisting of $6,000 in cash and 2,683,273 shares of the Company’s common stock) was deposited into an escrow account for a period of 18 months as security for the indemnification obligations of Linkage and certain key Linkage shareholders under the Combination Agreement.

In connection with the closing, on July 1, 2010, the Company changed its corporate name to “AsiaInfo-Linkage, Inc.”

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for historical information, the statements contained in this quarterly report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Private Securities Litigation Reform Act of 1995, or the Reform Act, contains certain safe harbors regarding forward-looking statements. Certain of the forward-looking statements include management’s expectations, intentions and beliefs with respect to our growth, our operating results, the nature of the industry in which we are engaged, our business strategies and plans for future operations, our needs for capital expenditures, capital resources and liquidity, and similar expressions concerning matters that are not historical facts. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. All forward-looking statements included in this report 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. The factors that could cause actual results to differ materially include, but are not limited to, the factors discussed under the heading “Risk Factors” in Part II Other Information below and in the reports we file with the U.S. Securities and Exchange Commission, or the SEC, from time to time.

In this report, “AsiaInfo,” the “Company,” “we,” “us” and “our” refer to AsiaInfo-Linkage, Inc. and its subsidiaries and consolidated variable interest entities, or VIEs.

Overview

We are a leading provider of high-quality telecommunications software solutions and IT security products and services in China. In the telecommunications market, our software and 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. In addition to providing customized software solutions to China’s telecommunications carriers, we also offer sophisticated IT security products and services to many small- and medium-sized companies and government agencies in China.

We commenced our operations in the United States, or the U.S., in 1993 and moved our major operations from the U.S. 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 operating subsidiaries, most of which are Chinese companies. In July 2010, we completed our previously announced business combination with Linkage Technologies International Holdings Limited, or Linkage and, in connection with the closing, changed our corporate name to “AsiaInfo-Linkage, Inc.”

We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of large telecommunications customers, such as China Mobile, China Unicom and China Telecom and their respective provincial subsidiaries. The following table shows our revenues and percentage of total revenues derived from those three customers (and their respective provincial subsidiaries) for the three months ended June 30, 2010 and 2009.


	Three Months Ended June 30,
	2010				2009
	Revenues (in thousands)		Percentage of Total Revenues		Revenues (in thousands)		Percentage of Total Revenues
China Mobile	$	44,335	66	%	$	38,206	65	%
China Telecom		2,604	4	%		4,966	9	%
China Unicom		11,559	17	%		9,510	16	%

Total	$	58,498	87	%	$	52,682	90	%

As a result of our reliance on our key customers in the telecommunications industry, our operating results are influenced by governmental spending policies in that sector. Historically, a number of state-mandated restructurings in China’s telecommunications sector have led to cancellation or delays in telecommunications-related capital expenditures, and have negatively impacted our operating results in certain periods. However, certain state-mandated restructurings in China’s telecommunications sector have caused our revenues to increase as carriers have increased spending on software and IT infrastructure designed to increase their competitiveness. Any future restructurings affecting our major telecommunications customers may result in delays or cancellation of telecommunications-related spending, which could have an adverse impact on our business.

Since our acquisition of the non-telecommunications-related IT services business of Lenovo in October 2004, we have been organized as two business segments: AsiaInfo Technologies, encompassing our traditional telecommunications business, and Lenovo-AsiaInfo, providing IT security products and services to China’s enterprise market. For financial reporting purposes, each of the two business segments is further organized into three product lines:

•

software products and solutions;

•

services; and

•

third-party hardware.

Recent Developments

On July 1, 2010, we completed our previously announced business combination with Linkage. Pursuant to the Business Combination Agreement dated December 4, 2009, as supplemented on June 5, 2010 by the Supplemental Agreement, by and among the Company, Linkage, certain shareholders of Linkage, and Libin Sun as agent for the shareholders of Linkage, which we collectively refer to as the Combination Agreement, we purchased from Linkage 100% of the outstanding share capital of its wholly-owned subsidiary, Linkage Technologies Investment Limited, or Linkage Technologies, for $60 million in cash and 26,832,731 shares of our common stock, resulting in Linkage Technologies becoming our wholly-owned subsidiary. In connection with the closing, on July 1, 2010 we changed our corporate name to “AsiaInfo-Linkage, Inc.”

Revenues

We report our revenues on the basis of the three principal types of revenues derived from our business: software products and solutions revenue, service revenue and third-party hardware revenue. We allocate revenues of bundled arrangements in the three categories based on the selling prices of each component as set out in sales contracts. Please refer to Note 19 to the condensed consolidated financial statements included in this report for detailed financial information regarding segment reporting.

Software products and solutions revenue. We typically sell our software as part of a total solutions package for our customers, which includes proprietary software licenses, professional services related to the design and implementation of the solutions (such as consulting, training, technical support and maintenance) and, in cases where the customer requests a turn-key solution, related hardware. Software products and solutions revenue includes 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 or third-party software products in perpetuity, typically up to a specified maximum number of users. In most cases where a customer is required to purchase additional licenses from us because the number of users exceeds the number of licensed users, we enter into an extension agreement with the customer to expand and upgrade the customer’s system. These extension contracts will usually include a license for the additional users, updated versions of our software and, if required, additional services and hardware for the customer’s network. Our software license revenue also includes the benefit of value-added tax rebates on software license sales, which reflect the Chinese government’s policy of encouraging the development of China’s software industry. Software services revenue consists of revenue from software installation, customization, training and other services. We also record reductions from revenue for our estimates of expected software sales returns from distributors based on current sales and historical sales returns.

