With its new cookie-screening feature that lets surfers know who's tracking them, Microsoft's Internet Explorer 5.5 has created yet another headache for online advertisers and e-commerce sites. But the feature is manna from heaven to privacy groups such as Junkbusters.com, which is still fuming about the Federal Trade Commission's (FTC) acceptance of what they consider inadequate privacy regulations.

Proposed and adopted by ad networks last week and now before the Senate Commerce Committee, the regulations include so-called informed choice, which means NAI members place "large and conspicuous notice" of their cookie-tracking practices. As surfers are being notified, according to the regulations, they can then choose whether to opt-out of being tracked.

Jeff Connaughton of the Network Advertising Initiative (NAI), a spokesperson for a coalition of online advertisers that includes Alley-based DoubleClick, Real Media and 24/7, believes that Microsoft's new screening feature is "an overbroad technological solution that demonizes all cookies." Connaughton asked: "Why does it treat all third party cookies differently then first party cookies?"

The NAI and its constituency of ad networks are concerned that users will block all cookies in an effort to retain privacy, while denying them the information they need to target advertising.

But privacy groups such as Junkbusters.com feel that conducting online surveillance of users ("cookie-ing") without notifying them is a gross invasion of privacy.

Ad networks contend that their "informed choice and consent" self-regulation is a fair balance to the privacy needs of consumers and the information needs of advertisers. These network members believe market-based privacy software that blocks all cookies, regardless of their purpose, does the user a disservice because it doesn't allow ad networks to properly market to users and undercuts the Web's ability to personalize a buyer's experience.

To Connaughton and other members of the NAI, the Internet is an ad-supported medium, unique in its application. Ad networks, of course, can collect extensive, targeted information about a Web user -- down to such granular details as which shade of make-up a user bought to how often folks check their stocks. This information helps ad networks place targeted banner ads designed to increase click-through rates and ultimately boost purchases.

Even While Microsoft has assured the NAI it will work with ad networks on the new IE feature, other companies in the area are coming up with similar cookie-blocking features of their own.

Ponoi (Hawaiian for self and private), is one example. The Alley-based start-up is working on a privacy platform that allows users to surf the Web while blocking their identity. Colin Savage, Ponoi's CEO, says the software places a bubble of privacy around the user, allowing ad networks to see that somebody is accessing a certain site, while not revealing any personal information about the user's identity.

If a user is shielded behind Ponoi's software, an ad network won't be able to build a personal profile of the user, but will be able to collect information about the user's actions. However, users have the ability to reject third party cookies--such as those from an ad network--if they choose.

According to Savage, the software is aimed at giving consumers a choice in the degree of privacy they want to assume while surfing the web.

Another privacy company, Saratoga, Ca. based IDcide inc., is currently offering free downloads of "The Privacy Companion," a software application users can install on their browser. Once the companion is in place, users can see the number of cookies following them and where they came from; at that point they can place a low, medium or high level of security over their actions. IDcide's CEO, Ron Perry, says that his particular privacy software gives the user notice and consent over what cookies they choose to receive, options Perry feels users want more of.

But Connaughton believes the NAI has adequately addressed the privacy concerns of users with its list of self-imposed regulations, "I think we went through this already with the FTC. We're trying to give strong notice and control to the user about their privacy options."

The main self-regulations proposed by the NAI were opting-out of cookies, and asking users for permission to merge anonymous data with personal information to create personal user profiles.

Savage of Ponoi and Perry of IDcide believe that their market-based solution is the answer to consumers' privacy concerns online. Their business model is set up to provide free downloads to users, and fee-based services to help companies market to clients while enhancing trust.

But not all marketers and ad networks see it that way.

Mike Griffins, chief technology officer of Conn.-based MatchLogic (an NAI member) calls Ponoi and IDcide's software "a shortcoming in an approach that treats all third-party cookies the same. We would prefer a solution that includes informed choice about third-party services."

To Griffins and other NAI members, the critical point to consider is informed choice. Ad networks contend that not all cookies are bad. So, in their view, arbitrarily blocking them without knowing what kind of data they're collecting is ultimately doing a disservice to the Internet industry as a whole.

"Today we always allow choice, but that doesn't mean these applications are providing meaningful choice. You can't give meaningful choice without notice," Griffins says, "and without knowing what these cookies do you can't know the benefits of them."

Junkbusters.com's president, Jason Catlett, isn't buying the argument. Catlett believes that Microsoft's browser is just what users need. "It's difficult to convey the magnitude of this to the user. If most people knew that they where being followed everywhere they would say 'hell no' to that."

*Sam Rosales(srosales@internet.com) is Assistant Editor for atNewYork.com