This is a partial transcript from "The O'Reilly Factor," August 1, 2006, that has been edited for clarity.

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BILL O'REILLY, HOST: Hi. I'm Bill O'Reilly. Thank you for watching this tonight. No "Talking Points Memo" this evening because we have a cable news exclusive for you. One of the world's most influential officials, especially now that war has erupted in the Middle East.

Joining us from Washington, Secretary of State Condoleezza Rice.

Very nice to have you on the program this evening, Madame Secretary. I'm going to start right off with our reporters at FOX tell us the ground war in under way in southern Lebanon. What do you know about it and what do you think is going to happen there?

CONDOLEEZZA RICE, SECRETARY OF STATE: Well, clearly in southern Lebanon there has been a situation in which a terrorist group, Hezbollah, decided to launch an attack from Lebanese territory without the knowledge of the Lebanese government against Israel. Israel then exercised its right to defend itself.

We think it's very important that after these events are over that we will not have a return to the status quo ante and so the United States is working for a cease-fire, for an end to the hostilities that will not allow a return to the status quo ante. And if we — if we don't work for a cease-fire that will be lasting and enduring, then we're going to be right back here in several months talking about another cease-fire.

So we've been laying those political conditions, and I think we're making progress, Bill.

O'REILLY: Does your — does your office know that Hezbollah moved in thousands of rockets in bunkers in Southern Lebanon? And it seems to have caught Israel and the United States by surprise. Did you know they had done that over the last two years?

RICE: Well, I think there's a lesson from what is being learned about Hezbollah, and that is that over the last several years, they have significantly improved their capabilities, largely because of the forbearance and the largesse of both Syria and particularly Iran, which has given them much more sophisticated technology.

And so, yes, they have improved their capabilities, but ultimately, Hezbollah is going to be defeated through a combination of the desire to make sure that they don't have the military capabilities, but also they're going to be defeated politically.

And so we are trying to work to extend the authority of the Lebanese government, to extend the authority of the Lebanese armed forces throughout Lebanon. And we're making progress, I think. During my trip I saw a Lebanese government that is prepared to take its responsibilities and an Israeli government that will be prepared, also, to have a partner.

O'REILLY: All right. So what you're telling me, and correct me if I'm wrong, as I so often am, is you were caught by surprise, the United States was caught by surprise, Israel was caught by surprise, didn't know Hezbollah had all those rockets aimed at the Israeli cities, and that there is going to be a substantial ground campaign to eliminate the threat from those missiles.

Am I taking anything wrong here? Am I making a mistake?

RICE: Well, I'm — I'm not going to try to account for what the Israelis will do in their military operations. We don't plan military operations with the Israelis. We don't...

O'REILLY: Do you — don't you discuss them? I mean...

RICE: What we do with the Israelis is to talk with them about the situation, how to end this violence in a way that does not permit Hezbollah to claim a victory, that does not permit a return to the status quo ante.

But I don't know whether the Israelis fully understood the extent of the Hezbollah capabilities. I can't say. I do know that those capabilities were quite extensive, and it points right to the influence of Iran in this region.

O'REILLY: No, I know that, but Madam Secretary, after 9/11 and after the Iraq, you know, occupation, it troubles me as an American citizen. I didn't know Hezbollah had 15,000 rockets in Southern Lebanon.

And it — we had the Israeli ambassador on last night. He didn't say so, but it looks like Mossad didn't know. It looks like the CIA didn't know. You had 2,000 U.N. peacekeepers there for two years, trying to enforce 1559. They didn't — either they didn't know or they didn't say anything.

Doesn't that trouble you, that all of this armament was built up?

RICE: Well, I'm not going to try to get into the intelligence. You know that, Bill. I'm not going to try to get into the intelligence. But of course, it's troubling, the capabilities that Hezbollah has.

But if you think about how these terrorist organizations operate, they burrow in with the population. They hide their capabilities inside of villages. They're very hard to detect.

But we do know that this is more than just Hezbollah in Lebanon. This is an extension of Iranian power through proxy war...

O'REILLY: And Syria, too.

RICE: And Syria, as well.

O'REILLY: Is Hezbollah using women and children as human shields?

RICE: Well, I would not be at all surprised, because of course, terrorist organizations like nothing better than to expose — or to use the civilian population to shield an activity. So I wouldn't be at all surprised.

O'REILLY: You haven't made a determination on that after Qana?

RICE: No, we've not. And as you know, the Israelis have said that they will investigate that very, very tragic circumstance. And let's recognize, Bill, that was a terribly tragic circumstance...

O'REILLY: Everybody knows that.

RICE: It was tragic for the Lebanese people. It was tragic for the world. But the fact is, unfortunately, these terrorist organizations are very much bred into these villages and it's very hard to root them out.

O'REILLY: Now, you know that most of the world, at least the world press, including in our own country, is now saying that Israel is overly aggressive and the United States is wrong for backing Israel.

The Los Angeles Times has shifted their position. They're now saying that it's too much. The New York Times, it's too much. The Boston Globe, it's too much. And around the world you see the demonstrations.

So, again, the United States' image is taking a beating here. What do you have to say about that?

RICE: Well, of course, the United States has to do what it thinks is right and President Bush is always going to do what he thinks is right.

Now, we do think that the violence should end. We think it should end, of course, on a basis that is not going to create a situation in which we're right back here again several months from now or several years from now.