Service revenue. Service revenue consists of revenue from professional services, including IT services, management consulting, and network planning, design, systems integration and training services.

In addition, in recent periods we have begun to generate service revenues by acting as a sales agent for International Business Machines Corporation, or IBM, or its distributors for certain products sold to China Mobile and its provincial subsidiaries, or the IBM Arrangement. The service fee under the IBM Arrangement is determined as a percentage of the gross contract amount. We have evaluated the criteria outlined in guidance issued by the Financial Accounting Standards Board, or the FASB, regarding reporting revenue gross as principal versus net as an agent, in determining whether to record as revenues the gross amount billed to China Mobile and related costs or the net amount earned after deducting hardware costs paid to the vendor, even though we bear inventory risks after the vendor ships the products to us and we bill gross amounts to China Mobile. We record the net amount earned after deducting hardware costs as agency service revenue because (1) the vendor is the primary obligor in these transactions, (2) we have no latitude in establishing the prices, (3) we are not involved in the determination of the product specifications, (4) we do not bear credit risk because we are contractually obligated to pay the vendor only when China Mobile pays us, and (5) we do not have the right to select suppliers.

Third-party hardware revenue. Other than the IBM Arrangement, we sometimes procure for, and sell hardware to, our customers as part of certain turn-key solutions. We typically minimize our exposure to hardware inventory risks by sourcing equipment from hardware vendors against letters of credit from our customers. For these hardware transactions, we have also evaluated the criteria outlined in FASB guidance. As a result of the evaluation, we record the gross amounts billed to our customers as revenues because (1) we are the primary obligor in these transactions, (2) we bear the inventory risk, (3) we have latitude in establishing prices, (4) we are involved in the determination of the product specifications, (5) we bear credit risk, and (6) we have the right to select suppliers. As the telecommunications-related IT services market in China develops, our customers are increasingly purchasing hardware directly from hardware vendors and retaining us for our software and professional services.

Net revenue (non-GAAP). Although we report our revenue on a gross basis, inclusive of hardware acquisition costs, we manage our business internally based on revenues net of hardware costs, or net revenues (non-GAAP), 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 revenue as against prior periods, but will not adversely impact revenue net of hardware costs. The following table shows our revenue breakdown on this basis and reconciles our net revenues (non-GAAP) to total revenues:


	Reconciliation of Net Revenues (non-GAAP) to Total Revenues
	Three Months Ended June 30,
	2010							2009
	AsiaInfo Technologies		Lenovo- AsiaInfo			Total		AsiaInfo Technologies		Lenovo- AsiaInfo		Total
Revenues net of hardware costs:
Software products and solutions revenue	$	51,773	$	7,347		$	59,120	$	41,776	$	5,375	$	47,151
Service revenue		6,288		97			6,385		5,883		48		5,931
Third-party hardware revenue		62		(7	)		55		253		23		276

Total revenues net of hardware costs		58,123		7,437			65,560		47,912		5,446		53,358
Total hardware costs		1,175		129			1,304		4,786		424		5,210

Total revenues	$	59,298	$	7,566		$	66,864	$	52,698	$	5,870	$	58,568


	Reconciliation of Net Revenues (non-GAAP) to Total Revenues
	Six Months Ended June 30,
	2010							2009
	AsiaInfo Technologies		Lenovo- AsiaInfo			Total		AsiaInfo Technologies		Lenovo- AsiaInfo		Total
Revenues net of hardware costs:
Software products and solutions revenue	$	105,528	$	11,343		$	116,871	$	81,158	$	8,430	$	89,588
Service revenue		10,122		167			10,289		10,730		200		10,930
Third-party hardware revenue		145		(6	)		139		399		101		500

Total revenues net of hardware costs		115,795		11,504			127,299		92,287		8,731		101,018
Total hardware costs		2,746		284			3,030		7,564		962		8,526

Total revenues	$	118,541	$	11,788		$	130,329	$	99,851	$	9,693	$	109,544

We believe total revenues net of hardware costs in each of the segments of our business more accurately reflect our core business, which is the provision of software solutions and services. We also believe this measure provides transparency to our investors because it is the measure used by our management to evaluate the competitiveness and performance of our business in each of the segments. In addition, third-party hardware revenue tends to fluctuate from period to period depending on the requirements of our customers. As a result, a presentation that excludes hardware costs allows investors to better evaluate the performance of our core business and we report this presentation to our chief operating decision maker.

Cost of Revenues

Software products and solutions costs. Software products and solutions costs consist primarily of three components:

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

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

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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 further developing our proprietary software are classified as research and development expenses as incurred.

Service costs. Service costs consist primarily of compensation and travel expenses for the professionals involved in designing and implementing IT services, management consulting and network solutions projects.

Third-party hardware 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.

Amortization of intangible assets, depreciation of properties and equipment, and rental expenses are also included in cost of revenue.

Operating Expenses

Operating expenses are comprised of sales and marketing expenses, general and administrative expenses, and research and development expenses. 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, sales commissions and sales consulting fees, as well as the depreciation and amortization expenses allocated to our sales and marketing departments.

