The following is a transcribed excerpt from 'FOX News Sunday,' August 15, 2004:

CHRIS WALLACE, HOST OF FOX NEWS SUNDAY: There was plenty of action on the foreign-policy front this week. U.S. and Iraqi troops battled insurgents in Najaf. There are new worries about Iran's role in the region. And the presidential campaigns argued over how best to defend the homeland.

Here to discuss all this, the chairman of the Senate Foreign Relations Committee, Republican Richard Lugar.

And, Senator, welcome. Good to have you with us here.

SENATOR RICHARD LUGAR: Thank you, Chris.

WALLACE: For more than a week now, U.S. and Iraqi forces have been battling Shiite cleric Muqtada al-Sadr and his forces. How serious a threat do you think that these rebels and the possibility of a larger Shiite uprising pose to progress in Iraq?

LUGAR: Well, the progress situation really is in limbo. These are the players, the young Sadr that you've mentioned, who, after all, is a very minor cleric. But at the same time, the Ayatollah Sistani is in London. He is the senior cleric with whom our people had been dealing. And he is out of the picture.

Other clerics...

WALLACE: He had heart surgery this week.

LUGAR: Yes. Other clerics are deferring to the young Sadr because they really don't want to get Shiites disunited.

So as a result, the Iraqi government, Prime Minister Allawi, his fledging government, is left with the very tough task of taking on Sadr and going, apparently, into the shrines, if that is their choice finally, and therefore alienating a good part of the 65 percent of the population, the Shiites, who will see this as desecration of the shrine, whether it's done by Americans or Iraqis.

It would be worse still if it were done by Americans, because Sadr's view is also that we ought to get out, that we are the occupiers, that essentially the fates of Iraq ought to be a theocratic government with Shiites in charge.

And so, he has said, "I'll be a martyr. I'm prepared to die for this principle. And he has enlisted, first of all, of course, his own forces back in Sadr City, a slum (ph) in Baghdad, where they have a good bit of control, and then has taken on the Najaf situation, the holy shrine city, where people have followed him because of his strength.

WALLACE: Let me ask you about it, because you make it sound when you say that the progress of the fledgling government is in limbo, you make it sound like it's a pretty serious...

LUGAR: Yes, it's very much at stake, because Sadr is also saying Allawi should resign, that these are puppets of the United States, this is not really an Iraqi government.

WALLACE: But let me ask you, last weekend Prime Minister Allawi said that there will be no truce, no negotiations with Sadr. There was fighting; then they tried to have talks. The talks have broken down.

How do they, how does the Iraqi government, how does the U.S., balance on the one hand the goal of crushing Sadr and his supporters and solving the problem, with on the other hand the danger of an explosion, if do you that?

LUGAR: Well, there is simply a big gamble involved in all of this. Because the gamble is, if you don't crush Sadr, or at least get him totally disarmed and out of the picture so an example is set that Najaf is not one of many such places in which insurgents like the Fallujah situation might continue or in Somarra where American Marines were involved today in more action. If you don't stop this sort of thing, then the fledgling forces of the Iraqis, the police that are trying to be trained, are not going to make it.

Now, it's touch-and-go whether they are trained enough — that is, the Iraqi police — to take on Sadr now in Najaf. That will be a close contest if it comes to that.

But in any event, Allawi says correctly, if we don't meet it, we really don't have much of a government.

BC-FOX-NEWS-SUNDAY 1STADD FOX-NEWS-SUNDAY 1stadd The Federal Document Clearing House

EVENTDATE: 08-15

XXX of a government.

LUGAR: We have essentially Saddam wiped out and all sorts of locuses of authority, wherever someone has a militia, wherever somebody wants to gather together some people to take charge.

WALLACE: And all this, of course, happens as this national conference is starting...

LUGAR: Precisely.

WALLACE: ... to meet today in Baghdad...

LUGAR: The very day.

WALLACE: ... to form this assembly which would oversee the Iraqi government.

Let me switch, if I can, and talk to you...

