In the face of such obstacles to clearing her name, Reed said, she gave way to despair. 'You feel like you have no control over anything. You literally get hysterical. You just wail... a wail coming out of your body. The only thing people can do is put their arms round you till you stop. Quite often I stopped eating, because I had no control over anything except what was entering my body.

Little wonder, considering the ordeal of the past nine years, with first criminal charges of abuse levelled then rejected in court, followed by the creation of an inquiry team by Newcastle City Council which claimed they were guilty after all, culminating in last week's extraordinary vindication of Reed and Lillie in the High Court.

Their ordeal began in April 1993. Reed and Lillie ran the toddlers room at Shieldfield, a social services nursery in Newcastle, where most of the children came from deprived backgrounds. Describing her work, Reed's eyes still light up: 'I loved being around children. They keep you young. It was delightful.'

In another part of the city, a male nursery nurse had pleaded guilty to abuse. Next day, Lillie was told to report to the nursery head. 'She explained there had been an allegation that I'd hurt one of the children changing his nappy. I couldn't believe it: I couldn't remember hurting a child. All I could think of was it was one of the old towels we had to use on their bottoms - we were told [baby wipes] were too expensive.'

He was ordered to leave, pending an inquiry. A few weeks later, on 5 May, he was interviewed by police. 'The officer said it had all been a misunderstanding, that nothing had ever happened, that I'd be going back to work.'

Waiting for the call, he tried to enjoy his unexpected leisure. Reed and Lillie spoke only briefly after his suspension, and he remained unaware of what was happening at Shieldfield. Had he known, he would have felt less comfortable. The mother of the first supposed 'victim' was embroidering her original allegations and sharing them with other parents, encouraging them to suspect that their children, too, had been abused. 'It was a dreadful atmosphere,' Reed said. 'Everyone felt threatened.' Lillie first learnt of the darkening developments when his partner, Lorraine, opened the door one morning to the father of another nursery child. 'He pushed past her, said he knew I'd sexually abused the children, and that there were others involved. Then he punched me in the face.'

The ground was being laid for mass hysteria, and when a new police team took over the case in July, it was ready to be unleashed. Arrested again, Lillie was accused of abusing other children. 'I couldn't believe what was happening. I didn't know where these allegations were coming from,' he said. Reed was also held: 'They put these allegations to me and I couldn't come up with any explanation. They kept asking, "why would a child say this if it wasn't true?" You don't have an answer to a question like that.

The answer became apparent before the criminal trial in 1994, when Lillie and his lawyers watched a series of videotapes of interviews by police and social workers with a number of Shieldfield children. In his judgment nine years later, Justice Eady endorsed the analysis of these tapes by Professor Maggie Bruck, an expert on children's testimony. She concluded that the interviews were some of the worst and most dangerous she had ever seen. 'Extremely young and bewildered children were brought in and interrogated (sometimes for over an hour) by one, two and even three interviewers. These interviewers used the full array of suggestive techniques to elicit allegations of abuse. When the children denied they had been abused, they were bombarded with more suggestions, they were scolded, threatened and bribed. When some children whimpered, moaned or begged the interviewers to end the questioning, the interviewers continued.'

The American expert called by the council review team, William Friedrich, claimed the interviews were evidence of abuse. Then he told the court that despite writing that he had viewed the tapes in his pre-trial report, he had not watched them at all. In September 1994, Reed and Lillie were charged and remanded in custody.

For 14 weeks, Reed was held at Low Newton prison. 'I could see the car park from there - the outside world. I would sit on my bed and just stare out. When my family would visit, it felt as if they were coming to see someone with a terminal illness. I could read a book from cover to cover and not remember anything. I was just so dazed.

Once a fortnight, Reed and Lillie were taken to the local magistrates' court for pre-trial hearings, where they were surrounded by Shieldfield parents, their friends and other 'hangers-on', who were literally baying for their blood. 'By now, the process of being taken out was so horrific, with the mob screaming, shouting, banging on the side of the prison van, that the prison began to seem like a place of safety,' Reed says. 'I was glad to get back behind the locked door.'