Research and development expenses relate to the development of new software and the modification of 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 and VIEs. Prior to the enactment of China’s new Chinese Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, foreign-invested enterprises, or FIEs, were generally subject to a 30% state enterprise income tax plus a 3% local income tax. However, most of our operating subsidiaries in China, as FIEs, were entitled to tax holidays or certain preferential tax treatments, which thus reduced their effective rate of income tax to 15% or lower in some cases. Since the EIT Law became effective, all resident enterprises are subject to a flat 25% income tax rate, unless they are otherwise eligible for certain preferential tax treatments under the new rules.

Pursuant to the implementation rules to the EIT Law issued in December 2007, and the several subsequent transition rules, certain of our subsidiaries in China can continue to enjoy preferential tax rates, as long as they are qualified as high and new technology enterprises, or HNTEs. Some of our subsidiaries and VIEs in China became subject to a normal 25% income tax rate, while certain of our subsidiaries and VIEs in China remain eligible for the lower rates under the transition rules. The HNTE status allows qualifying entities to be eligible for a 15% tax rate for three years. At the conclusion of the three-year period, the qualifying enterprise has the option to renew its HNTE status for an additional three years through a simplified application process if such enterprise’s business operations continue to qualify for HNTE status. After the first six years, the enterprise would have to complete a new application process in order to renew its HNTE status. As of December 2009, we had received certification of HNTE status for AsiaInfo Technologies, AsiaInfo Technologies (Chengdu), or AICD, and Lenovo Security, which allows for a reduced 15% tax rate starting January 1, 2009. Accordingly, we have used the reduced rate of 15% in the calculations of current and deferred tax balances for AICD. AsiaInfo Technologies was approved as a key software enterprise, and it is eligible for the preferential tax rate of 10% for 2008 and 2009 and 15% for 2010. Lenovo Security was subject to an applicable tax rate of 0% from 2005 to 2007 and 7.5% from 2008 to 2009. If Lenovo Security continues to maintain its HNTE status in 2010, then it will remain subject to an applicable tax rate of 12.5% in 2010.

Sales of hardware procured in China are subject to a 17% value-added tax. Most of our sales of hardware procured outside of China are made through our U.S. parent company, AsiaInfo-Linkage, Inc., and thus are not subject to the value-added tax. We effectively pass value-added tax on hardware sales through to our customers and do not include them in revenues reported in our financial statements. Companies that develop their own software and register the software 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 and software-related services, the excess portion of the value-added tax is refundable immediately. This policy is effective until the end of 2010. The benefit of the rebate of value-added tax is included in software revenue. Historically, the value-added tax refund is not taxable for income tax purposes as long as the refund is used for research and development activities. However, according to a new tax circular which was issued by the PRC State Administration of Taxation in January 2009, although the value-added tax refund would remain non-taxable when the refund is used for expenses or purchase of or expenses associated with fixed assets, the expenses and depreciation associated with such fixed assets are not tax deductible for income tax purposes. This circular also stipulates that any VAT refund not spent after five years since being received shall be treated as taxable income. It is unclear how this new rule will be implemented and in the absence of specific guidance we are treating the value-added tax refund received as a non-taxable item for income tax purposes till the five-year period ends.

Our PRC subsidiaries and VIEs are subject to business tax at the rate of 3% and 5%, respectively, on certain types of service revenues, which are presented in our statements of operations net of business tax incurred. Business taxes deducted from revenues during the six-month periods ended June 30, 2010 and 2009 were $3.9 million and $3.0 million, respectively.

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

Foreign Exchange

A majority of our revenues and expenses relating to the hardware, software and service components of our business are denominated in Renminbi, or RMB. The value of our shares will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while our shares are traded in U.S. dollars. Furthermore, an increase in the value of the RMB may require us to exchange more U.S. dollars into RMB in order 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 RMB and the U.S. dollar when we believe such adjustments will reduce our foreign exchange risks. For example, in February 2004 we exchanged approximately $28.0 million cash from U.S. dollars to RMB in order to address concerns regarding a possible increase in the relative value of the RMB. We did not engage in any significant foreign exchange transactions in the six-month period ended June 30, 2010.

As of June 30, 2010, approximately 56.1%, or $129.0 million, of our cash, cash equivalents and restricted cash were RMB-denominated and approximately 43.9%, or $101.0 million, were U.S. dollar-denominated. Pursuant to the rate of exchange quoted by People’s Bank of China as of June 30, 2010, the exchange rate between the U.S. dollar and the RMB was US$1.00 = RMB6.7909, compared to the rate of US$1.00=RMB6.8319 as of June 30, 2009.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with US GAAP. 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, as well as the reported amount of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenues and cost of revenues under customer contracts, warranty obligations, bad debts, inventories, short-term investments, long-term investments, long-lived assets, income taxes, goodwill and other intangible assets, stock options, 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. Our revenue is derived from three primary sources: (i) software license and related services, including assistance in implementation, customization and integration, post-contract customer support, or PCS, training and consulting; (ii) professional services for systems design, planning, consulting, and system integration; and (iii) the procurement of hardware on behalf of our customers.

