There's good news, at long last, from Smith Island. The crab-picking ladies of Tylerton are legal.

For generations, working in their individual "outhouses" on the Chesapeake Bay island off Maryland's lower Eastern Shore, they had been picking meat from the crabs their husbands caught in the summertime. Then, four years ago, state health officials cracked down on the unlicensed, at-home pickers.

They said the work had to be done in an inspected facility with stainless steel tables and steamers and other equipment that meets sanitary regulations. That was practically unheard of in Tylerton, the smallest of Smith Island's three communities and separated from the two others by water.

So in 1992, authorities seized 350 pounds of crab meat as it was being unloaded from Smith Island boats at Crisfield, Md. Confessed Janice Marshall, from whom 35 pounds of contraband crab meat were confiscated: "They got me."

But Marshall got them back. She decided to organize the Smith Island Crab Co-op with help from state, federal and private sources. It meets all requirements and recently opened for business. "The crabs have been very slow, but we've been doing good," Marshall said.

The other week, the 15 members of the co-op picked 800 pounds of crab meat. "It was a good week for us, scarce as crabs has been," Marshall said.

Housed in a gleaming new building, the co-op was supposed to open more than two years ago, but there were cost overruns and bureaucratic delays. Ultimately, the state came up with $83,000, and the Farmers Home Administration provided $155,000 in grants. There also was a $15,000 loan from the University of Maryland's Rural Development Center and $10,000 lines of credit each from poultry king Frank Perdue and Dewey Beach, Del., restaurateur Jay Prettyman.

While work on the co-op was underway, the women were allowed to continue crab picking at home under tight controls, and out-of-state sale was prohibited.

Now that they are legal, they have resumed selling most of their product to Prettyman's Rusty Rudder conglomerate in Dewey Beach. "What I've found with their meat is you don't have to repick it," Prettyman said. "There is very little or no shell."

The co-op's opening two months ago (the formal dedication won't come until October) couldn't have come at a better time for the islanders, who have made their living from the bay since their ancestors settled the Smith archipelago in the 17th century. Times have been tough.

The Chesapeake Bay island off Maryland's Eastern Shore has been waging a seemingly winless war for survival against the forces of erosion, a scarcity of crabs and a dwindling population. In June, the school at Tylerton closed for good because of a lack of students. And then the co-op opened.

"Each woman picks their own husband's crabs they bring in," Marshall explained. "We don't really have a boss. Each woman is a boss. We're doing the same thing we did before. Only we're legal now. We're very encouraged." CAPTION: Janice Marshall picks crabs in her home in Tylerton on Smith Island. She organized a pickers' co-op.