LUGAR: Yes, and that assembly — a three-day assembly, a thousand people that are herded behind the security, essentially, of our compound. They've got to reach a tough decision to get 100 people who will set the rules of the game for the election, but also have veto authority over Allawi by a two-thirds vote.

So this is not an inconsequential development, if there is to be an Iraqi democracy.

WALLACE: Let me ask you about Iran, because there is evidence that Iran is supporting some of these Shiite insurgents in Iraq, and also Iran is now saying it's going to go ahead with its program to enrich uranium, it says, to produce electric power.

How tough should the U.S. get with the ayatollahs running Iran?

LUGAR: Well, we're going to have to get very tough. We have been working closely — and we're hoping Europeans will get very tough, that the U.N. will get very tough, that the IAEA, the atomic energy people of the U.N., will get tough — in other words, that we're not out there all alone.

But the fact is that the Iranians are moving toward weaponization of the uranium experiment that they have. And they've been clearly doing this. And some, in fact, in Iran, are asserting, as a sovereign right, they have the ability to do this and the right to do it.

Furthermore, that they have a problem because Pakistan and India have nuclear weapons; they allege that Israel has nuclear weapons. So, in defense of their country, they're saying they can do it.

Now, the U.N., we are hopeful, will come forward with the Security Council to tell Iran to stop and then to impose sanctions, I suspect to begin with economic sanctions on Iran. And other nations hopefully are aboard — will observe that.

But not ruling out at the end of the day military sanctions against Iran. That is another step down the trail that is very serious.

WALLACE: Wait, when you talk about military sanctions, in the end, can the U.S. allow Iran to get the bomb? Or, in the end, if they proceed against the threat or the reality of sanctions, would the U.S. have to support a preemptive strike, such as Israel's against Iraq in 1981, to end their nuclear program?

LUGAR: I'm not going to speculate for a moment on a preemptive strike or any specific action. I'm just sort of tracing what I see to be the course to the U.N. We're not to the U.N...

WALLACE: What would military sanctions be, Senator?

LUGAR: Well, eventually the Security Council would say that the nations of the world, the people represented by the U.N., have got to do what is necessary to stop this.

WALLACE: But you're saying we cannot allow Iran to get a nuclear bomb?

LUGAR: No, I think that has to be stopped in the same way that over in North Korea we're working with the six-power talks, with the idea clearly at the end of the day is that North Korea gives up its program in return for whatever. And there is great discussion as to what "whatever" should be or whether we should be negotiating that at all.

WALLACE: Senator, I want to switch subjects with you, and I want to play a couple of clips from the campaign trail in recent days. Take a look.

(BEGIN VIDEO CLIPS)

U.S. SENATOR JOHN KERRY (D-MA): I believe I can fight a more effective, more thoughtful, more strategic, more proactive, more sensitive war on terror that reaches out to other nations.

DICK CHENEY, VICE PRESIDENT OF THE UNITED STATES: America has been in too many wars for any of our wishes, but not a one of them was won by being sensitive.

(END VIDEO CLIPS)

WALLACE: Senator, in the context in which Senator Kerry was speaking, "being sensitive to reach out to other countries," anything wrong with fighting a sensitive war on terror?

LUGAR: Well, we should reach out to other countries. And we're doing that in North Korea, obviously, with the six-power talks and with all of the talks that are involved in Iran — and, for that matter, with Iraq. We are eager for anyone to come in and to help us; encouraging people to do that.

So there's no difference really in the reaching-out process here. I think I would just say Senator Kerry is really moving against a false target. The reaching-out process is really profound.

WALLACE: But when he says, "I want to fight a thoughtful, effective, sensitive war on terror," is there anything wrong with sensitive? Because the Republicans have been making fun of him for saying that.

LUGAR: Well, I think the word "sensitive" has become a campaign issue itself. And you saw, as I did, the two clips that were brought at the fore (ph). It is not an appropriate word, given, I suspect, the dangers that are involved.