Revenues from customer orders requiring significant production, modifications, or customization of the software are recognized over the service period based on the percentage of completion method as prescribed by US GAAP. Software arrangements with significant production, modifications, or customization are sold with bundled PCS services. Because PCS services have never been sold separately in these arrangements, they do not have stand-alone fair value or vendor specific objective evidence of fair value. The percentage of completion method of revenue recognition is therefore applied to the period from the start of the significant production, modifications, or customization through the last element delivered, which is typically the end of the bundled PCS service period. Revisions in estimated contract costs 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.

The information security products sold by our Lenovo-AsiaInfo division are accounted for under US GAAP because the related software is considered to be more than incidental and is essential to the functionality of the related equipment. These information security products are sold bundled with PCS services over a term of one, two or three years.

For contracts entered into before December 31, 2008, we recognized the total arrangement fees for the information security products as revenue upon delivery assuming all other revenue recognition criteria were met regardless of whether the PCS services terms are one, two or three years because (a) PCS services primarily included telephone and online support, (b) PCS services were substantially provided within the first year of the arrangement term, (c) the costs of providing PCS services had historically been insignificant and were expected to be insignificant in the future, and (d) PCS services did not include upgrades or enhancements. PCS services provided beyond the first year of the service term had historically been negligible. We accrued the estimated costs of providing PCS services upon delivery of our Lenovo-AsiaInfo information security software products.

For contracts entered into after January 1, 2009, we extended PCS services terms to include unspecified upgrades. In addition, we have established vendor-specific objective evidence of fair value of the PCS services. Therefore, the security products revenue is now recognized upon delivery and the PCS services revenue is deferred and recognized ratably over the PCS services period.

Consulting and other professional services revenues are recognized when the services are performed. Sales of third-party hardware, if not bundled with other arrangements, are recognized when delivered if all other revenue recognition criteria are met. Costs associated with revenues are recognized when incurred.

Revenue recognized in excess of billings is recorded as unbilled receivables and is included in trade accounts receivable. Amounts billed but not yet collected are recorded as billed receivables and are included in trade accounts receivable. All billed and unbilled amounts are expected to be collected within one year. Billings for installation and customization services are rendered based on agreed upon milestones specified in customer contracts. Billings in excess of revenues recognized are recorded as deferred revenue.

Income taxes. Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, including net operating loss carry forwards and credits. It is computed by applying statutory tax rates applicable to future years. According to the new EIT Law, the transitional rules and relevant regulations, the eligible tax rate for AsiaInfo Technologies is 10% for 2009 and 15% for 2010 and 2011; the eligible tax rate for AICD is 15% for 2009 to 2011; and the eligible rate for Lenovo Security is 7.5% for 2009, 12.5% for 2010 and 15% for 2011. Unless otherwise specified, our other Chinese subsidiaries and VIEs are subject to the statutory tax rate of 25%.

Under the EIT Law, a “resident enterprise,” which may include an enterprise established outside of the PRC with management located in the PRC, will be subject to PRC income tax. We believe we and our subsidiaries registered outside the PRC are not resident enterprises under the EIT law.

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 assets in the future, an adjustment to the valuation allowance would be charged to income in the period such change occurred.

Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.

Goodwill. The excess of the purchase price over the fair value of net assets acquired is recorded on our consolidated balance sheets as goodwill. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. We perform our annual goodwill impairment test on October 1 of each fiscal year for all reporting units. Goodwill is tested following a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. We recognized no impairment loss on goodwill in the second quarter of 2010 and 2009.

Impairment of long-term and short-term investments. We review our long-term and short-term investments for other-than-temporary impairment in accordance with relevant accounting literature, based on the specific identification method. We consider available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds the investment’s fair value, we consider, among other factors, general market conditions, government economic plans, the duration and the extent to which the fair value of the investment is less than the cost, and our intent and ability to hold the investment. We recognized no impairment loss on long-term or short-term investments in the second quarter of 2010 and 2009.

Consolidated Results of Operations

Revenues. Total revenues were $66.9 million for the three-month period ended June 30, 2010, representing a 14.2% increase over the year ago period and a 5.4% increase sequentially. Total revenue for the first half of 2010 was $130.3 million, an increase of 19.0% year-over-year. The year-over-year and sequential increases were driven by strong demand from China’s major telecom carriers.

Software products and solutions revenue was $59.1 million for the three-month period ended June 30, 2010, representing an increase of 25.4% over the comparable period in 2009 and a 2.4% sequential increase. Software products and solutions revenue was $116.9 million for the six-month periods ended June 30, 2010, which was a year-over-year increase of 30.5%. The year-over-year increase was mainly due to growth in both our telecommunications software business and our IT security business. Telecommunications software products and solutions revenue for the three-month period ended June 30, 2010 was $51.8 million, representing a year-over-year increase of 23.9% and a sequential decrease of 3.7%. Telecommunications software products and solutions revenue for the six-month period ended June 30, 2010 was $105.5 million, representing a year-over-year increase of 30.0%. The year-over-year increases were mainly due to strong uptake for our telecommunications customers with an increasing number of contracts we have entered into to upgrade and maintain their existing systems. Software products and solutions revenue from our IT security business in the three-month period ended June 30, 2010 was $7.3 million, representing a 36.7% year-over-year increase and an 83.9% sequential increase. Software products and solutions revenue from our IT security business in the six-month period ended June 30, 2010 was $11.3 million, representing a 34.6% year-over-year increase. These increases were mainly due to customers’ demand for professional consultants to assist in the installation and maintenance of IT solutions. The sequential increase was partially due to seasonality, as sales in our Lenovo-AsiaInfo business unit typically strengthen as the year proceeds.

