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I did however research the technology before making my post.
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Did you look at the patent information for the system? It includes things like the modification of web pages between server and end user, which is a major threat to net neutrality.
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I do however have doubts that what they're doing is illegal
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It's monitoring the contents of the traffic that goes through a communications network. It's like wiretapping a phone or opening somebody else's post. It would be illegal for Royal Mail to open your post so they can see what junk mail to send you, and it would be illegal for your phone provider to record all your conversations so they can send you junk mail, so why do you have doubts that it's illegal for your ISP to track your surfing patterns so that they can send you adverts?
The European Commissioner for Information Society and Media has already stated, in letters you'll find posted earlier in this thread, that it's breaching the european convention on human rights and the EU charter of human rights.
How much more do you need?
Oh yeah, the system as it is relies on a cookie placed on your computer that claims to have been placed by a different website - that's fraudulent misrepresentation, and is illegal under the fraud act. It's also illegal under the computer misuse act.
The system also relies on making an unauthorised copy of the page requested for analysis and financial gain. That's copyright theft, and I know several webmasters prepared to take legal action against this system if it ever rolls out.