For the past two years, the Clinton administration has been locked in a debate about "encryption" -- how people and companies can protect sensitive information in the digital age. At least three companies, including a small firm in Maryland, think they have a key to the dilemma.

On one side of the debate are government and law enforcement officials, who have endorsed a plan called the "Clipper chip" that would let them tap telephone conversations and, if used in computers, peek at data messages to safeguard the country from terrorists.

Opposing Clipper is an odd pairing of civil liberties activists and corporations. The activists worry that the government could have too much access to private exchanges. Companies have chafed at export restrictions that stop them from using the best encryption technologies in products they sell abroad.

Come up with a better idea, the government said, and we'll consider it.

Now, at least three companies have taken up that challenge.

At the head of the pack is the 120-person Trusted Information Systems in Glenwood, Md., which specializes in protecting the information pumped through private and public networks, including the Internet. The company is headed by Steve Walker, who spent 22 years working in various divisions of the Defense Department before starting his firm.

"I advocate a simple policy," Walker said. "Good encryption should be available to any American citizen, without government restrictions."

The U.S. government, however, has held to a different view. Although people can scramble messages and data files within the United States any way they'd like, export laws prohibit companies from adding the best encryption techniques to the products they sell overseas. So the government proposed Clipper.

By adding a Clipper chip to, say, a telephone, users could scramble their phone conversations. But precisely how Clipper encrypts messages is classified. And to ensure that law enforcement officers can easily tap Clipper-scrambled exchanges, the government would "escrow," or keep copies of, Clipper decoding keys.

Companies would rather include many different encryption technologies in the products they sell and don't want to be locked into government-approved hardware. They also point out that their customers overseas are unlikely to want to use the Clipper lock knowing that the U.S. government holds the keys.

Walker's company, Bankers Trust New York Corp. and Hewlett-Packard Co. say they are testing new alternatives. In late February, Walker began shipping experimental software to companies that promised to test it -- but not include it in their products yet. A governmental working group is slated to complete a review of Walker's proposal by mid-spring, said Lynn McNulty, associate director for computer security at the National Institute of Standards and Technology.

"We're very excited about what Walker and others in the industry have done," said Michael Nelson, special assistant to the vice president for information technology.

"The government is being very receptive to . . . good ideas," said Dorothy Denning, a professor at Georgetown University who has been a staunch supporter of the government's concerns for national security. "I think they're really making an effort to find an alternative that's acceptable to everyone."

The proposals also are meeting with cautious approval from a handful of civil liberties advocates. "All {encryption} systems need to be voluntary," said Jerry Berman, who runs the newly created Center for Democracy and Technology in Washington. Even so, he added, "in terms of an escrow system, {Walker's proposal} certainly moves in a positive direction for privacy and security."

Walker calls his approach "commercial key escrow." "It's like having a spare key in your wallet," he said. But instead of letting the government hang on to those spare keys, Walker would rely on "data recovery centers" run by commercial outfits.

The scheme would work like this: A person wants to encrypt a file using the best scrambling technology in the world. That individual would hold the key to unlock the coded file.

But such an encrypted file would also include a "field," a sort of electronic strongbox that would hold a copy of the key. Like any safe, that field would be locked up with its own key. That field key would then be stored in a data recovery center. If people looked at the entire scrambled file, all they could read would be the location of that recovery center. The recovery center would be licensed by the government; it would turn over a field key only to an authorized individual, such as an officer with a court warrant.

Walker argues that as long as the government can get at the keys used to lock up documents and data exchanges, people should be able to use any form of encryption they please. If U.S. authorities want to see information that's locked up in other countries, they would have to work through the country's local police authorities -- much as they do when investigating more low-tech crimes. The commercial key escrow proposal consequently would let law enforcement officers do their job, Walker contended, without making encryption access as easy for them as Clipper does.

Bankers Trust similarly is exploring ways to give the government limited means of getting at scrambled messages in exchange for letting companies and individuals choose whatever brand of encryption they'd like to use. The bank company became involved in the encryption debate as it looked for ways to expand its traditional services to customers by providing them with a secure way of keeping copies of keys for encrypted files.

"We believe that there are valid business reasons to have key backup systems, independent of what the government needs to do," said Frank Sudia, a vice president with Bankers Trust in New York.

According to this scheme, a person or a company could buy an encryption card and plug it into a computer or telephone. The person could then choose several escrow "agents," each of which would safeguard a fragment of the complete key. An unscrambled part of the message would inform authorized parties who they needed to contact to obtain the pieces of the keys needed to unlock the entire message.

"A lot of what we've done is just to make key escrow more general," Sudia said. But that makes it more complicated, he added. Bankers Trust hopes to build a software version of its system soon, he said.

In contrast, Hewlett-Packard, like most other computer companies, wants to be able to include the best encryption technology possible in the products it sells overseas, as well as in the United States. "The ultimate dilemma is how do you produce secure messages and meet the national policies of different countries?" said Jim Schindler, information security program manager at Hewlett-Packard in Cupertino, Calif. Hewlett-Packard, which demonstrated its ideas at the recent meeting in Brussels of the Group of Seven major industrial nations, has built its approach around a chip the company calls a "flag card." Only national governments would issue flag cards, much as they do postage stamps. Flag cards would enable people to use those encryption technologies approved by their government. Using a flag card also would be like stamping a document with certain information about how it was encrypted.

Although none of the systems would guarantee that the government could easily nab terrorists, neither would the voluntary Clipper plan, the industry representatives contend.

Besides, Walker argues, if the government wants to ensure that it can eavesdrop around the world, it must embrace alternatives to Clipper -- and soon. Increasingly, companies and individuals are brewing their own encryption strategies and using everything but Clipper. "If you wait too long, you will have lost {a chance to create encryption policies} and law enforcement will be fundamentally hurt," Walker said. CAPTION: THE KEYS TO THE KINGDOM The government is reviewing several alternatives in the "Clipper chip" that might allow companies to sell a wider variety of encryption technologies overseas and still give the U.S. government access. Here is what Trusted Information Systems, based in Glenwood, Md, proposes: 1. In a "commercial key escrow system," a person would scramble a file and keep a copy of a "key" for unlocking it. 2. Inside that file would be a "field" with the address of a "data recovery center" and, in scramble form, the user's identity and a spare key. 3. To get that spare key, authorized parties would have to prove to the data recovery center that they had a permission to review the scrambled file. The center would then provide another key for unlocking the filed, which would release the key needed to review the file.