Principally we've been talking about Iraq. There's nothing sensitive about the situation there for the moment. This is a tough business as to who is going to prevail and what kind of winds of political change could make possible a democracy in a tough situation.

WALLACE: Tomorrow the president is going to announce the first major reconfiguration of U.S. forces around the world since the end of the Cold War, pulling, we are told, up to 70,000 troops out of Europe and out of Asia.

First of all, do you think that's a good idea in general? And specifically, is it wise to pull troops out of South Korea at a time when there's considerable tension with North Korea?

LUGAR: Well, that's a tough call. And clearly, some have come out of South Korea already, as I understand, to go to Iraq simply to supplement there.

I think this is a situation for very careful, continuing negotiations with our South Korean friends and I would think with the six-power talks. We ought not to do anything that's going to jeopardize the success potentially of those talks.

Now, I think the president's announcement is prospective. It will suggest that there is a great deal of negotiation and talks still to proceed, and there should be.

WALLACE: Just a little bit of time left, about a minute.

Porter Goss, named CIA director — to be nominated as CIA director this week by President Bush. Some people are concerned that, at a time when there was criticism of the CIA, that it didn't maybe tell it straight to the White House before 9/11, before the war in Iraq.

Is there a danger of having a politician as CIA director and particularly one who has taken sides, as a Republican congressman, in the presidential campaign?

LUGAR: I think that Porter Goss is a good selection. I think it's a timely selection, one that should be made. There could be many other candidates, but he seems to me to be clearly one at the top list of anybody's consideration.

I understand the real battle is with the 9/11 Commission and their desire to really change the configuration of intelligence, the nature of the leadership altogether. But I suspect that that will be subordinated for the moment to the need to have somebody there. And Porter Goss is a good person to be at the president's side.

The real issue with Congress and the CIA is that CIA has not penetrated the Al Qaida cells. And we have not had the kind of intelligence that can only come if you're sitting around the table and you hear the dates and the place and so forth. Now, that is what the new director or the new configuration, whatever it may be, has got to achieve.

WALLACE: Senator, thank you. Always a pleasure to talk with you. Come on back.

LUGAR: Thank you, Chris.

WALLACE: When we return, from swift votes to stem cells, it's been a rough week on the campaign trail. Back in a moment.

WALLACE: We have the good fortune to be able to talk politics today with two of the smartest and toughest practitioners of that fine trade: Mary Matalin, a senior advisor to the Bush campaign, and Donna Brazile, a top Democratic strategist and campaign manager for Al Gore in 2000.

Welcome to both of you. Good to have you here.

MARY MATALIN: It's nice to be called smart first thing in the morning, don't you think, Donna?

WALLACE: And tough.

DONNA BRAZILE: Absolutely, on the weekend, too. Thank you.

WALLACE: Before we get to the presidential campaign, let's start with the remarkable doings in New Jersey this week. Governor McGreevey admitted to a homosexual affair and then stepped down to protect the office of governor, but said he's not going to actually leave office for some period of time. Let's watch.

(BEGIN VIDEO CLIP)

JAMES MCGREEVEY, GOVERNOR OF NEW JERSEY: Given the circumstances surrounding the affair and its likely impact upon my family and my ability to govern, my resignation will be effective on November 15th of this year.

(END VIDEO CLIP)

WALLACE: Donna, is there any reason, any reason, for McGreevey to stay on until November 15th, except for the fact that he wants to keep the office of governor in Democratic hands?

BRAZILE: Well, the office of governor will remain in Democratic hands because the state senate president is a Democrat, and that's the line of succession.

WALLACE: But if there was a special election in September, then maybe...

BRAZILE: If there was a special election — first of all, I think what Governor McGreevey is trying to do right now is to allow for an orderly transition, to work with the incoming governor, acting governor, to figure out the budget, figure out some of the political priorities.

I think he made the right decision to step down. And I believe that over the next two and a half, three months, the state of New Jersey will be in capable hands with Governor McGreevey beginning to transition out of office.