Service revenue was $6.4 million in the three-month period ended June 30, 2010, representing an increase of 7.7% over the comparable period in 2009 and a 63.6% sequential increase. The sequential increase was primarily due to lower integration service revenue in the first quarter, which is a seasonally slow quarter. Service revenue was $10.3 million in the six-month period ended June 30, 2010, representing a decrease of 5.9% over the comparable period in 2009.

Third-party hardware revenue for the three-month period ended June 30, 2010 was $1.4 million, representing a year-over-year decrease of 75.2% and a sequential decrease of 24.9%. Third-party hardware revenue for the six-month period ended June 30, 2010 was $3.2 million, representing a decrease of 64.9% year-over-year. Third-party hardware revenue has been generally decreasing for many years as we have gradually shifted our focus to our software product solutions business. However, from time to time we offer third-party hardware for certain projects in response to customer requests.

Our Lenovo-AsiaInfo business unit contributed $7.6 million, or 11.3%, of our total revenue in the three-month period ended June 30, 2010, including a 12.4% contribution to software products and solutions revenue and a 1.5% contribution to service revenue. Overall, total revenue for our Lenovo-AsiaInfo business unit increased 28.9% over the year-ago period and 79.2% sequentially. Our Lenovo-AsiaInfo business unit contributed $11.8 million, or 9.0%, of our gross revenue in the six-month period ended June 30, 2010, representing an increase of 21.6% over the year-ago period. Our AsiaInfo Technologies business unit contributed $59.3 million, or 88.7%, of our total revenue in the three-month period ended June 30, 2010. Overall, total revenue for the AsiaInfo Technologies business unit increased by 12.5% over the year-ago period and increased 0.1% sequentially. Our AsiaInfo Technologies business unit contributed $118.5 million, or 91.0%, of our gross revenue in the six-month period ended June 30, 2010, representing an increase of 18.7% over the year-ago period.

During the second quarter, sales to our top three customers, China Mobile, China Unicom and China Telecom (and their respective provincial subsidiaries), accounted for approximately 87.5% of our total revenue.

Our revenues are impacted by a variety of customer-specific factors beyond our control. For instance, although we previously indicated our expectation that full year 2010 net revenue (non-GAAP) for AsiaInfo on a standalone basis would increase in the range of 25-30%, we now expect the increase in net revenue (non-GAAP) for AsiaInfo-Linkage on a pro forma basis to be in the range of 15-20%, primarily because projects in certain China Unicom and China Telecom accounts have been temporarily delayed.

Cost of revenues. Our cost of revenues was $27.1 million in the three-month period ended June 30, 2010, representing a decrease of 8.9% over the comparable period in 2009. Cost of revenues in the second quarter increased 11.0% compared to the preceding quarter. The year-over-year decrease in cost of revenues was primarily due to the decrease in the low-margin revenue from third-party hardware sales, and the sequential increase in cost of revenues was in line with the changes in total revenues for the same periods. Our cost of revenues was $51.6 million in the six-month period ended June 30, 2010, representing a decrease of 3.1% over the comparable period in 2009.

Gross profit. Our gross profit margin in the three-month period ended June 30, 2010 was 59.4%, compared to 49.1% in the same period in 2009 and 61.5% in the preceding quarter. The year-over-year increase in gross margin reflected an increase in revenues from higher-margin software solutions and services and a decrease in revenue from lower-margin, third-party hardware sales.

Operating expenses. Our operating expenses in the second quarter of 2010 were $25.2 million, representing an increase of 12.6% over the comparable period in 2009 and 10.0% sequential decrease. The sequential decrease was primarily due to certain non-recurring combination-related expenses as well as bad debt provision incurred in the preceding quarter. Our operating expenses in the first half of 2010 were $53.2 million, representing an increase of 21.6% over the comparable period in 2009. The increases were due to increased sales and marketing, research and development, and general administrative expenses, discussed below.

Sales and marketing expenses were $10.8 million for the second quarter of 2010, representing an increase of 8.8% over the comparable period in 2009 and a 4.8% sequential increase. Sales and marketing expenses were $21.1 million for the first half of 2010, representing an increase of 3.2% over the comparable period in 2009. Those increases were mainly due to higher sales commission expenses incurred upon signing new contracts and in line with the increase of sales headcount, offset in part by improved operational efficiency.

General and administrative expenses were $4.6 million for the second quarter of 2010, representing an increase of 25.9% over the comparable period in 2009 and a 46.9% sequential decrease. General and administrative expenses were $13.3 million for the first half of 2010, representing an increase of 83.7% over the comparable period in 2009. The year-over-year increase and sequential decrease was primarily due to $3.5 million in combination-related expenses incurred in the first quarter of 2010.

Research and development expenses were $9.8 million for the second quarter of 2010, representing an increase of 11.2% over the comparable period in 2009 and an 8.7% sequential increase. Research and development expenses were $18.8 million for the first half of 2010, representing an increase of 17.3% over the comparable period in 2009. The research and development expenses are in line with our strategy of continuing to invest in the research and development of world-class products.

