The flames were flickering in the Oval Office fireplace, suggesting intimacy, for the meeting that fall afternoon just after the November 1984 election victory. CIA Director William J. Casey strode in with his papers and a summary of talking points on a single sheet of paper. He was certain he had reduced the issue to its basics: The Reagan administration looked impotent because of the fanatics and suicide bombers who had destroyed U.S. facilities in Beirut, and the president had agreed to do something about it.

Casey had in mind a presidential intelligence order, called a "finding," that would direct the Central Intelligence Agency to train and support small units of foreign nationals in the Middle East so they could conduct preemptive strikes against terrorists. If intelligence data showed that someone was about to hit a U.S. facility, such as an embassy or a military base, the units would be able to move to disable or kill the terrorists.

Casey explained to the president that the finding was simply to train and put the units in place; another finding would be required to take action in a specific case. The Israelis were experienced at this kind of covert preemptive work, but it was essential that the administration not get into bed with them on this. Any U.S. action had to be seen as antiterrorist, not anti-Arab.

With luck, no one outside a small circle would ever know about the existence of these new units. At first, three five-man units would be trained and set up in Lebanon. Any preemptive hit would be carried out undercover; it would not be traceable to the CIA or the United States; all would have deniability.

The president told Casey to inform the congressional intelligence committees but to invoke the provision in the law that allowed him to inform only eight people -- the chairmen and vice chairmen of the Senate and House committees, and the Republican and Democratic leaders of the Senate and House.

Casey said he would see to it personally. That would emphasize the sensitivity. No loudmouth staffers would know. He saw a chance to show that the CIA could conduct truly secret operations.

President Reagan signed the formal finding and an accompanying National Security Decision Directive. The immediate cost for the Lebanese units would be about $1 million. When the program was expanded to include similar teams in other countries, the cost would be $5.3 million.

Rear Adm. John M. Poindexter, then the deputy national security adviser, who was at the meeting, later suggested to a colleague that the afternoon session was a mere formality because Reagan and Casey already had had a meeting of the minds. "Casey mumbled, and Ronald Reagan nodded off," Poindexter said.

Casey's CIA had to be dragged kicking and screaming to this "active" counterterrorism. John N. McMahon, Casey's deputy, had issued a no-thank-you; the CIA did intelligence, not killing.

But with the backing of Secretary of State George P. Shultz, Casey had won Reagan's support and was determined to see this through. McMahon, however, continued to resist and fight Casey every step of the way, littering the bureaucratic landscape with doubts, even after the finding was signed by Reagan. Could they trust the foreign nationals, particularly the Lebanese? McMahon asked. Could the CIA control them? As McMahon saw it, either answer to the second question spelled trouble. If the CIA had control, wouldn't this involve the agency in assassination planning, which was banned by Reagan's executive order? If the CIA did not have control, were they not launching unguided missiles? And, McMahon wondered further, would they ever have intelligence of the quality, certainty and timeliness to justify a preemptive strike? They had never had it so far.

Casey had a written legal opinion from CIA lawyers asserting that preemptive action would be no more an assassination than would a case in which a policeman gets off the first shot at the man who is pointing a gun at him. It was called "preemptive self-defense."

But training the Lebanese in early 1985 was proving to be trouble, as McMahon had predicted. Casey's own CIA people began slowing down. In Casey's view they were frightened by the prospect of a real encounter with danger.

All the bold planning was going to be a wasted effort. After four years of frustration with his agency and Congress, Casey had reached the breaking point. He decided to go "off the books," to go outside normal CIA channels and turn instead to King Fahd of Saudi Arabia and the Saudi intelligence service.

Casey found the Saudis happily free of the CIA's self-doubt. Under the Saudi monarchy, there were no legislatures, courts or oversight committees with power to second-guess. In one secret operation, the Saudis were already providing millions of dollars to the Nicaraguan contras. Casey's proposal for a counterterrorist operation would be more in line with the Saudi interest in the Middle East, where the monarchy was anxious to make a strong statement against terrorism, particularly the radical fundamentalist Moslems affiliated with the regime of Ayatollah Ruhollah Khomeini of Iran.

King Fahd pledged $3 million of Saudi money for the operation, enabling Casey and the Reagan administration to circumvent both the CIA and Congress, which would normally provide funds for covert operations.

Fahd next dispatched a courier directly to his ambassador in Washington, Prince Bandar bin Sultan, with secret instructions to cooperate with Casey. Bandar, 36, a flashy, handsome man-about-town, was the son of the powerful Saudi defense minister. He exemplified the new breed of ambassador -- activist, charming, profane. The former air force pilot was a kind of Arab Gatsby who waved around Cuban cigars, laughed boisterously and served his favorite McDonald's Big Mac hamburgers to guests on sterling silver trays in his private office.

Bandar immediately made an appointment to visit Casey at CIA headquarters in Langley. Casey saw him, but proposed a second meeting elsewhere, saying, "Let's have a bite." It was as if he didn't want to talk at the CIA. They agreed to have lunch over the weekend at Bandar's residence, a palatial estate just a mile down Chain Bridge Road from the CIA. Casey said he would bring his wife, Sophia.

