For those of you less versed in geek-speak Phorm is a system for placing targeted adverts on certain websites that you might visit, based upon collecting and analysing your browsing history. One controversial aspect of Phorm is that you might be deemed to have signed up for this "service" simply by agreeing to your ISP's terms and conditions of use. Much more about Phorm at the Wikipedia link above, including mention of BT's secret trials of the system (that's British Telecom, not Brian Taylor blether-fans!).
Following a Freedom of Information request an email exchange has been released that appears to show mandarins at the Home Office asking Phorm for advice on whether their "service" is legal or not. Baroness Miller is quoted by the Beeb as saying:
"The fact the Home Office asks the very company they are worried is actually falling outside the laws whether the draft interpretation of the law is correct is completely bizarre."
Cynics among you might well wonder whether this could be a backdoor means of resurrecting the mother of all databases to track every phone call, email and website that we all visit. Personally I don't think the government are that competent though, looks more like a damning indictment of standards in Whitehall than anything more sinister.