Total other income, net. Total other income, including interest income, dividend income, and other income (expenses), net, in the second quarter of 2010 was $1.4 million, representing a decrease of 19.5% over the comparable period in 2009 and an increase of 112.5% over the preceding quarter. Total other income in the first half of 2010 was $2.1 million, representing a decrease of 17.8% over the comparable period in 2009. The year-over-year decrease was primarily due to lower investment gains, and the sequential increase was primarily due to the sale of certain short-term investments and dividend income in the second quarter of 2010.

Net income. Net income was $13.5 million for the second quarter of 2010, representing an increase of 87.0% over the comparable period in 2009 and an increase of 35.8% sequentially. Net income was $23.4 million for the first half of 2010, representing an increase of 80.1% over the comparable period in 2009.

Net income attributable to AsiaInfo-Linkage, Inc. Net income attributable to AsiaInfo-Linkage, Inc. for the second quarter of 2010 was $13.9 million, or $0.29 per basic share, compared to $7.2 million, or $0.16 per basic share, for the year-ago period, and $10.3 million, or $0.22 per basic share, for the previous quarter. Net income attributable to AsiaInfo-Linkage, Inc. for the first half of 2010 was $24.3 million, or $0.51 per basic share, compared to $13.0 million, or $0.30 per basic share, for the year-ago period.

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. With respect to our billing cycle, 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. However, we sometimes obtain less favorable payment terms from our customers, thereby increasing our working capital requirements. In addition to this careful management of our billing cycle, we have also historically financed working capital and other capital requirements through private placements of equity securities, our initial public offering in 2000 and, to a limited extent, bank loans.

Our net cash used in operating activities for the six-month period ended June 30, 2010 was $11.6 million. This was primarily attributable to our net income of $23.4 million, adjusted by a net non-cash related expenses of $7.8 million and a net increase in the components of our working capital of $42.8 million.

Our accounts receivable balance as of June 30, 2010 was $120.9 million, consisting of $52.3 million in billed receivables and $71.5 million in unbilled receivables. Our billed receivables are recorded based on agreed-upon milestones included in our customer contracts. Our unbilled receivables are based on the revenues that we have booked through the percentage completion method, but for which we have not yet billed the customer. The IBM Arrangement related accounts receivable balance as of June 30, 2010 was approximately $28.0 million. Our days sales outstanding as of June 30, 2010 was 117 days, as compared to last quarter’s 104 days. When calculating our days sales outstanding, we have adjusted for the net effect of the IBM Arrangement.

Our inventory position at the end of the second quarter of 2010 was approximately $8.5 million, as compared to $9.5 million as of December 31, 2009.

Our accounts payable balance as of June 30, 2010 was approximately $51.4 million, compared to $76.0 million as of December 31, 2009. As of June 30, 2010, our accounts payable balance related to the IBM. Arrangement was approximately $36.7 million under which we are contractually obligated to pay our vendor only when China Mobile pays us.

Our net cash used in investing activities for the six-month period ended June 30, 2010 was $7.3 million. This was primarily due to our purchase of Hangzhou Zhongbo for $4.1 million, net of cash acquired.

Our net cash provided by financing activities for the three-month period ended June 30, 2010 was $3.6 million. This was primarily due to proceeds we received from the exercise of stock options.

As of June 30, 2010, we had cash and cash equivalents and restricted cash totaling $230.0 million and short-term investments totaling $44.2 million.

As of June 30, 2010, we had total short-term credit facilities of $32.0 million for working capital purposes, expiring in March 2011, which were secured by bank deposits of $5.0 million. As of June 30, 2010, unused short-term credit facilities were $25.6 million and used facilities totaled $6.4 million. The used facilities were pledged as security for issuing standby letters of credit and trade notes payable to hardware suppliers and customers. Additional bank deposits of $0.9 million were used for issuing standby letters of credit and bank acceptance drafts as of June 30, 2010. Total bank deposits pledged as security for these credit facilities totaled $5.9 million as of June 30, 2010 and are presented as restricted cash in our consolidated balance sheets.

We anticipate that our 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 2010. We may need to raise additional funds in the future, however, in order to fund acquisitions, develop new or enhanced services or products, respond to competitive pressures to compete successfully for larger projects involving higher levels of hardware purchases, or if our business otherwise grows more rapidly than we currently predict. We anticipate that we would raise additional funds, if necessary, through new issuances of shares of our equity securities in one or more public offerings or private placements, or through credit facilities extended by lending institutions.

In the event that we decide to pay dividends to our stockholders, 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 RMB into foreign currencies.

Off-Balance Sheet Arrangements

We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as stockholders’ equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

As of June 30, 2010, we had short-term credit facilities for working capital purposes totaling $32.0 million, expiring in March 2011, of which $6.4 million had been used for issuing standby letters of credit and trade notes payable to hardware suppliers and customers. Unused short-term credit facilities were $25.6 million.

Accounting Pronouncements

(1) Newly Adopted Accounting Pronouncements

In June 2009, the FASB issued an authoritative pronouncement that changes how a company determines whether an entity should be consolidated when such entity is insufficiently capitalized or is not controlled by the company through voting (or similar rights). The determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design and the company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The pronouncement retains the scope of previously issued pronouncement but added entities previously considered qualifying special purpose entities, since the concept of these entities was eliminated by the FASB. The pronouncement is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The adoption of this pronouncement did not have a significant impact on our consolidated financial position or results of operations.

