This is a partial transcript from "The Beltway Boys", June 26, 2004, that has been edited for clarity.

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JUAN WILLIAMS, GUEST CO-HOST: I'm Juan Williams, in for Mort Kondracke.

FRED BARNES, CO-HOST: Glad to have you here, Juan.

The hot story, number one hot story is, countdown. Of course, that's countdown to Wednesday's handover of sovereignty from the U.S. to the Iraqis to a new Iraqi government. And it reminds me of that old Middle Eastern saying that the dog barks, but the caravan moves on.

Obviously the dog that's been barking and biting in Iraq, with this violence that we had this last week, 1 day, 6 cities were bombed, and more than 100 people were killed, 3 American GIs were killed, and so on, that was the terrorists and the Ba'athists.

And but you know, that really hasn't changed anything. In the first place, it hasn't blocked the turnover. In the second place, and importantly, it has not scared off the new prime minister, Iyad Allawi. Now, listen to what he said about the violence, by the way.

(BEGIN VIDEO CLIP)

IYAD ALLAWI, IRAQI PRIME MINISTER: Unfortunately, many lives have fallen victims to these deadly criminals. Many lives may fall again in the near future. But this is all going to be part of liberating our society and building peace, progress, and stability, both in Iraq and in the region.

(END VIDEO CLIP)

BARNES: He may look like an average Joe, but he is a tough guy...

WILLIAMS: He is.

BARNES: ... and, of course, one insurgency, the one of that young cleric, Muqtada al-Sadr (search), has already collapsed. But you do have this important insurgency that's left with Zarqawi, and Fallujah is still a city where the terrorists and the Ba'athists, are in charge.

One, Allawi has said he's going to smash this insurgency too. General Mark Kimmitt of the U.S. Army over in Iraq has said they are going to shatter Zarqawi's whole terrorist organization. Now, those are big aims, but they're, they're certainly pledged to do it.

And all, while all this is going on, not only a new government being set up, machinery is being put in place to have an election, a democratic election of a democratic government, you know, by the end of next January. So all in all, I'm more optimistic than not about the future of Iraq.

WILLIAMS: Fred, I don't know where you get those glasses. I can't tell if they're rose-colored, but they must be, given what you just said, because the level of violence has just been scary, it's terrible.

BARNES: Well, it has been high, yes.

WILLIAMS: And it's destabilizing and exactly what they don't need in Iraq. I mean, the idea that it could degenerate into civil war is now a realistic prospect. And that's the concern. When you hear them say, when you hear Allawi say he's going to crack down on the opposition, I just don't think it's realistic. Even the American military says they do not have the capacity at the moment to properly train the Iraqis to defend themselves.

So it's going to have to be an American military operation. And so far, the way the American military has dealt with this is by making deals with the insurgents and saying, Stay over there...

BARNES: Yes.

WILLIAMS: ... stay in Fallujah...

BARNES: Yes.

WILLIAMS: ... stay in Najaf. We won't bother you, you don't...

BARNES: Yes.

WILLIAMS: ... bother us. That's not going to be so good enough much longer.

BARNES: Right. No, no, you're right, of course Fallujah, that effort of, has failed. It's as simple as that.

WILLIAMS: All right. Hot story number two, the Iraq effect. The latest Fox News poll shows 45 percent approve of President Bush's handling of Iraq. That's down 12 points since the beginning of last year. Excuse me, beginning of this year.

Fifty percent say the war with Iraq was the right thing to do. That's down 13 points since last July. When asked if there was a relationship between Iraq and al Qaeda, 56 percent say there was, 28 percent say no, there wasn't. Forty-eight percent say the U.S. should continue to fund reconstruction efforts in Iraq after next week's handover.

And when asked what the future Iraqi government will look like five years from now, only 34 percent say it will be a democracy. Forty-seven percent say it'll revert to a dictatorship, Fred.

BARNES: So I bet you're drawing from that that Iraq is hurting Bush, right?

WILLIAMS: Well, it's -- you know what? In the short run, it ...might. We can't ... tell about... the long run, but clearly, Americans for the moment are don't like what they're seeing, and they ... it's turning them off.

BARNES: Whenever there's violence, and there has been a high level of violence, no question about it, I think the numbers go down. It hurts President Bush (search). The handover, I think, is going to change that as we move toward a fully democratic Iraq. It's going to change that. And the, and the level of violence will go down.

One other thing that I would point out to you, Juan, and that is that President Bush, even while all this has happened, President Bush has opened up a 6-point lead over John Kerry in a head-to-head matchup. That's up 5 points since two weeks ago. That must mean something, right?

WILLIAMS: Oh, it does. It's amazing to me how he can hold, now, the polls differ. We have different polls that have different numbers.

BARNES: Yes, right.

WILLIAMS: But clearly, President Bush has been waiting was able to withstand all the troubles in Iraq. And I say, Fred, on your earlier point, I think one of the problems is, the president doesn't have a clear strategy for dealing with what's going on in Iraq. And I think that's why the American people are losing faith in the idea that America can handle this and that Iraq will eventually one day be the democracy that the president has dreamed of.

BARNES: Well...

WILLIAMS: That's his grand vision.

BARNES: Well, let me just add one thing, and that was that Zarqawi memo that was intercepted about a month or two ago, it actually was back in March, in which Zarqawi said he was writing to Al Qaeda, the headquarters, and saying, Send more help, because once this turnover of sovereignty to the Iraqis, and in the short run it won't be total sovereignty, but it will be a lot of sovereignty, once that happens, it's going to just completely undercut our entire operation. And people will be less willing to tolerate attacks on an Iraqi government with sovereignty.

And so Zarqawi's worried, and that's one of the reasons I'm more optimistic than not.

WILLIAMS: Well, I think it's a reason for optimism.

BARNES: Yes.

WILLIAMS: I just hope, I mean, I happen to believe, when President Bush says he has his vision for democratizing that Arab world and that it's key to Middle East peace...

BARNES: Yes.

WILLIAMS: ... I think it's a good idea. The question is, can he do it ... in the short run without a high cost of American life? And that, obviously, you know, it's not clear.

BARNES: That's a fair question. All right.

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