This is a partial transcript from "The Journal Editorial Report," May 20, 2006, that has been edited for clarity.

PAUL GIGOT, HOST, THE JOURNAL EDITORIAL REPORT: Welcome to "The Journal Editorial Report," I'm Paul Gigot. The State Department announced a full restoration of diplomatic ties with Libya this week, after a quarter century of economic and political isolation. The moves follows Libyan leader, Moammar Gadhafi's announcement in late 2003 that he would dismantle his government's WMD programs and allow British and U.S. inspectors to oversee the process. As the Bush administration struggles to stop Iran and North Korea from acquiring nuclear weapons, my guest this week says there are lessons to be learned from the Libyan success. Former New York Times reporter, Judith Miller joins me now in the studio.

Judy, welcome.


GIGOT: Fascinating account of Gadhafi's decision. Why do you think he decided to give up the WMD?

MILLER: I really think it was a combination of factors, Paul. There's no doubt that, as the Libyans themselves told me, on the record, the world has changed. The Soviet Union was gone, the old revolutionary rhetoric just wasn't cutting it. Sanctions were really cutting into their ability to export oil, but they knew that they had to get on the right side of the United States. And as Saif al-Islam Gadhafi is, the leader's son, told me, is that we knew that we had to do something beyond just renouncing terrorism. We knew that you were going into Iraq because of concern about WMD, we also knew you weren't going to find any WMD in Iraq, but you could find it Libya, so we decided to play that card.

The administration will tell you it was all, all the invasion of Iraq that got Gadhafi change his mind. My reporting did not substantiate that.

GIGOT: But, would it have happened if we had not gone into knock out the Taliban? And had we not been massing to go take out Saddam Hussein and therefore at least the threat of force was very real to Gadhafi?

MILLER: Absolutely, and that was a factor , but it was not dispositive. I mean, I think that after 9/11, Gadhafi figured out that, as he told fellow foreign leaders, he might be next. He didn't want to come as the next target after the Taliban. So, he decided to make his move then. But with Gadhafi, it's two steps forward, three steps backwards, and it took a while to persuade him. I think two things were critical: The interception of the BBC China, which was a ship that was bound for Libya loaded with centrifuges and the second think that I disclosed in The Wall Street Journal was the intercept of a conversation between A.Q. Khan, his nuclear supplier, and the head of his nuclear program discussing weapons. So Gadhafi could no longer claim that his program was peaceful as Iran is doing.

GIGOT: Well, the CIA's come in for an enormous amount of criticism for a lot of their misjudgments in recent years, but this seems to be a genuine success. What did they get right this time?

MILLER: They got a lot right. I mean, first of all they got the intercept. This intercept was of a conversation that took place in 2002. So, for a whole year they sat on this conversation knowing that one day it might be relevant. Steve Kappes, who is the man slated to be No. 2 at the CIA, did a fantastic job getting into Libya after they were invited in, to look at all the facilities and figure out what they had. In fact, it was Steve Kappes who first learned about the existence of the engineering blueprints that actually showed the Libyans how to design the war head and compress and miniaturize material for a war head. And that's the most sensitive and difficult part of making a nuclear weapon.

GIGOT: When Gadhafi made his decision he opened up everything for the United States, Kappes and his team, to go in there and they brought back enormous amounts of materials to the United States. It allowed us to find things about other proliferations, nuclear programs, about the A.Q. Khan network, did it not? Well, how important was this decision to our non-proliferation raise strategy?

MILLER: I think it really enabled us in cooperation with Britain and the IAEA, the international inspectors, to expose and shut down parts of the network that had been monitored and surveilled for a very long time. This was finally the kind of "smoking gun." And after that, Pakistan could no longer claim that A.Q. Khan was not a problem or that he was just providing a little assistance. It was a real intelligence coup.

GIGOT: But on the other hand, we also were surprised when we went in there, were we not, about just how far Gadhafi was, not just on his nuclear program, but also on chemical programs?

MILLER: Well no, we learned a few things, I think, that were surprising, according to what my sources said. We learned, for example, that Gadhafi claimed not to have — and there was no evidence of— a biological warfare program. We also found out that he did not make binary chemical weapons in which the two agents come together and become lethal only when a bomb explodes. That he had only made mustard gas, but he had made a lot of it and had stored a lot of it. I think the other thing that the inspectors told me was that — the American inspectors — that they wouldn't have been able to find a lot of the installation, the place where Gadhafi was either making chemicals or planning to put up his centrifuges, unless he had cooperated. I think one inspector said to me, you know, this was a really humbling experience and that as good as we think our intelligence is, you know what you don't know unless the country's cooperating and I think that's a cautionary tale.

GIGOT: Judy, you also argue that the Bush administration should have done more to reward Gadhafi. They find — this week they find — in the wake of this decision, this week they did finally recognize him and take him off the terrorist sponsor list. What else should the Bush administration have done or what else should it do now?

MILLER: Well, I think the administration itself said it was going to make a "model" out of Libya from the beginning. And I didn't see Gadhafi wondering around Iran or North Korea saying look at all that I got for giving up WMD. Only now is that becoming possible. I think the administration kind of got distracted by other things after all of the sensitive equipment and material were taken out of the country.

Oh, OK, check the box, that's done, that's over, now let's move on. They kind of forgot about Libya. So, when I got there in — at the end of February, beginning of March — the Libyans were extremely unhappy, saying what about us? We gave up everything. We've jeopardized our national security and what have we gotten to show? I think now the administration is finally taken a step that the Libyans wanted taken. On the other hand, Gadhafi is very difficult to deal with. He still has some egregious human rights abuses but the issue is how does the United States and Libya, how do these two countries resolve these differences? The Libyans said it was best to resolve the problems in the context of a full diplomatic relationship. We'll see.

GIGOT: Well, and that's going ahead now. OK, Thank you Judy Miller. Thanks for being here.

MILLER: Thank you very much.

Content and Programming Copyright 2006 FOX News Network, Inc. ALL RIGHTS RESERVED. Transcription Copyright 2006 Voxant, Inc. (www.voxant.com), 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, Inc.'s and Voxant Inc.'s copyrights or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.