For those of you who don't know much about the Carnivore system, it was originally designed to read and capture emails from a suspect (to be used only with a court order). It is a device which detractors call a "black box" which sits between the suspect's Internet Service Provider and the rest of the internet. (see earlier kuro5hin stories).
Originally I thought it only operated at the email level, but I've been told that Carnivore actually captures information at the packet level. This means that it can (and has been used to) intercept and archive chat-packets, ICQ/AIM/etc... information, and... well, "reliably capture and archive all unfiltered traffic to the internal hard drive." This is bad. Actually, it's good for the FBI, but bad for everybody else because it means that they can recreate in a lab situation any stream of traffic in which any user is involved.
Not only can they get a terrorist's secret email about blowing up buildings, but also the complete interception of all internet traffic to and from that user. (I'd assume by IP address.)
Of course "The FBI said that the lab report [capturing all unfiltered traffic] was the result of a test to determine Carnivore's 'breaking point,' and that laws and court orders restricted Carnivore from being used so broadly".
If you haven't seen Enemy of the State, please do so now.