Upon arriving at Bandar's house, Sophia recognized that she and her husband had once looked at the house and had considered buying it; Casey had liked the large library. At lunch, Sophia found the ambassador's wife friendly and nice. The lunch, she felt, was just another Washington social obligation. "For no purpose at all that I could see," she said later.

After lunch, Casey and Bandar walked alone out to the garden. When they were about as far away as possible from the house and the security guards, Casey withdrew a small card from his pocket and handed it to the ambassador. It contained the handwritten number of a bank account in Geneva. The $3 million was to go there.

"As soon as I transfer this," Bandar said, "I'll close out the account and burn the paper." He would make sure there were no tracks on the Saudi end.

"Don't worry," Casey said. His end would be clean, too. "We'll close the account at once."

Bandar knew how to have a conversation that never took place. Though it was widely suspected that the Saudis were funneling millions to the contras, Bandar denied it routinely with a confident laugh and a long lecture about implausibility. Their relationship was the kind that both Bandar and Casey valued -- one in which men of authority could have frank, deniable talks and emerge with an agreement only they understood.

Bandar and Casey agreed that a dramatic blow against terrorists would serve the interests of both the United States and Saudi Arabia. They knew from their intelligence reports that a chief supporter and symbol of terrorism was Sheikh Mohammed Hussein Fadlallah, the fundamentalist Moslem leader of the militant Party of God, Hezbollah, in Beirut. Fadlallah had been connected to all three bombings of American facilities in Beirut during 1983 and 1984. He had to go. The two men were in agreement. Control Shifted to Saudis

Later Casey decided to give effective operational control to the Saudis, particularly as the CIA bureaucracy grew still more resistant. The Saudis came up with an Englishman who had served in the British Special Air Services, the elite commando special operations forces. This man traveled extensively around the Middle East and went in and out of Lebanon from another Arab nation.

The CIA, of course, could have nothing to do with "elimination." The Saudis, if the operation became exposed, would back a CIA denial concerning involvement or knowledge. Liaison with foreign intelligence services was one CIA activity out of the reach of congressional oversight; over the years Casey had flatly refused to tell the committees about this kind of sensitive work. And in this case, the CIA -- as an institution -- did not know. Nothing was written down; there were no records. The Saudi $3 million deposited in the Geneva account was "laundered" through transfers among other bank accounts, making certain it could not be traced to the Englishman or his Beirut operation.

The Englishman established operational compartments to carry out separate parts of the assassination plan; none had any communication with any other except through him. Several men were hired to procure a large quantity of explosives; another man was hired to find a car; money was paid to informers to make sure they knew where Fadlallah would be at a certain time; another group was hired to design an after-action deception so that the Saudis and the CIA would not be connected; the Lebanese intelligence service, a lethal organization that had close ties to the CIA, hired the men to carry out the operation.

On March 8, 1985, a car packed with explosives was driven into a Beirut suburb and parked about 50 yards from Fadlallah's high-rise residence. The car exploded, killing 80 people and wounding 200, leaving devastation, fires and collapsed buildings. Fadlallah escaped without injury. His followers strung a huge "MADE IN USA" banner in front of a building that had been blown out.

When Bandar saw the news account, he got stomach cramps. Tracks had to be meticulously covered. Information was planted that the Israelis were behind the car bombing. But the Saudis needed to go further to prove their noninvolvement. They provided irrefutable intelligence that led Fadlallah to some of the hired operatives. As Bandar explained it, "I take a shot at you. You suspect me and then I turn in my chauffeur and say he did it. You would think I am no longer a suspect."

Still, Fadlallah was a problem -- after the assassination attempt, potentially a bigger problem. The Saudis approached him and asked whether, for money, he would act as their early-warning system for terrorist attacks on Saudi and American facilities. They would pay $2 million cash. Fadlallah said he would agree if the payment were made in food, medicine and educational expenses for some of his followers. This would enhance his status among his people. The Saudis agreed.

There were no more Fadlallah-supported bomb attacks against Americans, as far as the CIA could determine.

"It was easier to bribe him than to kill him," Bandar remarked.

Casey was astounded that such a comparatively small amount of money could solve such a giant problem.Efforts in Chad and Libya

Bandar and the Saudis undertook two other covert operations at Casey's request. One was to bolster efforts in Chad designed to thwart Libyan leader Moammar Gadhafi. This was a particularly delicate undertaking for the Saudis because Gadhafi was a fellow Arab. The Saudis secretly put $8 million into an ongoing operation. It was also supported by the CIA and France, the colonial power in Chad until 1960.

The second was even more sensitive for Casey and the United States. Determined to thwart communism everywhere, Casey was worried about the growing influence of the Communist Party in Italy. Though it was still a minority party, polling about 30 percent of the vote, there were projections that the Communists would get more votes than any other Italian party in the May 1985 election.

Keenly aware that Congress had no stomach for covert action in Western Europe, Casey turned to the Saudis, who supplied $2 million for the Italian election. It could not be learned what impact, if any, this money had, but in the election on May 13, 1985, the Communists failed to outpoll the Christian Democrats.

