NEW YORK -- In the summer of 1962, record producer George Martin signed a singing group from Liverpool, England, to a record contract with EMI Records Ltd., a large British recording company. Even by the standards of the time, it wasn't much of a contract -- the band would receive a penny for each record it sold.

The group was the Beatles, and when their first few records sold in the millions, EMI generously doubled that initial royalty payment, then signed the Fab Four to more lucrative contracts.

The Beatles became the best-selling recording group of all time, bringing in millions of dollars for themselves and for EMI and its American subsidiary, Capitol Records. At one point in the early 1970s, the Beatles accounted for roughly 30 percent of Capitol's annual sales, according to company officials.

But 25 years after the Beatles signed their first record contract, a bitter, long-running legal dispute is under way between lawyers for the group and EMI-Capitol. The charge: The record company has systematically shortchanged the group on record royalties for years.

In court papers, two of the three surviving Beatles and the widow of the fourth have accused EMI and Capitol of a "pervasive practice of lining their own pockets at the expense of {the Beatles} through improper and fraudulent accounting practices" and of "an unconscionable distortion of the language and intent of the manufacturing and distributing agreement in order to deprive {the Beatles} of the amounts to which they are entitled."

"The Beatles do not enjoy litigation, and would much prefer to avoid it, but there are some situations where it really is the only thing to do," said Leonard Marks, the attorney for Apple Records Inc., the company set up by the Beatles in 1968 to handle their affairs and that now is pressing the case against the record company. "The Apple companies and the Beatles had been cheated."

But officials of Capitol and EMI adamantly deny the charges. And in an industry that is traditionally tight-lipped about contract disputes, they have been unusually outspoken about the case. Executives of EMI-Capitol portray the dispute as a simple contract-interpretation problem that is being overzealously pursued by Marks.

"The original lawsuit really represents different interpretations of contractual situations between EMI Records and Capitol in their many agreements in the past with Apple," Bhaskar Menon, Capitol's chairman, said in an interview last week. "We see not the slightest value or benefit of pursuing this long, drawn-out, dust-laden series of litigations. ... In some quarters, there is somebody who is benefiting from this. I can certainly say we aren't, and I can't imagine the Beatles themselves are."

Part of the dispute already has been decided: A suit filed by Apple against EMI in England resulted in a $4 million judgment against the record company three years ago. Marks called it a victory; EMI said it felt the British court found accounting errors rather than any wrongdoing. "We have cheerfully paid whatever we were called upon to pay," Menon said.

But the companion case against Capitol, filed in New York State Supreme Court in 1979, still is nowhere near trial. It has turned into a knockdown, drag-out battle that provides an unusual glimpse into the workings of a contract between a superstar rock group and a major record company.

Apple has charged Capitol with breach of contract and fraud -- the latter charge was dismissed earlier this year, but Marks is appealing -- and is asking $80 million in damages. Perhaps more significantly, Apple is asking that Capitol be required to return the Beatles' master recordings to the group for sale elsewhere. Marks believes the rights to the Beatles' recordings could be worth $100 million on the open market.

The case has been highlighted by some remarkable allegations, including those surrounding the disappearance or destruction of 19 million Beatle records, charges that some of these were sold "out the back door" of Capitol factories to avoid royalty payments, and hints of organized crime involvement in the record industry.

And the 1979 case has spawned two related, newer suits, filed last month. In one, Apple alleges that Capitol delayed the release of Beatle albums on compact discs to punish the group for its earlier lawsuit, and then underpaid the royalties on the CDs.

In the other suit, Apple alleges that Capitol wrongfully licensed the recording of the Beatles song "Revolution" to Nike Inc. for use in a shoe commercial.

Capitol has adamantly denied those charges as well, calling them "frivolous" attempts by Marks to call attention to the broader case.

And there is another bizarre aspect to the dispute: It is not even clear that the Beatles themselves are in unanimous agreement about the allegations being made on their behalf. While George Harrison, Ringo Starr and John Lennon's widow, Yoko Ono, are plaintiffs in the cases, Paul McCartney has decided to sit them out -- although as a co-owner of Apple he will get 25 percent of any winnings. Sources say McCartney declined to participate because he dislikes depositions -- and because he is signed to Capitol as a solo artist.

In addition, Yoko Ono is participating in the suit against Capitol and Nike over the "Revolution" commercial even though she was quoted in news stories earlier this year as approving of the song's use by Nike. Marks said Ono's interest in the publishing rights to the song divides her loyalties on the Nike case.

Meanwhile, Nike officials, who paid Capitol $250,000 for the rights to "Revolution," say they feel they have been caught in the middle.

"We believe Nike is a party to the suit solely because 'Beatles sue Nike' makes much better headlines than 'Apple sues EMI-Capitol for the third time,'" Nike Chairman Philip H. Knight said last week. And Nike spokesman Kevin Brown said, "This suit is essentially a dispute between Apple and EMI."

Contract disputes between recording artists and the companies that press and distribute their records are nothing new, particularly in the rock 'n' roll era. Tales of companies signing young artists to penurious contracts or gypping them on royalty payments are common in the record industry.

