Just months after touching off a national debate about privacy and the sale of public records, a small New Hampshire company has abandoned plans to buy state databases of driver's-license photographs to create a private network to fight identity fraud.

The turnabout follows a furious reaction to news reports that Image Data LLC of Nashua, N.H., had signed contracts to buy more than 22 million photographs from Colorado, Florida and South Carolina. It was the first time states had agreed to sell the images wholesale.

Since then, all three states have canceled their contracts and legislators in at least 17 states have proposed laws restricting access to driver information, according to StateNet, a legislation-tracking service. Also, Congress voted, as part of an annual transportation spending bill, to require states to get permission before releasing driver photos or information.

Now, Image Data intends to offer a revamped version of its True ID system that would gather photos and personal information from one customer at a time at retailers, banks and other participating companies.

In pilot programs underway at one bank and one store, customers who want to pay with checks or use in-house credit cards will be asked to turn over their licenses. The data on the licenses, including the photographs, names and other identifying information, will be scanned in a small machine and electronically flashed to Image Data's computers.

Image Data officials declined to identify the companies involved in the pilot programs, citing contractual obligations.

The idea is that clerks will then be able to prevent fraud and verify the identity of someone by typing or scanning in a check or credit-card number and looking at the photograph that appears on a small Image Data screen near the cash register. By collecting photographs individually, company officials say, Image Data hopes to head off complaints that it is violating drivers' privacy by gathering the images without their consent.

Founder Robert Houvener acknowledged he changed the approach because of a storm of complaints from drivers who were angered they were not told their photographs were being sold for less than a penny each.

"We viewed the whole thing as a learning experience," said Houvener, who described the new effort as a "choice-based system." "One of the big things with all this technology is that people understand we're not trying to hoodwink them," he said.

Privacy advocates remain concerned about the company's efforts, in part because of how it originally developed the True ID service.

Although Image Data officials had repeatedly said their database system would be used only to prevent check and credit-card fraud, drivers and state officials were angered to learn the company had received nearly $1.5 million in federal funding and technical assistance from the U.S. Secret Service.

Documents obtained from the Secret Service under a Freedom of Information Act request, along with letters from several members of Congress who supported the effort, suggest that company officials believed True ID could be used to combat terrorism, immigration abuses and other identity crimes.

In a recent interview, Houvener said he assumed all along the technology--but not the driver information--might be used for other purposes, possibly by the government. Several foreign governments have inquired about whether technology could be used to verify the identities of voters, he said.

Critics said the new approach raises questions about whether the company is adequately informing customers how their information will be gathered and used.

Under Image Data's rules, participating companies will be required to post a flier in the vicinity of the checkout counter, giving a general description of the effort and offering customers an opportunity to call a toll-free number or visit the company's World Wide Web site for more information. Businesses also will have to post a True ID sticker near their entrances.

Clerks will not be required to draw attention to the flier or encouraged to discuss how the system works because "you don't want a 14-year-old clerk trying to explain something," Houvener said. If customers have questions, they will be given a slip with the company's telephone number and Web address.

When asked about requiring a more explicit notice, such as a signed agreement before scanning a customer photograph, Houvener said, "That would never happen in a million years. It would be like a credit card disclosure. Who ever reads it?"

Houvener said he believes the new system offers people a clear choice to participate. If someone doesn't want to share a license and a clerk chooses not to process the sale, he can go to another store or bank, a company official said. Drivers who decide they are uncomfortable after having their licenses scanned, he said, can call the company any time and ask Image Data to stop using their photographs.

But Andrew Shen, a policy analyst at the Electronic Privacy Information Center, an advocacy group in the District, and several other privacy specialists said the arrangement appears to fall short of good information practices.

Shen believes the company's approach will confuse some customers and leave other poorly informed about how their information is being gathered and used. He said many people will not notice Image Data's flier or understand what it means. "It should be more explicit to them," Shen said. "They won't be fully aware."

CAPTION: Companies participating in Image Data's new ID system will be required to post fliers telling customers where to find more information.