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we can't observe all of Iraq 24 hours a day 7 days a week or in real time.
True, our satellites make passes over areas under surveillance, and high definition/resolution pictures can only be made over a narrower surveillance path.
This seems does seem to be how we came by a lot of the intelligence that Gen. Powell showed in his presentation to the UN.
Signal Intelligence (Sigint) satellites, designed to intercept radio and mobile phone traffic have been used recently in conjunction with the Echelon phone, fax and e-mail monitoring system to gather the intel presented.
And yes, it does seem rather silly that Iraq says the UN can fly U-2's, but can't guarantee that they won't be shot down. Iraq probably does not posess the capability of doing so, but it's par for the course pertaining to their 'cooperation'.