This partial transcript of Special Report with Brit Hume, December 21, 2001 was provided by the Federal Document Clearing House. Click here to order the complete transcript.

SNOW: Pakistan isn't the only country where citizens may differ with their government on the war on terror. Here to talk about the situation there in Saudi Arabia and elsewhere is Arnaud de Borchgrave, editor at large at United Press International.

Let's begin by talking a little bit about the situation in Pakistan. Here you have President Musharraf sticking his neck out, trying to help the United States. But at the same time, now the Pakistani government is issuing official protests against efforts by the United States to shut off funding for organizations we suspect of terrorism.

ARNAUD DE BORCHGRAVE, UNITED PRESS INTERNATIONAL: Musharraf knows very well that they've been engaged in terrorism, but they call it national liberation for Kashmir. They've been trained in the same camps as Al Qaeda people, all of those have been interchangeable over the years.

It's Musharraf's worst nightmare come true. He's now faced with four hostile fronts. One, the Northern Alliance in Afghanistan, which is traditionally very close to India, Russia and Iran. Two, he is faced with a hostile India. Three, he's faced with a disloyal ISI, Interservices Intelligence Agency.

SNOW: Yes. His —

BORCHGRAVE: And three, he's faced with a hostile clergy. And the clergy and ISI are in bed together. So it's a real can of worms.

SNOW: And the clergy and the ISI were originally sponsors of the Taliban.

BORCHGRAVE: That is correct.

SNOW: And they continue to operate the madrassas, the radical Islamic schools, that've turned out many people who graduated to Al Qaeda.

BORCHGRAVE: Well, all of the recruits for Al Qaeda that come from the madrassas, and this has been going on for the past 10 years, all of this has been funded by the Saudi Arabian Wahhabi clergy. And of course, the Saudi government officially says they know nothing about it. They just give billions to the clergy. And it's up to the clergy to dispense their largess wherever they feel fit.

SNOW: I want to get to Saudi Arabia in a minute. But let's stick with Pakistan for a minute, because we also saw in Steve Centanni's report a little snippet from the attack on the Indian parliament on the 13th of this month. How likely is it that we're going to see an armed conflict between India and Pakistan?

BORCHGRAVE: An armed conflict, I doubt. Nuclear escalation, I do not believe for a minute that will escalate into that. That there will be skirmishes and hotter and hotter skirmishes, I have no doubt. That this was a rogue operation, probably ISI, most probably.

SNOW: Now you mentioned before that Musharraf is having problems with the ISI, his intelligence service. What he did is he tossed out the old head of the service at the beginning of this war, but you still have a lot of people from the old regime still working in the rank and file.

BORCHGRAVE: Yes, the culture of that organization is principally fundamentalist and anti-American. It did spawn the Taliban movement. They were the Taliban's only source of supply between 1996 and now. They now have to go through the motions of hunting down Taliban chieftains, but everybody knows where these Taliban people are. They have second homes in Quetta and Peshawar in Pakistan, where they park their families, just as the U.S. bombing was beginning.

SNOW: Now about a decade ago, the United States suspended military to military cooperations and some intelligence cooperation, as well, with Pakistan. Do we need to re-engage so that we do not allow this kind of opposition to arise within the ranks of the of the ISI or even the professional military in Pakistan?

BORCHGRAVE: It is absolutely essential. And for ISI, it would suggest that the kind of reform that the CIA went through in the mid 1970's, with the Church and Pike committees. ISI's totally unaccountable.

Its chief, who is a loyalist, a Musharaff loyalist, reports directly to Musharraf, nobody else. There's no national security council, so they're unaccountable. And whether a chief of ISI can really find out what the organization is up to, after two months or two and a half months on the job is doubtful.

SNOW: All right, let's switch to Saudi Arabia. The bin Laden tapes recording to several news organization indicate not only that bin Laden knew more about the operation than even we had believed, he names as many as nine different hijackers, but also seems to insinuate that there are much more formal ties or at least open ties between Al Qaeda and the government of Saudi Arabia.

BORCHGRAVE: The government of Saudi Arabia and Al Qaeda I doubt very much, but that there are ties between high ranking members of the Saudi Wahhabi clergy and Al Qaeda, there is no doubt. In fact, some of the names are mentioned in that tape.

SNOW: As you mentioned before, the government itself though tries to deal with the Wahhabi clergy by giving them lots of money.

BORCHGRAVE: This is a quid pro quo. The clergy does not criticize the extravagant excesses of the royal family, which is now 30,000 strong. And in return, the Wahhabi clergy gets billions of dollars to dispense as they see fit.

SNOW: So from the United States point of view, strategically, how reliable are the Saudis?

BORCHGRAVE: Well, the Saudis are reliable allies insofar as our oil supplies are concerned, but the House of Saudi is sitting on a powder keg. Hopefully it won't explode. Hopefully we can persuade them to move in the direction of a constitutional monarchy, which has to happen sooner or later. Right now as you know, it's an absolute monarchy that rules by the divine right of the king.

SNOW: And furthermore the House of Saudi, you keep mentioning Wahhabism. That is a form of Islam. It not only is practiced there, but it stalled when the House of Saud came to power.

BORCHGRAVE: That is correct. It's the strictest possible interpretation of Koranic law.

SNOW: So the United States now, in trying to look for Saudi Arabia, we also have had some qualms in terms of their cooperation with us when it came to banking, for instance trying to choke off some of the funds. What leverage do we have right now over the royal family?

BORCHGRAVE: Well, you know, they are entirely dependent on the United States for their defense. They spent billions on their own defense but without the U.S., they would be nowhere. So let's suppose that something were to happen again on the Iraqi front. It seems to me that the Saudis would very much need the U.S. military presence.

SNOW: Saudis are complaining bitterly about the treatment at the hands of the American press.

BORCHGRAVE: Well, they're complaining bitterly about the truth coming out about what their clergy has been up to in places like Pakistan. The madrassa system is about 15,000 schools with one million children who have been taught to hate America, hate Israel and hate India, all paid for with Saudi funds and also some UAE funds, I might add.

SNOW: Now the United States could or should say to the Saudis it is time now for you, because you have political control over what happens in the mosques, to put in people who are going to be friendlier toward us and to shut down the madrassas?

BORCHGRAVE: Absolutely. You can't shut down the madrassas when a million kids depend on them. It's free board and lodging. I think changing the curriculum, the syllabus of these madrassas is something that Musharaff wants to do, but that'll take time and a lot of money.

SNOW: All right, Arnaud de Borchgrave, editor at large of United Press International. Thanks for joining us.

Click here to order the complete transcript.

Copy: Content and Programming Copyright 2001 Fox News Network, Inc. ALL RIGHTS RESERVED. Transcription Copyright 2001 eMediaMillWorks, Inc. (f/k/a Federal Document Clearing House, Inc.), which takes sole responsibility for the accuracy of the transcription. ALL RIGHTS RESERVED. No license is granted to the user of this material except for the user's personal or internal use and, in such case, only one copy may be printed, nor shall user use any material for commercial purposes or in any fashion that may infringe upon Fox News Network, Inc.'s and eMediaMillWorks, Inc.'s copyrights or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.