The process was complex, time-consuming, and very expensive. This was not about a lone hacker sitting at a computer screen trying to guess passwords. Instead, it was an attempt to split the foundation stone supporting an entire industry - the technology protecting pay TV.

The challenge handed in the autumn of 1997 to a team of scientists working quietly at a laboratory in Haifa, northern Israel, was to crack the encryption technique used to unscramble TV signals delivered to many paying customers through cable and satellite across Europe and the US.

The so-called "smart" or "conditional access" cards used to access Sky, ITV Digital, and other premium channels contain wafer-thin computer chips holding complex codes to make sure viewers see only what they have paid to see.

The Haifa team knew all about this. They worked for NDS, a Murdoch company which had begun life as a start-up firm, News Datacom, in Israel eight years earlier. Rupert Murdoch's News Corporation had backed the venture in the belief that the coming digital age required a quantum leap in areas such as data security and the encryption of communications.

NDS was to go on and design the encryption process that would be used on the smart cards handed out with every Murdoch pay TV package in the world. With 27m viewers using its cards in 40% of the world's satellite receivers, it would become a company valued at well over $1bn in its own right.

But NDS had one important rival, an encryption technology developed in France by the local broadcaster Canal Plus which had been adopted by just about all News Corporation's rival broadcasters.

The NDS team in Haifi, according to a lawsuit filed in the US district court for the Nothern District of California, set out to "sabotage Canal Plus technological security measures engineered into its smart cards."

Breaking the encryption alone would cost up to $5m. The process demanded the use of ultra-expensive electron-scanning microscopes, with the team probing wafer-thin chips no bigger than a thumbnail. Each chip contained up to 50 layers, with each layer in turn carrying up to 1,000 transistors, every one of which had to be pulled apart and analysed.

Unlimited funding



Even with access to the most sophisticated equipment and seemingly unlimited funding, it took the Haifa team six months to unravel a code which was supposed to be impossible to decipher.

From there, according to Canal Plus's $1bn claim for damages, it was a relatively straightforward matter of releasing the information and then waiting for the world's counterfeiters to undermine every rival broadcaster using the French encryption system.

In early 1999, the NDS team isolated a piece of the encryption software known as the UserROM, a portion of computer memory on a smart card which controls access to the rest of the digital data. This information was dropped into a downloadable internet file called Secarom.zip, which, according to the Canal Plus claim, was then sent to the Haifa team's colleagues in California at NDS Americas with instructions that it be published on the internet so that anyone wanting to produce pirate Canal Plus cards could do so.

Canal Plus claims that the file was then transferred to a web operator called Al Menart, who ran a website known as DR7.com, a geekish internet service which promptly published the Canal Plus code for all to see.

By late 1999 the first counterfeit cards had begun to appear and, according to Canal Plus, by September 2000 the Italian market was flooded. Proliferation across Europe was in full swing.

The cards have become commonplace in Britain, with ITV Digital complaining recently that more than 100,000 pirate cards are in circulation here.

Executives at ITV Digital, which has struggled to build a strong base of subscribers and which continues to haemorrhage cash, were apparently appalled recently by comments made by Sky's chief executive, Tony Ball, during an address to the company's US investors. "ITV Digital/DTT is completely pirated, a joke. For $7 you can buy a card for all channels," he is reported to have said.

Canal Plus faces the exhaustive process of renewing the technology in the 12 million cards issued worldwide. ITV Digital customers can expect completely new plastic by the end of the year.

François Carayol, chairman and chief executive of Canal Plus Technologies, said: "When it emerged that the most secure part of our smart card system had been invaded we immediately launched an investigation into why and how it happened.

"We certainly didn't expect our investigations to lead us to NDS. It is not the type of action we would have expected from such a well-established firm."

For its part, NDS says the whole piracy claim is an outlandish fabrication. A statement from Abe Peled, the company's president and chief executive, last night said the counterfeiters had simply targeted an inferior technology and succeeded without any help from anyone.

He suggested that Canal Plus is in commercial trouble and revealed that the French firm had approached NDS before Christmas suggesting a merger, adding that the French had been trying to poach the NDS employee accused of leaking Canal Plus's code.

Corporate battle



In a pointer to the corporate battle that is unfolding, Mr Peled also drew attention to news reports over recent weeks suggesting disagreement within Canal Plus's parent company, Vivendi Universal, over what direction the French media business should take.

Vivendi, in its current form as a media and communications giant with interests ranging from Hollywood movies to third-generation mobile phones, has been built in double-quick speed by a former investment banker called Jean Marie Messier. He is known as Jean 2M and considered a messianic figure in French business circles, having burst out of the confines of the French national market to create a real threat to Mr Murdoch.

But he built Vivendi with a furious round of acquisitions just as the internet boom was hitting its peak.

Last week he was forced to take a write-down in Vivendi's accounts to cover the value which has been destroyed as dotcom and technology companies have imploded.

The battle with NDS is likely to test his mettle even further.

As for News Corporation, executives there will be well aware that this is not the first time that its 80% owned associate NDS has polluted the group's public image.

One morning in October 1996, Israeli tax officials, apparently acting on a tip-off from a former employee, raided the company's Jerusalem offices and also the site in Haifa. They were looking for evidence that NDS had evaded £100m in tax oversix years; 70 tax officers removed more than 50 cartons of papers from the NDS offices.

In the event, the allegations never stuck. But the mud did.