(2) Recently Issued Accounting Pronouncements Not Yet Adopted

In September 2009, the FASB issued an authoritative pronouncement regarding revenue arrangements with multiple deliverables. This pronouncement was issued in response to practice concerns related to accounting for revenue arrangements with multiple deliverables under the existing pronouncement. Although the new pronouncement retains the criteria from the existing pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the separation criterion under the existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. The new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date or retrospectively for all periods presented. Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. We are in the process of evaluating the effect of adoption of this pronouncement.

In September 2009, the FASB issued an authoritative pronouncement regarding software revenue recognition for arrangements with multiple deliverables. This pronouncement addresses how consideration should be allocated to different units of accounting and removes the previous criterion that entities must use objective and reliable evidence of fair value in separately accounting for deliverables. The pronouncement provides that products containing both software and non-software components that function together to deliver the product’s essential functionality are excluded from the scope of current revenue recognition guidance for software products. The pronouncement includes factors that entities should consider when determining whether the software and non-software components function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date or retrospectively for all periods presented. Early application is permitted. However, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. We are in the process of evaluating the effect of adoption of this pronouncement.

In March 2010, FASB issued an authoritative pronouncement regarding the effect of denominating the exercise price of a share-based payment awards in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity’s functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The pronouncement will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. We do not believe the adoption of this pronouncement will significantly impact our financial position or results of operations.

In April 2010, the FASB issued an authoritative pronouncement regarding the milestone method of revenue recognition. The scope of this pronouncement is limited to arrangements that include milestones relating to research or development deliverables. The pronouncement specifies criteria that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The criteria apply to milestones in arrangements within the scope of this pronouncement regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronouncement will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Affected entities can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. We are in the process of evaluating the effect of adoption of this pronouncement.

For information concerning certain risks that may affect our operating results and the value of our common stock, please see the factors discussed under the heading of “Risk Factors” in Part II, Other Information below and in the other reports we file with the SEC from time to time.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risk primarily associated with our cash and short-term investments. To date, we have not entered into any types of derivatives to hedge against interest rate changes. There have been no significant changes in our exposure to changes in interest rates for the quarter ended June 30, 2010. Our exposure to interest rate changes is limited as we do not have any material borrowings.

We are exposed to exchange rate risk in connection with the relative value of the U.S. dollar and the RMB. Substantially all of our revenues and expenses relating to the service and software components of our business are denominated in RMB. As of June 30, 2010, approximately 56.1%, or $129.0 million, of our cash, cash equivalents and restricted cash were RMB-denominated and approximately 43.9%, or $101.0 million, were U.S. dollar-denominated. As of that date, the rate of exchange quoted by the People’s Bank of China was US$1.00 = RMB6.7909. If the exchange rate were to increase by 10% to US$1.00 = RMB7.4700, our net assets would potentially decrease by $21.4 million. If the exchange rate were to decrease by 10% to US$1.00 = RMB6.1118, our net assets would potentially increase by $26.2 million.

The value of our shares may be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while our shares are traded in U.S. dollars. Furthermore, an increase in the value of the RMB may require us to exchange more U.S. dollars into RMB to meet the working capital requirements of our subsidiaries and VIEs 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 RMB and the U.S. dollar when we believe such adjustments will reduce our foreign exchange risk. For example, in February 2004 we exchanged approximately $28 million cash in U.S. dollars into RMB in anticipation of increases in the value of the RMB. We did not engage in any significant foreign exchange transactions during the six-month period ended June 30, 2010.

As in any other business, we are subject to the risk of macroeconomic changes such as recessions and inflation.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

In December 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 our IPO. The lawsuit alleged violations of the U.S. federal securities laws and was docketed in the U.S. 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 of their purchasing shares in our IPO. The lawsuit further claimed that the alleged 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, or the IPO Allocation 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.

In April 2009, we and most of the other issuer defendants in the IPO Allocation Cases reached a definitive agreement with the plaintiffs and the underwriter defendants to settle the IPO Allocation Cases. The agreement was filed with the court in April 2009 and a final approval was granted by the court in October 2009. The final approval was subject to appeal until November 2009. Several objectors filed timely appeals and those appeals remain pending. If the settlement is approved, we expect any damages payable to the plaintiffs to be fully funded by our directors’ and officers’ liability insurance policies. If the litigation proceeds, we intend to continue to defend the litigation vigorously. Moreover, if the litigation proceeds, 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.