WALLACE: Mary, this is not the presidency of the United States. Couldn't you have a transition after a special election in September?

MATALIN: You absolutely could. And he's not staying in office for any of the reasons Donna suggests. It's a political move. It's a pure political move.

But we don't really have a dog in this fight. It's up to the voters of New Jersey. It's hard to imagine that they would let that situation stand as he's called for it, but that's between the voters and the Democrats in New Jersey.

WALLACE: Do you think the Republicans should try to make a big issue of it and try to force him out?

MATALIN: You know, I'm kind of focused on the presidential race, and to the extent that it affects that, there isn't much extent to which it affects that race. So we'll be working hard in New Jersey.

BRAZILE: Mary is absolutely right. Right now John Kerry is ahead in the polls in New Jersey by 20 points. There's no reason to step down at this point. He said he's going to leave. There's a Democrat that will replace him. It's likely that a Democrat will take over the seat in 2005 when there's another election.

WALLACE: All right. Let me turn to the somewhat tamer world of presidential politics.

As we were saying with Senator Lugar, the president and vice president hit Senator Kerry this week for fighting a sensitive war on terror. Cheap shot?

BRAZILE: Oh, absolutely. John Kerry said at the Unity conference that he wants to fight a strategic, effective, all-out war on terror using our allies, making sure we have the resources — essentially in regards to American power. That's what George Bush said back in 2001. We should be sensitive how we use American power.

MATALIN: His strategic approach is not applicable to this enemy. His strategic approach is a legacy of the Cold War. He said at his convention that he's for swift and certain action after an attack. That's Cold War thinking. 9/11 enemies, post-9/11 enemies, these Islamic terrorists, we need to get them before they get us. The president has gone on the offense.

The problem with Senator Kerry's policy is not whether they're sensitive, it's not the verbiage. It's that they don't apply to this enemy. He's not for going on the offensive. He's for pulling out troops in six months, which is the worst signal you can send to the Iraqis and the insurgents...

BRAZILE: Oh, Mary...

MATALIN: ... and he thinks that going on the offense and going after the terrorists creates more terrorists.

BRAZILE: First of all, that is not Senator Kerry's position...

MATALIN: Yes, it is, Donna.

BRAZILE: ... and that's not the position of the Democratic Party.

Our position is one of strength. It's one of making sure that we are prepared to fight this war on terror with our allies and not allow the American people to have the burden alone of spending all of our resources, but to effectively engage the enemy by having strategic allies at the table.

Look, we can go out there and be America, the world's bully. That's what we've done so far with George Bush.

WALLACE: Let me add one other...

MATALIN: This is such a canard. There are more allies in this engagement...

BRAZILE: And they are pulling away by the day.

MATALIN: ... than the previous...

BRAZILE: They are pulling away every day.

MATALIN: No, no. You know, tell that to Silvio Berlusconi and you tell that to the Australians and the Brits and the Poles and the Norwegians and...

BRAZILE: And why not have more allies on the battlefield so we're not spending all our capital...

WALLACE: Let me get in here for a second. Forgive me. Let me bring one more element into this debate.

Senator Kerry I think was still, one could argue, was still struggling this week to explain whether, knowing everything that he does now, whether he would have still voted to authorize the president to go to war in Iraq. Here's what he had to say. Let's look.

(BEGIN VIDEO CLIP)

KERRY: Yes, I would have voted for the authority. I believe it's the right authority for a president to have. But I would have used that authority, as I have said throughout this campaign, effectively.

(END VIDEO CLIP)

WALLACE: Donna, isn't it getting a little late for "yes, but" answers on this question?

BRAZILE: But he's being consistent. He's been consistent on the position.

He has stood by his vote of giving the president the authority to go to war. And he has stood by the criticism of the way the president went to war, how he mishandled the information and misled the American people. So I think John Kerry's being consistent.

