This is a partial transcript of "The Big Story With John Gibson," Sept. 6, 2004, that has been edited for clarity.

Watch "The Big Story With John Gibson" weeknights at 5 p.m. ET!

HEATHER NAUERT, GUEST HOST: Today in Iraq, a homicide bomber just outside the town of Fallujah (search) killed seven U.S. Marines and three Iraqi national guardsmen. The terrorists set off a powerful car bomb just as the military convoy passed by.

Joining me now is Fox Military Analyst, retired Army Major General Bob Scales. And here's today's big question, General Scales: Are things heating up or cooling down in Iraq? It was a tough day there.

RETIRED MAJOR GENERAL BOB SCALES, FOX NEWS MILITARY ANALYST: Well, it's really a combination of both, Heather. It depends on where you are in the country.

Most of Iraq is fairly stable. This new administration, the Iraqi police and the new Iraqi government are doing a pretty good job of achieving some form of stability in most of the country. But you've got three or four hot spots.

NAUERT: That's right. We got Mosul (search), we have Fallujah.

SCALES: Sadr City.

NAUERT: And Najaf, of course.

SCALES: Sure. And, unfortunately, these are hot spots that are getting worse and worse and worse because the coalition has sort of walked away from trying to control the streets of places like Fallujah. And, so, these places have become recruiting grounds for new terrorists.

They've become essentially manufacturing plants for bombs and propaganda centers. Eventually, if the country is going to be stabilized and elections held pretty soon, these regions have got to be stabilized.

NAUERT: Well, you're right. These guys have been given largely free reign in places like Fallujah and Najaf and, of course, last week in Najaf (search), or the week before rather, we saw a lot of the fighters be able to just walk away — weapons in hand.

And you know they're not going to hand those off to the U.S. military or the new Iraqi military. So how can we expect any kind of stability in Iraq with this kind of hands-off approach that the U.S. has to take?

SCALES: Well, the answer, obviously, Heather, is to put hands on. And you do it by doing a couple of things. First of all, I think the seal around these cities has to be made air tight, particularly Fallujah, to a lesser extent, Sadr City, have to be contained both psychologically and physically.

And secondly, the pace at which we train Iraqi forces has got to be accelerated because eventually those cities won't be stabilized until the Iraqi army and the Iraqi police go into Fallujah, Sadr City, Mosul and the other cities and achieve some form of governmental control and stability.

If that doesn't happen, these places are going to continue to fester.

NAUERT: Well, I understand that at least in Najaf that those Iraqi forces who went in ahead of our guys were actually some of the best Iraqi forces out there and that they did a pretty good job, unlike the job that they did in Fallujah back in April after those contractors were horribly killed.

So how are these Iraqi forces down in places like Fallujah? Are they even going in there?

SCALES: No, unfortunately, they're not and that's really the issue. I think the U.S. command is going to wait until the competency of this new army and this new police force is up to standard because, particularly the Sunni rebels in Fallujah, are a pretty tightly bound, fairly well trained, very dedicated group. And it is going to take a while before — particularly the Iraqi army — is able to deal with it.

Now, the commando units are very good but, remember, there's only 700 to 800 commandos in all of the Iraqi army. It's got to grow, it's got to get better, it's got to get confidence in itself before it's able to take on the enemy's main force of insurgents with any degree or any hope of success.

NAUERT: It seems like these guys don't fear a whole lot and certainly you and I would probably agree that the U.S. isn't making them pay for anything that they're really doing. So what's to stop these guys from regrouping? You say a tighter cordon around the area but they have to start feeling some pain, don't they?

SCALES: Absolutely. When I say a watertight seal, what I mean is you've got to put a cork in the city; you've got to contain the insurgents so they're not able to export their terror. And I think that's working fairly well, obviously, with the exception of what happened tragically today.

But, again, the sore is not going to be healed until someone is walking the streets of Fallujah and taking these guys on face to face. The occasional bomb that's dropped to take out, say, "You know, a headquarters element or something like that, that's not going to do the job because these guys are smart."

They're learning how to avoid the killing power of American precision weapons, and they only way you're going to be able to do it in the long term is to take them on face to face.

NAUERT: And we're doing that right now. We're occasionally launching air strikes — at least on Fallujah — but I guess there's really nothing else going on there. We're just standing by and letting these guys regroup and I believe that's where Mohammed al-Douri, who is Saddam Hussein's main finance man, the number one guy they're on the lookout for in Iraq right now, who's believed to be financing so much of this, that's where it's believed he's holed up, isn't that right?

SCALES: That's right. And of course, the great fear is that if this issue isn't addressed over the next couple of months, you're going to have almost like a government in exile, an internal government in exile, if you will, begin to be formed in these cities.

So to allow the Sunni and the Shi'a separatists to get away with establishing a sort of opposite pole government in that country can only lead to disaster. We've got to take them on. It's best done by the Iraqis themselves.

A less likely solution would be to use Marine and Army forces but I would argue before January these cities have got to be addressed.

NAUERT: Yes, that's going to be tough though, because as you said, we want to put an Iraqi face on it.

Let's shift gears for one second and talk a little bit about the hunt for Usama bin Laden. Over the weekend, a guy by the name of Coffer Black, who's the counterterrorism guy for the State Department, said that concrete progress had been made in trying to find Usama bin Laden and that he wouldn't be shocked if we woke up tomorrow and found that he had been caught with his lieutenants. He said it could happen tomorrow, a week or a month from now.

Does Mr. Black know something that we don't?

SCALES: No. I think what he's talking about is the success that we've had lately, sort of tearing the veil and peeling away Osama bin Laden's support structure.

What's happening is that his lieutenants are being captured, they're quitting, they're being killed. His sources of finance are being dried up and increasingly this guy is getting more and more isolated.

The actual snaps, the actual capture, the killing of this guy, is an entirely different issue. It may or may not happen soon but the real lesson here is that the Pakistanis and the Special Forces soldiers are being pretty successful at isolating this guy and marginalizing him in the region.

NAUERT: All right. So he's just giving fodder for those conspiracy theorists out there. Major General Bob Scales, thanks a lot and have a good Labor Day.

Content and Programming Copyright 2004 Fox News Network, L.L.C. ALL RIGHTS RESERVED. Transcription Copyright 2004 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, L.L.C.'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.