The two operations were never traced to the Saudis or exposed.Intelligence Finding Rescinded

Failure of the March 8, 1985, mission to kill Fadlallah left Casey despondent. The CIA role in training the units put the agency in jeopardy. Even though the Lebanese intelligence service had only the comparatively small role of hiring the men to plant the car bomb, this all tied the CIA too closely to an assassination plot. McMahon, who was not aware of the Saudi role, wanted a "disconnect"; he said urgently that the agency had to get out of covert antiterrorist training. Casey had no choice, and Reagan rescinded the finding that allowed the operation to go forward.

At The Washington Post, we had learned that Reagan had signed the finding to create three secret Lebanese units for preemptive attacks on terrorists. We then learned that the finding had been rescinded after the Beirut car bombing had killed 80 people. We knew only about the role of the Lebanese intelligence service at that point, and nothing about the secret role of the Saudis or their $3 million contribution to the operation. The CIA tired to dissuade us from running a story. We saw no reason to withhold a story, since the operation had failed and the finding was history.

The story ran in The Post on May 12, 1985: "Antiterrorist Plan Rescinded After Unauthorized Bombing." It described the bombing as a "runaway mission" not authorized by the CIA, though the finding gave the agency "an indirect connection to the car bombing."

Casey called me at the paper 10 days later. "Lives are in danger," he said. "I'm not sure it was a story that had to be written, but I can't control that. Maybe I should, though. It's the way it got picked up -- as if we had our own hit team out there." He said that it would make life more difficult for him and his agency. The matter has lethal consequences, he said, and care must be exercised in not just the facts but in the impression created. "You shouldn't have run it." His tone was matter-of-fact, but it turned to ice: "You'll probably have blood on your hands before it's over."Ransoming U.S. Hostages

Though the terrorism from the car bombs had been stopped, Americans continued to be taken hostage in Beirut. David P. Jacobsen, director of the American University Hospital there, was kidnaped on May 28, 1985. Several others were still being held, including CIA station chief William Buckley, who had been hostage for more than a year. Something more had to be done.

In the White House, Marine Lt. Col. Oliver L. North, who was in charge of counterterrorist operations for the National Security Council and frequently consulted with Casey, developed a plan. Two agents of the Drug Enforcement Administration had been told by an informer they had used on Middle East heroin trafficking that $200,000 could get two American hostages out, and that one of them would be Buckley. CIA operatives raised doubts about the informer's credibility and suggested that such a payment would violate U.S. policy not to offer ransom to terrorists.

Nonetheless, national security adviser Robert C. McFarlane won the president's approval for a plan to raise the ransom money privately. The task fell to North. He contacted Texas billionaire H. Ross Perot, who in 1979 had hired a seven-member commando team to rescue two of his employes held captive in Iran. Perot was always willing to help the White House. He sent the $200,000 to an account in Switzerland.

North met in Washington with the DEA informer and then wrote a June 7, 1985, TOP SECRET EYES ONLY SENSITIVE ACTION four-page memo to McFarlane. The memo described the $200,000 as only a down payment. "The hostages can be bribed free for $1 million apiece," North wrote. "It is assumed that the price cannot be negotiated down, given the number of people requiring bribes." McFarlane initialed -- RCM -- in the "approve" box. The $200,000 was dispatched to the informant. But nothing happened.

The next month the administration became involved with Israel in the first stages of the secret arms sales to Iran. The same pattern emerged. To achieve its counterterrorist objectives, the administration developed a covert plan that included payment of ransom for hostages. This time the payment was weapons to the Iranians who had influence over those holding the hostages in Lebanon. North Testifies About Plan

North testified last July to the congressional Iran-contra committees about Casey's "off-the-books" approach to covert action.

"The director was interested in the ability to go to an existing -- as he put it -- off-the-shelf, self-sustaining, stand-alone entity that could perform certain activities on behalf of the United States," North testified on July 10. "Several of those activities were discussed with both Director Casey and with Adm. Poindexter. Some of those were to be conducted jointly by other friendly intelligence services . . . . "

In his testimony, North described Casey's off-the-books approach only as a plan for the future. He said nothing about past operations, and it could not be learned whether he or Poindexter had any knowledge of the Fadlallah incident or the Saudi role.

NEXT: Threats from Libya

Barbara Feinman of The Washington Post was research assistant for "VEIL: The Secret Wars of the CIA, 1981-87,"

1987 by Bob Woodward, published by Simon and Schuster Inc. All rights reserved.

"VEIL" is based on interviews with more than 250 people directly involved in gathering or using intelligence information and on more than four dozen substantive discussions or interviews with the late CIA director William J. Casey. In addition, hundreds of documents, notes and other written materials were provided by various sources. Because of the sensitivity of intelligence operations, nearly all interviews were on "background," meaning the sources cannot be identified. Where dialogue is used in the narrative, it comes from at least one participant in the meeting or conversation, or from someone's notes or contemporaneous memos. When someone is said to have "thought" or "believed," that point of view has been obtained from that person or from someone who learned of that person's point of view during a conversation.