What happened this week is that the Bush-Cheney campaign, fearful that John Kerry and John Edwards have closed the gap on national security, closed the gap on who would be a better commander in chief, they went after and they parsed words in order to try to get a strategic advantage.

So I think Kerry has been consistent. And he has to continue to go out there and stay on his message and not get into Bush's message.

MATALIN: Chris, since the convention and after a year of all the ads and the to-ing and fro-ing and saying I'm strong and saying I'm strong, Senator Kerry actually has fewer people that think he's strong and more people that think he changes his mind too much.

MATALIN: The New York Times this morning, the megaphone for the Kerry campaign, said these votes on Iraq were political opportunism and they were calibrated to his presidential aspirations, that he was a hawk when Gephardt was leading and he was a dove when Howard Dean was leading.

We do not need a leader in this day and age...

BRAZILE: But, Mary, if you want to get into a conversation about missed...

MATALIN: Please stop interrupting me, Donna.

BRAZILE: All right, all right, but let me finish too.

MATALIN: ... in this day and age that is neither strong nor steadfast. He's been inconsistent on Iraq, and he has given no view, at least not a 21st-century view, on going forward on the global war on terror.

BRAZILE: Misleading...

MATALIN: And that's why he has no — he's losing altitude in his attributes on strength and on steadfastness and changing his mind too much.

BRAZILE: The incumbent president and vice president don't have a plan to get us out of Iraq. They've mishandled the situation in Iraq. They don't want to talk about what happened this week in Iraq. Rather, they want to attack John Kerry's plan on how he would handle this war differently.

This is a president and vice president that said they would greet us with flowers, who said "Mission accomplished" almost 18 months ago.

So, in my judgment, I think Senator Kerry has gone about this in the right way...

WALLACE: All right. All right.

(CROSSTALK)

WALLACE: I want to move on to something else, because I feel like I've heard this part of it before.

Let's move on to the question of the swift boats, which has become something of an issue over the last couple of weeks.

Mary, do you have any reason to believe that John Kerry isn't a war hero? Do you have any reason to believe he didn't fight bravely in Vietnam and that he didn't save Americans' lives?

MATALIN: Contrary to the false accusations of this Kerry campaign, we have never questioned his service. This is a canard of theirs.

What we do question is the record, his record for the 19 years that he was in the Senate during the rise of this Islamic fundamentalism where he cut the biggest tool against these terrorists, which is intelligence.

WALLACE: But as far as...

MATALIN: That's his record, and his going-forward proposals.

WALLACE: As far as the Swift Boat allegations by these...

MATALIN: Chris, it's not — you know, there is a lot of — no, that's not our ad. We don't question his service.

But he has one message that he's been trying to propagate since the primaries, and he's saying that a condition of his commander-in- chiefness is that he served in Vietnam. There are those who served with him who question that. He put it on the table, and there are those who remain angry all these many years later for his coming back from Vietnam and accusing them of atrocities and war crimes.

BRAZILE: Oh, boy.

WALLACE: Well, Donna, I want to ask you about that. If more than 200 of Kerry's fellow swift-boat veterans come out against him, point out holes in his story, isn't that a legitimate issue?

BRAZILE: Chris, these are a bunch of hired guns. These are the same gentlemen — and, look, I support all of these guys who've served in Vietnam, unlike some who decided to, you know, find other things to do.

MATALIN: President Clinton?

BRAZILE: These are guys who — they are hired guns who went after John McCain — and, by the way, John McCain said, you know, last week that we should take these ads down. He called on the president, called on the vice president to distance themselves from these ads.

These guys are lying. They're smearing John Kerry's record.

The men who served with John Kerry and know him best, the men who were on the boat know him best.

WALLACE: But, Donna, let me...

BRAZILE: ... and they say that he served honorably.

WALLACE: Let me ask you about that, because you say that they're lying, they're smearing him.

Kerry says that he was on patrol in Cambodia on Christmas Eve of 1968, that it was seared into his memory. The Swift Boat opponents said not so, and the Kerry campaign's been forced to concede this week they're right.

