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The convergence of computers and telephones has created a whole new industry for moving information around the globe. With it comes new economic opportunities as well as challenges to social and legal standards. A good illustration may be in the evolution of the facsimile machine.

When they first appeared, fax machines could send and receive documents on heat-sensitive paper but not much else.Now they are programmable, use plain paper and laser printers and can send one document to multiple places. There is even a car fax machine. In spite of these advances, faxes still have a basic handicap - they are not private. Anyone can read documents as they emerge.

A small company in Pelham, N.Y., has patented a scanning device that makes faxed documents private by first encoding them in computer bits.

The company, Kryptofax Corp., does not yet have a product - its patent may be its most valuable commodity.

But in the eyes of the Patent and Trademark Office under the Clinton administration, that is exactly as it should be.

Right now Kryptofax employs 31/2 people, counting a part-time hardware designer. The company was set up to sell a scanning device that uses encryption algorithms to turn fax text into indecipherable dots on a page.

The device comes in two sizes similar to those of standard desktop fax machines. After documents are inserted, a user types details about the fax's title and its destination on a keyboard. That information appears on a display panel.

"Then the most critical thing is to provide a password," Richard Virga, a former computer programmer who is the president of Kryptofax, said.

The sender can choose any combination of letters; the recipient would use the same password to decode the document. The password can be used repeatedly or can be changed for each document.

With the routing information and password in place, the machine scans the document. Software using a common encryption algorithm - a formula for rendering letters into computer bits - turns the words into dots and compresses the data. Virga said the scanner could read printed text, graphics or handwritten notations.

The encoded page emerges with the title and addressee name appearing at the top. The rest is a grid of random dots. That page is then faxed on any fax machine. On the receiving end, only someone knowing the password can decode the document by inserting it in their scanner.

"As the Kryptofax machine reads the encrypted grid, it begins simultaneously to print a decrypted version of the page," Virga said. "It will look identical to a fax of the original - about 200 pixels per inch."

"The marketplace we're aiming at is the large workplace where people share fax machines," Virga said, especially businesses where documents written by one person to a second are faxed and received by secretaries or clerks.

If the pages are put in upside down or out of sequence, the Kryptofax will tell the user to straighten things out. Virga said his company hopes to sell Kryptofax software that can be embedded directly into personal computers or fax machines.

"We use an encryption algorithm called seeded pseudo-random number generator," Virga said. That is a string of random bits set off by giving the computer a "seed," or string of characteristics or numbers. The company chose that algorithm because it is in the public domain, he added.

But first Kryptofax has to find manufacturers for its product, which Virga said should cost about $3,000 at first.