Lillie was held among murderers in Durham jail. He was supposed to be on Rule 43, segregated from ordinary inmates for his own protection. Twice in his first week, an officer told him to take his meals with non-sex offender prisoners. 'I now know I could have been killed,' he said. 'I heard there were threats on my life.' Later, a prisoner smashed his face with a steel tray, then vanished. He was covered in blood, but no one, officer or inmate, apparently 'saw' anything. Yet Lillie was determined not to live the skulking life of a 'nonce'. As the months went by, he won respect and some security by telling other prisoners what he had been charged with, and protesting his innocence. 'They said they believed me - if I'd really abused children, they said I would have told everyone I was in for burglary.'

Their trial, in July 1994, should have been the end of the matter. They were acquitted on the direction of Mr Justice Holland who said he could not leave the matter to a jury, because having watched three video interviews with the key witness, he considered they pointed to Reed's innocence, and that the evidence against Lillie was dangerous and unreliable.

But that same afternoon, Tony Flynn, then and now the leader of Newcastle City Council, told the media: 'We do believe that abuse has taken place ... we have dismissed them as employees.' In the libel case, he admitted this statement had been drafted a week earlier, before the judge had made his ruling. Under pressure from the Shieldfield parents, he established the review team consisting of Dr Richard Barker, a lecturer in social work at the University of Northumbria, independent social worker Judith Jones, psychologist Jacqui Saradjian and retired director of social services, Roy Wardell. Last week, Flynn refused to speak to The Observer .

On the night of the verdict of the criminal case, Reed left for a holiday: 'I remember sitting in Newcastle airport, waiting for the plane to Corfu, praying no one would recognise me. I knew it wasn't the end.' That November, she married, 'but we couldn't settle anywhere. We had to live with relatives. We had to have the protection of the extended family. We didn't have a chance.'

As the years passed, Reed and Lillie began to think the review team would not be publishing a report - possibly, they believed, because it had endorsed their innocence, and the council would find this embarrassing.

On publication day, 12 November 1998, Lillie was working as a chef in Gateshead. He bought the Newcastle Chronicle and took it home. It was several hours until he realised his photograph was on the front page, and that the review panel had gone far beyond any of the allegations in the criminal trial - claiming he and Reed had been part of a 'paedophile ring' responsible for abusing a large number of children, and for producing pornographic movies.

Soon there were knocks on the doors from reporters. 'We sat in the dark, listening to what was happening outside. Finally I escaped out the back and walked the streets, too terrified to go the railway station or the airport, because I'd be recognised. In the small hours Lorraine's parents picked me up from somewhere up the Tyne.'

As the Sun urged its readers to 'find these beasts', Lillie went into hiding. The same day, Reed was working in a taxi firm on South Tyneside. One of the drivers left his paper in the office: there was her photograph on the front page of the Mirror . 'I don't know how much time passed. My next memory is I am sitting at my aunt Anne's house, and all the family keeps ringing saying reporters have been there, and then there's a knock on the door where I am and it's a reporter. Anne packed me a bag of her own toiletries and some of her clothes and we set off in three cars to try to confuse them. I don't know how many hours or days passed. I went to Scotland, on my own. It was around this time that Reed's marriage crumbled under the pressure and she and her husband divorced.

Last night, a Newcastle City Council spokeswoman said that failing to tell Reed and Lillie before the review team's publication was an 'oversight'.

The road to vindication began a few weeks later when, through relatives, writers Bob Woffinden and Richard Webster made contact with Reed and Lillie. Without their intervention, both the former nurses said, they would now probably be dead: either through suicide or murder. Webster and Woffinden found them lawyers, S.J. Cornish and Co and Adrienne Page QC, who took their case on a 'no-win, no-fee' basis, and would have faced almost certain ruin if Reed and Lillie had lost.

'After all that had happened, to find people who wanted to help us just out of the goodness of their hearts was amazing,' Reed said.