BRAZILE: Well, look, I don't know anything about who — out in 1968 what happened, in 1969.

The point is, is that these band of these — this new band of brothers are smearing his record. They did not serve with him. And when John Kerry was up for reelection for the United States Senate, two of them came out in support of him. So now they've had a change of heart.

So I think we should examine the guys who are out there smearing John Kerry and the men and the Republican operative from Texas who are paying for these ads, and not challenge John Kerry. He served honorably and he served courageously in Vietnam.

MATALIN: You know, what we ought to do, Chris, is — and Kerry ought to stop this. He's running his campaign predicated on four months of service 35 years ago in the middle of the Cold War.

We have a new enemy. We have new challenges. We need to transform the military. We need to...

BRAZILE: And he's talking about that, as well, Mary.

MATALIN: ... relaunch a strategic direction to meet this terrorist attack today, not 35 years ago.

WALLACE: All right.

MATALIN: And that's another problem with his numbers. The reason he's stuck is because there's no forward vision.

We are into our second-term agenda...

BRAZILE: There's a book...

MATALIN: And it's all words.

BRAZILE: ... which outlines his agenda. It's not words.

MATALIN: This is another example of where words don't matter...

BRAZILE: It's a vision. It's a vision of the country...

WALLACE: Guys, can I ask one last question?

(LAUGHTER)

BRAZILE: Yes, sir.

WALLACE: I want to get into one last area, and, Mary, that's embryonic stem-cell research.

Three years ago, the president authorized, for the first time, funding for some existing — about 78 existing embryonic stem-cell lines. Not a ban, as some people have said.

But scientists now say only 21 of those lines are available, and in fact it is hindering research.

WALLACE: Some of the leading conservatives in your party, according to the polls, the majority of Republicans say the president's policy is wrong.

MATALIN: The position that the Democrats have taken, this demagogic position — it's not some people; it's specifically Senator Kerry and Senator Edwards saying that the president has banned this research. That is a flat-out and deplorable lie. Not only has he not banned out, he is the first president to fund it.

BRAZILE: That's not Kerry's position.

MATALIN: Well, that's what they said at the convention, and that is what you're saying, and that's how it's been covered.

WALLACE: In any case, his position is to limit federal funding?

MATALIN: His position is that there is research — that he is funding this and that there has to be a balance between science and technology, and that there is research going on, very positive research, in adult stem-cell, umbilical cord blood.

And this is a deplorable tactic, to say that we're on the precipice of these findings. There have been no clinical trials. The problem with embryonic stem cells is their unreliability and differentiation. When they've been put into mice, they've turned into brain tumors.

WALLACE: I've got to give Donna...

MATALIN: Well, it's deplorable what they're saying.

BRAZILE: Mary likes to filibuster, because that's all the Republicans have come up with these days. It's empty rhetoric.

Look, the truth is that Orrin Hatch and Ronald Reagan, Jr., as well as Democrats, believe that the existing lines of stem cells, for adults especially, are no longer, you know, useful.

They need more embryonic cells than are available to our scientists so that they can go about the business of trying to find cures for these diseases. That's what they're saying.

That's all they're saying. Take the politics out of this. This is not a political issue. This about science and the scientists.

MATALIN: No, they've done nothing but put politics in it. They've lied about the president's...

BRAZILE: The scientists are calling for it.

MATALIN: ... position. And they've been cruel to those people who suffer, to lead them to believe that there's some cure right around the corner, while ignoring adult stem-cell research.

BRAZILE: I don't think Nancy Reagan has lied to the American people. I think Nancy Reagan has told the truth, that this is a...

MATALIN: Who's supporting President Bush. Nancy Reagan is supporting President Bush.

WALLACE: Folks? Folks? You can take this out in the corridor outside, which I hope you will.

BRAZILE: Never. Not us.

(LAUGHTER)

WALLACE: Thank you both very much. Thank you both very much for being here. I promise we'll have you back soon.

BRAZILE: Thank you.