As Phorm Inc. built a system that watches consumers' Web surfing in order to deliver targeted advertising, CEO Kent Ertugrul believed the British company was doing everything possible to respect, and actually enhance, Internet privacy.

Phorm even won approval from a noted privacy activist. And in the meantime, NebuAd Inc., a company with a similar technology, started working in the U.S. without much furor.

Yet guess what greeted Phorm's emergence this year: A privacy outcry.

Blogs with names like BadPhorm and Dephormation sprung up to advocate boycotts of companies working with Phorm. Internet policy analysts argue that it violates British wiretap laws.

The opposition probably won't stop Phorm. British officials have affirmed its legality. But the underlying story is a cautionary tale. As marketers try to pinpoint Internet advertising more effectively, Phorm's experience indicates how deeply privacy perceptions matter.

Phorm and NebuAd have a high bar to acceptance, because their technologies sound intrusive. Although these companies operate in slightly different ways, both work with Internet service providers to scan their customers' Web traffic. By analyzing the consumers' surfing patterns, Phorm and NebuAd determine which advertisements are likely to interest them.

So if you visit several sites with reviews and prices for Jaguar autos, NebuAd or Phorm can consider you a potential Jaguar buyer. Then sites that participate in the ad networks created by NebuAd or Phorm can be triggered to show you an ad for Jaguars or competing cars, while someone else sees a different ad.

Both companies say that while their Web detectors are attuned to users' interests, they don't register visits to sites related to "sensitive" subjects like health or sex. They also don't read e-mails, banking sessions or postings on social networking sites.

Also, NebuAd and Phorm do not track consumers by name, but rather by long strings of digits that are considered impossible to reverse-engineer so as to determine their source. NebuAd generates its number by running a consumer's Internet Protocol address through a cryptographic system known as a one-way hash. Phorm uses another approach that creates a random string that changes from session to session.

Privacy advocates point out that with enough data, even anonymous profiles can be exposed as belonging to particular people. After all, there are only so many people who have plumbed the Web for information on cats, Chevrolets, porch swings, pool tables and trips to Zanzibar.

But Phorm doesn't let consumer fingerprints get that detailed. It will discard a marketing profile that isn't shared by at least 5,000 other people, Ertugrul said.

Phorm's protections pleased Simon Davies, founder of watchdog Privacy International. After Phorm hired Davies' consulting business, 80/20 Thinking Ltd., to review its practices, Davies pronounced the technology "privacy friendly."

In contrast, Davies noted, search engines retain detailed logs of their users' queries, often for years. "Google and other companies have deployed technologies far worse than anything Phorm could have ever dreamt up," he said.