The Middle East is littered with cease-fires that didn't work. And so we have to work this time to try and change the circumstances on the ground, change the political circumstances, extend the authority of the Lebanese armed forces south. We can have an end to the violence. We need to have an end to the violence. But we also have to be certain that we are pointing in the right direction politically.

O'REILLY: All right, we'll take a quick break. When we come back, I'm going to ask you about a peacekeeping force that's being bantered around and then the French foreign minister also says some very controversial things.

(COMMERCIAL BREAK)

O'REILLY: Continuing now with Secretary of State Condoleezza Rice. You know French Foreign Minister Philippe Douste-Blazy, right?

RICE: Yes, I do.

O'REILLY: Is he your pal? Do you know him well?

RICE: He is, I know him well. We work well together, yes.

O'REILLY: All right, now, today he said, quote, "Iran is a key player in the Middle East and is a stabilizer… plays a stabilizing role."

Now, for those of us who don't know Mr. Blazy and think France is ridiculous, this sounds crazy. Your reaction?

RICE: Well, Iran is not a stabilizing force in the Middle East.

O'REILLY: So Philippe is misguided?

RICE: I don't know the context of that statement. I'll just tell you Iran is not a stabilizing force in the Middle East. It's one...

O'REILLY: All right, the context is...

RICE: ... of the most destabilizing forces in a long, long time in the Middle East.

O'REILLY: All right, so here's the context. He met with Foreign Minister Fawzi Salloukh, from Lebanon.

RICE: Yes.

O'REILLY: You know him.

RICE: Yes, I do.

O'REILLY: And then they came out and said all kinds of great things about Iraq [sic]. You know, with allies like France, who needs Hezbollah, you know? What I'm not getting — and you've known me for a long time. You know I'm pretty dense. You know I'm not the smartest guy in the world.

What I'm not getting is I see Hezbollah attack Israel. My viewers see it. Unprovoked, killing eight Israeli soldiers, going in, kidnapping two. Didn't have to happen, there's no real reason for it to happen. We understand that Iran and Syria transferred all these missiles that are going to kill civilians to Hezbollah. I see it, you see it, we all see it, but France thinks it didn't happen and the rest of the world is blaming Israel and the USA.

Can you explain that to me in just terms that I can understand?

RICE: Well, no, I've actually found more of a consensus than you might think about what started this. If you go back to the statement that the leaders had at G8, it was very clear where people put the blame for what happened here.

O'REILLY: But not now. Since Qana, they've turned against Israel, oh, Israel is overreacting. You know that, come on.

RICE: I do think that sometimes the very, very tragic pictures and the toll of human lives has an effect on people but I think we have to acknowledge that the important thing is to keep clear about what your strategic goals are.

O'REILLY: OK.

RICE: And Iran is a very, very bad factor in the international system.

O'REILLY: But our French allies don't seem to see it that way and it's extremely troubling because unless you get a world consensus you're never going to win the War on Terror. You're never going to defeat Islamo-fascism.

RICE: Well, Bill — but let me just make a point here. Of course we just yesterday passed a Security Council resolution on Iran in which France has been one of the major sponsors.

O'REILLY: Yeah, but Iran said they're not going to obey it.

RICE: Well ...

O'REILLY: Again, blank you. That's what they basically said.

RICE: And when the Iranians get passed this August 31 deadline, I think they are going to see sanctions from the international system that are going to start to make life pretty miserable.

O'REILLY: What about a peacekeeping force? Is that going to be in southern Lebanon? Do you support that? U.S. troops going to be in there?

RICE: Well, I don't think there is any anticipation, expectation of U.S. combat forces on the ground, for a lot of reasons.

But I do think that we are looking at an international force. It will likely be a force that would go in sometime after a cease-fire. I think they can't go in under fire. Nobody expects that. But it's going to be an important element of making sure that the Lebanese can deploy their forces to the south.

O'REILLY: Right. It will protect the Lebanese who can't stand up against Hezbollah. So you think that peacekeeping force is going to happen under the auspice of the United Nations?

RICE: I do think it will happen. I think there — after the Rome conference, one of the things that was really missed about the Rome conference, everybody talked about the immediate cease-fire calls but what really the Rome conference did was to say that the international community believes that there needs to be an international force that can help Lebanon extend its authority and can thereby get rid of that vacuum into which Hezbollah has flown.

O'REILLY: OK. Last question, and we really appreciate you taking time, Madame Secretary.

Richard Armitage, who was the deputy secretary of state before you guys took over, he said that you should talk directly to the Syrians and you made a mistake not talking to Syrians. Your reply?

RICE: Rich Armitage was one of the last U.S. administration officials to talk to the Syrians and they didn't react very well or in fact react at all to what he said and it was a very strong message that Syria had to make a strategic choice. We're still waiting for Syria to make that strategic choice.

The problem isn't that people don't talk to the Syrians, it's the Syrians don't act. And so I think we are very clear with the Syrians what needs to be done and hopefully one day the Syrians are going to do it.

O'REILLY: You think France thinks they're a stabilizer too? I had to get that cheap shot in there.

RICE: I know that there are a lot of problems with Syria and France. There is no doubt about that.

O'REILLY: All right, Madame Secretary. Good luck to you and we appreciate you coming on the program. You're welcome any time and we all hope that the situation winds down. Thank you very much.

RICE: Thank you, Bill.

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