WASHINGTON (FORTUNE) - Facing blistering new attacks from human rights advocates in Congress, Yahoo, Google, Microsoft and Cisco (Research) argued Wednesday that they are doing more good than harm in China even as they cooperate with the repressive government there.

Appearing before Congress for the first time to discuss China, the companies said they face a stark choice -- obey draconian censorship laws or leave. China is home to more than 110 million Internet users, second only to the U.S.

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One important difference did emerge among the U.S. companies. Google (Research) and Microsoft (Research) said they would keep data about their Chinese users private by locating e-mail and blogging services outside of the country. But Yahoo (Research), which since last fall has operated in partnership with a Chinese firm, Alibaba.com, admitted it cannot protect the privacy and confidentiality of its Chinese customers from the authorities.

All the company officials said that enabling a censored Internet to grow in China is better than having no Internet at all, or one controlled by Chinese search companies.

"The Internet is a positive force in China," said Michael Callahan, senior vice president at Yahoo, which came under harsh criticism. He said the company is "very distressed" about the fact that Yahoo had inadvertently helped China imprison at least one dissident.

Google's censored search engine, called google.cn, "will make a meaningful -- though imperfect -- contribution to the overall expansion of access to information in China," said Elliot Schrage, Google's vice president of public affairs.

Under pointed questioning about Google's role in abetting censorship, Schrage said: "I am not ashamed of it, and I am not proud of it."

Microsoft, meanwhile, said that its MSN Spaces blogging service has attracted 3.5 million users and more than 15 million readers since its introduction in May. Jack Krumholtz, Microsoft's top Washington operative, said the company was "deeply troubled" by the requirement that it censor blogs but said that, as a result of the blogs, "There's more opportunity for freedom of expression in China today."

Neither the congressional critics nor human rights activists were impressed.

They accused the tech firms of helping Chinese authorities spread disinformation and become more repressive. Several critics said that, at minimum, all the U.S. companies should move confidential information about their Chinese users out of the country, as Google has decided to do.

U.S. Rep. Chris Smith, who chaired the House subcommittee hearing, compared the tech company's actions to IBM's collaboration with Nazi Germany during World War II. Smith, a New Jersey Republican, dismissed the claim by firms that they have to obey local laws.

"If the secret police a half century ago asked where Anne Frank was hiding, would the correct answer be to hand over the information in order to comply with local laws?" Smith asked. "We must stand with the oppressed, not the oppressors."

U.S. Rep. Tom Lantos, a California Democrat and a Holocaust survivor, was even sharper in his attacks.

"Your abhorrent activities in China are a disgrace," Lantos told the tech executives. "I simply do not understand how your corporate leadership sleeps at night."

Several critics singled out Yahoo for providing the Chinese government with the identities of its customers, including a dissident named Shi Tao, who was sentenced to 10 years in prison. Yahoo's Callahan, while expressing regret, explained that the company had "no information about the nature of the investigation" when it identified Shi.

Because Yahoo has merged its China business with Alibaba.com, it is in a particularly difficult position. Callahan said he could not even tell Congress how often it opened its files to the Chinese government because that information would violate Chinese law. "We no longer operate the company on a day-to-day basis," he said.

All the companies tried to deflect criticism by saying they could not bring reform on their own. "These issues are larger than any one company or any one industry," said Callahan.

Nevertheless, the spotlight will remain on the tech firms. Smith has said he'll introduce legislation to regulate U.S. firms' activities in China. Activist shareholders say they will file resolutions.

Already, the controversy has taken some of the glow off the image promoted by Internet firms like Yahoo and Google.

As Congressman Lantos put it: "These companies tell us that they will change China. But China has already changed them."