This is a partial transcript of "Special Report with Brit Hume", June 2, 2004 that has been edited for clarity.

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(BEGIN VIDEO CLIP)

CONDOLEEZZA RICE, NATIONAL SECURITY ADVISER: Mr. Chalabi has had a difficult relationship with the government recently. But you know, nothing is forever. And the important thing is that it's not what his relationship is with us. It's what his relationship is with the Iraqi people.

(END VIDEO CLIP)

BRIT HUME, HOST: That of course, Condoleezza Rice on Fox News this morning, answering questions occasioned by news reports that Chalabi -- Ahmad Chalabi (search), once a close U.S. ally in Iraq, now stood accused by anonymous U.S. officials, of telling Iran that this country had cracked some of Iran's communications codes.

So what's going on here? For answers we turn to Michael Ledeen, resident scholar at the American Enterprise Institute, who thinks Chalabi is probably getting a raw deal.

Now, for openers, you're a friend of his, though. Right?

MICHAEL LEEDEN, AMERICAN ENTERPRISE INSTITUTE: True.

HUME: OK. Go ahead.

LEEDEN: Long-time friend.

HUME: So what's up? What in your judgment is at work here? What's going on?

LEEDEN: Well, what's going? I mean there's this story put out by unnamed intelligence officials that no serious person can believe.

HUME: Why not?

LEEDEN: Because the story goes, some drunk at CPA in Baghdad told Ahmed Chalabi...

HUME: CPA meaning the Coalition Provisional Authority.

LEEDEN: Right. That we had broken the Iranian code; whereupon Ahmed Chalabi races off to the Iranian station chief in downtown Baghdad, and says the Americans have broken your code.

HUME: Now, wait a minute. Iran presumably has a whole lot of codes, right?

LEEDEN: I don't know. I'm not -- I don't know.

HUME: Well, you know about intelligence services pro...

LEEDEN: Well, the basic thing, yes. Presumably, they had more than one code.

HUME: OK. So he -- so presumably -- but the fact that we had broken one of them, right, is...

LEEDEN: Right. So Chalabi goes and says they have broken your code, whatever code it is. And then, according to the same unnamed intelligence officials, the station chief in Baghdad, then using that very same code, sends a message to Tehran saying thank God Ahmed Chalabi just told us that the Americans can read this code that I'm now using.

So basically it assumes, A, that Chalabi is an idiot. And B, that the Iranian station chief in Baghdad is an idiot.

And the one thing we know for sure in all of this is that the Iranian intelligence service is very good, and they don't have idiots as station chiefs in places like Baghdad. So that story is impossible. Whatever is going on, that story is ridiculous.

HUME: Well, of course, the previous report in this was broader. It said that he had been passing things to the Iranians. Now, first of all, he has acknowledged, of course, that he has in touch with the Iranians.

LEEDEN: You bet. Everybody is in touch with the Iranians. You can't be a major figure in Iraq these days and not be in touch with the Iranians.

HUME: Why not?

LEEDEN: Because they're all over the place and they're very potent and powerful. And people who aren't nice to them get blown up. Furthermore, for the United States government to accuse Chalabi of being close to the Iranians is also preposterous, because they're the ones who put him there. I mean he's had an office in Iran -- in Tehran for the past several years. And it's been paid for by the State Department. I mean it's not as if he trotted off by himself and spent his money to open an office there. It's our money that we paid for so he would be there talking to them.

HUME: So what explains the disaffection with Chalabi? I mean obviously he has been named as a source of a lot of the information about weapons of mass destruction, some of which obviously didn't pan out. But what beyond that, or maybe it is that, explains the disaffection of this government with Chalabi? He blames the CIA, says the CIA doesn't like him? Why doesn't the CIA like him, because of the intelligence information on the weapons or what?

LEEDEN: No. I mean CIA has thousands of sources on WMD's, and Chalabi provided three, so to blame...

HUME: Three sources or three pieces of information?

LEEDEN: No, three sources. He didn't provide -- as far as I understand it, he did not have claim to have particularly profound information on WMD's. He gave his defectors, people defected to the INC he provided them to the United States.

HUME: INC being the Iraqi National Congress (search), which was his exile opposition group.

LEEDEN: Right. And so the United States government was responsible for vetting them and figuring out if those stories were true. So if there's an error made, as Chalabi said the other night, it's not his fault. I mean he turned these people over to the government, as he was supposed to. They evaluated it. If they misevaluated it, which by the way, I don't believe. I think WMD's were there. We just waited such a long time between Afghanistan and Iraq that they were sent to other places. And so they were no longer in the places where we thought they were.

But in any case, to get back to the why -- I mean why? The State Department and the CIA have hated the Iraqi National Congress for many years now. And the basic answer is -- to the why, is because they are happy to work with us, but they will not work for us.

HUME: Who, the Iraqi National Congress?

LEEDEN: Yes. And so when CIA used to tell Chalabi do this, do that, he would refuse and say, look, you know, you don't own me. I don't work for you. I'm an independent player. And he had the nerve to tell them in the 1990s that one of their coups in Baghdad had been penetrated by Saddam.

And they laughed at him, and it turned out that he was right, and all their people were killed, badly by Saddam.

HUME: All of whose people?

LEEDEN: All of the CIA, coup people were killed. People CIA had organized to station a coup against Saddam.

HUME: Got killed?

LEEDEN: Yes. Then...

HUME: Now...

LEEDEN: Then when Saddam attacked the Iraqi National Congress in 1996 and drove them out of northern Iraq, where we had been protecting them, they ran. They ran to Guam. And when they got to Guam, the same CIA that is now accusing Chalabi of being an Iranian agent, accused three INC people of being Iraqi agents, and threatened to send them back to Iraq. Where they surely would have been killed in the most horrible way.

And thanks only to James Woolsey, the former director of Central Intelligence, who intervened and demanded to see the intelligence, and discovered that there was no intelligence. That it was all a gag. I mean one piece of intelligence said that one of these guys had gone to Iraq, and it turned out he was 9 years old at the time.

HUME: Now, once Saddam had fallen, Chalabi became very critical of the U.S. about the occupation and so forth. Could that have engendered this opposition that led to this in you view?

LEEDEN: But all Iraqi politicians were critical of certain aspects of the United States occupation. No, I think -- I mean it's a long-standing, real visceral dislike both of Chalabi and of the organization itself. I don't think it's any one particular event. I think it's an accumulation of things over the years.

HUME: One-word answer if you can? Does it really matter anymore now?

LEEDEN: No. Condi said it right. It only matters what the Iraqis believe now. Not what we believe.

HUME: All right. Michael Ledeen, great to have you. Thanks very much.

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