When young dissidents in Egypt were organizing an election-monitoring project last fall, they discussed their plans over Skype, the popular Internet phone service, believing it to be secure.

But someone else was listening in-Egypt's security service.

An internal memo from the "Electronic Penetration Department" even boasted it had intercepted one conversation in which an activist stressed the importance of using Skype "because it cannot be penetrated online by any security device."

Skype, which Microsoft Corp. is acquiring for $8.5 billion, is best known as a cheap way to make international phone calls. But the Luxembourg-based service also is the communications tool of choice for dissidents around the world because its powerful encryption technology evades traditional wiretaps.

Throughout the recent Middle East uprisings, protesters have used Skype for confidential video conferences, phone calls, instant messages and file exchanges. In Iran, opposition leaders and dissidents used Skype to plot strategy and organize a February protest. Skype also is a favorite among activists in Saudi Arabia and Vietnam, according to State Department cables released by WikiLeaks.

In March, following the Egyptian revolution that toppled President Hosni Mubarak, some activists raided the headquarters of Amn Al Dowla, the state security agency, uncovering the secret memo about intercepting Skype calls. In addition, 26-year-old activist Basem Fathi says he found files describing his love life and trips to the beach, apparently gleaned from intercepted emails and phone calls.

"I believe that they were collecting every little detail they were hearing from our mouths and putting them in a file," he says.

A cottage industry of U.S. and other companies is now designing and selling tools that can be used to block or eavesdrop on Skype conversations. One technique: Using special "spyware," or software that intercepts an audio stream from a computer-thereby hearing what's being said and effectively bypassing Skype's encryption. Egypt's spy service last year tested one product, FinSpy, made by Britain's Gamma International UK Ltd., according to Egyptian government documents and Gamma's local reseller.

Click here for more on Skype “spyware” from The Wall Street Journal.