"What happens is that most record companies take horrible advantage of the artists, and it's a rare record company that gives an artist an honest count," said Marks, a longtime entertainment industry attorney whose clients have included Madonna, Whitney Houston and Eddie Murphy. "I have never found a record company issuing an accounting statement that made a mistake in the artist's favor, and I've never found an accounting audit done by an artist that didn't turn up substantial errors."

The Beatles' suit against Capitol is based in large part on such an audit, conducted for Apple by the accounting firm of Laventhol and Horwath. It found what appeared to be discrepancies between the number of records pressed and sold by Capitol and the amount of royalties paid the Beatles, beginning in 1969.

Under the terms of the contract, which was signed in 1969, the Beatles were to get about 10 percent -- about 50 cents at 1969 prices, closer to $1 now -- of the suggested retail price of each album sold.

But the royalty payment was to be increased by 25 percent in 1972, provided that the Beatles sold more than 500,000 copies of certain albums under the contract.

But the audit commissioned by Apple -- which Capitol has said is biased and seriously flawed -- found that Capitol allegedly failed to pay about $30 million in royalties because the company claims the 25 percent increase never kicked in.

According to Apple's suit, Capitol wrongfully considered "Sometime in New York City" -- a 1972 album recorded by Lennon and Ono -- as one of the records that had to sell 500,000 copies to trigger the 25 percent royalty increase.

"Sometime in New York City" -- described by Apple as a "noncommercial experimental double album, intended as a controversial political statement" -- was a bomb, selling well under 500,000 copies. And in any case, Apple alleges, the Beatles already had triggered the increased royalty rate before "Sometime in New York City" was released -- but Capitol didn't pay it. Capitol contends the 500,000-sales trigger point was not reached.

The audit also found that 19 million Beatles albums, singles and tapes had been removed from Capitol's inventory between 1969 and 1979.

Capitol officials say those records were destroyed as excess inventory. "Records that are deemed to be obsolete, our procedure is to destroy them," Menon said. "Obsolescence results from records not selling through to the extent that had been thought."

But Apple has said it does not believe the records actually were destroyed. It claims that some were sold to wholesalers to avoid royalty payments to the Beatles.

"The fact that the purported scrapping occurred during a period of continuing high demand for Beatles recordings further undermines the credibility of {Capitol's} claims to have scrapped 19 million Beatles recordings," Apple said in a court filing late last year. In some cases, Apple said, records such as the popular "Abbey Road" album were listed on Capitol's computerized inventory manifests as simultaneously being manufactured and destroyed. "Capitol's documents show that it repeatedly reported scrapping and manufacturing copies of the same Beatles selections in the same month," Apple said.

"We have said that if you believe that {the records were scrapped}, you believe in the tooth fairy," Marks said, "and we contend that a lot of those albums were sold out the back door."

Specifically, Apple has charged that thousands -- and perhaps millions -- of the "scrapped" records were sold to associates of John LaMonte, a purported organized crime figure who has been convicted for record counterfeiting. LaMonte currently is in the federal witness protection program and reportedly is testifying in a grand jury investigation into organized crime influence on the record industry.

Apple alleges that the records eventually were sold to the public, depriving the Beatles of royalties. In addition, Marks claims, some of those records were returned unsold to Capitol by wholesalers, and the Beatles' royalties accounts were wrongfully debited as a result.

Capitol denies the charges, saying in a statement issued last year that it is "false and malicious" to suggest that "it was the practice of Capitol Records to avoid paying royalties to its artists by reporting sales of their recordings as having been scrapped." And Capitol said it "has never had any dealings with Mr. LaMonte at any time."

As the charges fly, it is becoming increasingly clear that there is no love lost between executives of EMI-Capitol and the lawyer representing the company's best-selling group.

Marks, for instance, has charged that Capitol's abuse of the Beatles has continued with the recent highly successful release of CD versions of the group's first eight albums. He said a royalty statement received by Apple recently showed that Capitol was paying an unusually low royalty on the discs and charging Apple $3.25 per disc for "packaging costs," when the actual cost of packaging is about 50 cents, according to Marks. He also has alleged that Capitol held up the CD release to punish the group, and that the value of the Beatle catalogue is cheapened when the recordings are used as commercial jingles, as in the Nike case.

Capitol, for its part, has issued a series of increasingly angry press releases complaining about Marks' tactics. "He appears to believe it is required in the pursuit of his clients' case to issue a series of false charges at regular intervals concerning Capitol Records and its relations with the Beatles," the company said in a press release last year.

And in a statement denying the charges in the suit over Nike's use of "Revolution," Bob O'Neill, vice president and general counsel for Capitol, said, "As the latest in a succession of frivolous lawsuits ... this is certainly the most absurd and nonsensical."

Both sides say efforts to negotiate a settlement of the dispute broke off several weeks ago, and Menon said last week, "I'm now, of course, almost certain in my mind that certainly as far as the attorneys representing Apple, if they do indeed represent the wishes of the owners of Apple, then all the settlement discussions that we've had have been fruitless."

Still, Menon believes a settlement is possible. "Most disputes of this nature, when there's goodwill and good faith, do get resolved in settlement," he said. "I know of none that have gone through this long, epic procedure through the courts. This is not brain surgery. ... These issues are relatively simple."

But if a settlement is not reached, Marks predicts that the case finally will come to trial in about 18 months -- just in time to celebrate the 20th anniversary of the last Beatle recording session