In addition, in June 2007 we received a letter from a putative stockholder demanding that we investigate and prosecute a claim for alleged short-swing trading in violation of Section 16(b) of the Exchange Act by the underwriters of our IPO and certain of our unidentified directors, officers and stockholders. In October 2007, the putative stockholder commenced a civil lawsuit in the U.S. District Court for the Western District of Washington against Morgan Stanley and Deutsche Bank, two of the lead underwriters of our IPO, alleging violations of Section 16(b) of the Exchange Act. The complaint alleges that the combined number of shares of our common stock beneficially owned by the lead underwriters and certain unnamed officers, directors and principal stockholders exceeded ten percent of our outstanding common stock from the date of our IPO in March 2000, for at least one year. It further alleges that those entities and individuals were thus subject to the reporting requirements of Section 16(a) and the short-swing trading prohibition of Section 16(b), and failed to comply with those provisions. The complaint seeks to recover from the lead underwriters any “short-swing profits” obtained by them in violation of Section 16(b). None of our directors, officers or stockholders is named as defendants in this action, although we are named as a nominal defendant. In July 2008, we, together with several other issuers who are also named as nominal defendants in the action, filed a joint motion to dismiss the action. In March 2009, the court granted our motion, dismissing the complaint without prejudice on the ground that the plaintiff failed to make an adequate demand to us prior to filing the complaint. The plaintiff subsequently appealed the judgment to the Court of Appeals for the Ninth Circuit, and the underwriter defendants have filed certain cross-appeals. Briefing with respect to these appeals concluded in November 2009 and the appeals remain pending.

We intend to continue to defend vigorously the two litigation matters described above. While we cannot guarantee the outcome of these proceedings, we believe that the final results of these lawsuits will have no material effect on our consolidated financial condition, results of operations, or cash flows.

During the fiscal quarter ended June 30, 2010, we did not have any other material legal proceedings brought against us. No further material developments occurred in connection with any previously reported legal proceedings against us during the last fiscal quarter.

ITEM 1A.

RISK FACTORS

Set forth below are the risk factors we have revised from those appearing in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, filed with the SEC on March 16, 2010 and amended on April 30, 2010, or the 2009 Form 10-K, and in Part II, Other Information, Item 1A of our last Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed with the SEC on May 7, 2010, or the Q1 2010 Form 10-Q. In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed under the heading “Risk Factors” in our 2009 Form 10-K and Q1 2010 Form 10-Q, as well as information in our other reports filed with the SEC from time to time. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position and/or operating results.

Integrating the business of Linkage into our business will divert management’s attention and resources, and the anticipated benefits of the combination, including anticipated cost savings, may not be realized fully or at all or may take longer to realize than expected.

Our business combination with Linkage involves the integration of two companies that have previously operated independently with principal offices in two distinct locations. We will be required to devote significant management attention and resources to integrating the two companies. In the process of integration, the combined company may face difficulties in retaining customers and personnel, as well as in combining financial reporting systems, training personnel, and forecasting combined company financial results. If we fail to successfully integrate the business of Linkage with our business, we may not achieve the revenues growth we expect to accomplish from the combination. Even if we are able to integrate Linkage’s business operations successfully, this integration may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from this integration. Moreover, these benefits may not be achieved within a reasonable period of time, if at all.

ITEM 5.

OTHER INFORMATION

Our 2010 annual stockholders’ meeting will be held on September 29, 2010 at 3:00 p.m. Beijing time at 4th Floor, Zhongdian Information Tower, 6 Zhongguancun South Street, Haidian District, Beijing, People’s Republic of China. Because the date of the 2010 annual stockholders’ meeting is more than 30 days after the anniversary of the 2009 annual stockholders’ meeting, in accordance with Rule 14a-8 under the Exchange Act, stockholder proposals that are intended to be presented by stockholders at our 2010 annual meeting of stockholders must be received by our Corporate Secretary at our principal executive offices a reasonable time before we begin to print and send our proxy materials, which we regard as August 13, 2010, in order to be considered for inclusion in our proxy statement and form of proxy/voting instruction card.

ITEM 6.

EXHIBITS

Please see Exhibit Index.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, AsiaInfo-Linkage, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	AsiaInfo-Linkage, Inc.

Date: August 6, 2010	By:	/s/ Wei Li
	Name:	Wei Li
	Title:	Vice President and Chief Financial Officer
		(signing on behalf of the registrant and as principal financial officer)

EXHIBIT INDEX

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

Incorporated by Reference

Exhibit

No.

Exhibit Title

Filed
Herewith

Form

Exhibit
No.

File No.

Filing
Date

10.1

Supplemental Agreement, dated June 5, 2010, by and among the Company, Linkage Technologies International Holdings Limited and the other parties thereto

8-K

10.1

001-15713

6/7/2010

10.2

Form of Lock-Up Agreement, dated June 5, 2010

8-K

10.2

001-15713

6/7/2010

10.3*

Master Employment Agreement (including Confidentiality and Non-Competition Agreement, PRC Employment Contract, and Change of Control Severance Agreement), dated as of June 5, 2010, with Libin Sun

8-K

10.3

001-15713

6/7/2010

10.4*

Master Employment Agreement (including Confidentiality and Non-Competition Agreement, PRC Employment Contract, and Change of Control Severance Agreement), dated as of June 5, 2010, with Xiwei Huang

8-K

10.4

001-15713

6/7/2010

10.5*

Master Employment Agreement (including Confidentiality and Non-Competition Agreement, PRC Employment Contract, and Change of Control Severance Agreement), dated as of June 5, 2010, with Guoxiang Liu

8-K

10.5

001-15713

6/7/2010

31.1

Certification of Principal Executive Officer required by Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 6, 2010

31.2

Certification of Principal Financial Officer required by Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 6, 2010

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, dated August 6, 2010

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, dated August 6, 2010

*	Management contract, or compensatory plan or arrangement.