Facing heat over privacy worries, NebuAd said Tuesday it has a new notification and opt-out system for its targeted advertising system that critics say is invasive and spies on users.

With access to an ISP's (Internet service provider's) network, NebuAd's system monitors Internet browsing in order to deliver targeted advertisements related to search queries and Web sites a person has viewed.

NebuAd said it has developed a "direct online notification system" that would give consumers periodic reminders -- which could be used in addition to regular mail and e-mail -- that they are enrolled in the ad system.

The company also said it has developed a network-based "opt-out" mechanism that does not use cookies, a small data file stored on a user's PC. One of the ways targeted advertising systems can recognize if a person does not want to be in the system is by checking to see if an opt-out cookie is present.

An opt-out system using a cookie poses a problem if the cookie is deleted, as Web browsers have a control where users can flush out all cookies. That would mean users would potentially need to go through the opt-out process again to be excluded.

Behavioral targeting is seen as the next big advancement in advertising technology, but one that has stirred much controversy over potential conflicts with legal restrictions on wiretapping and consumer privacy rights.

ISPs, which face slim profit margins providing broadband service, could benefit from the systems by gaining a new stream of ad revenue. But privacy activists fear the systems could be presented to consumers in deceptive ways in addition to posing a risk if the collected data is mishandled.

NebuAd maintains its system can anonymously assign ads to people without retaining sensitive personal information.

NebuAd's announcement comes as its ISP partners are bailing out over fears they will alienate customers. Charter Communications, one of the largest cable broadband suppliers, cancelled a planned NebuAd pilot last month.

Another ISP, WOW -- which provides cable, Internet and phone service to Illinois, Michigan and Ohio -- has also suspended its deployment of NebuAd since the U.S. Congress started looking into behavioral advertising, a NebuAd spokeswoman said.

Efforts to reach NebuAd CEO Bob Dykes were unsuccessful on Tuesday. Dykes is scheduled to testify Wednesday before the Senate Commerce, Science and Transportation Committee, which will examine privacy issues around online advertising.

A report released last month by two digital rights watchdogs, Public Knowledge and Free Press, concluded that NebuAd's technology forged and modified TCP/IP (Transmission Control Protocol/Internet Protocol) packets and placed other cookies on a user's PC, techniques widely frowned upon by security experts.

NebuAd isn't the only company testing the choppy waters. In the U.K., Phorm has struck agreements with three ISPs -- incumbent operator BT, Virgin Media and Carphone Warehouse -- to trial its targeted ad system called Webwise as well as its Open Internet Exchange ad bidding system. Phorm also has offices in New York and Moscow.

The U.K.'s telecommunications regulator has said Phorm's system is okay as long as consumers willingly join the system. However, opposition is growing, and anti-Phorm activists plan to protest BT's plan to use the system at the company's annual meeting next week.