This is a rush transcript of "Special Report With Brit Hume" from July 26, 2007. This copy may not be in its final form and may be updated.

BRET BAIER, FOX NEWS ANCHOR: Next on SPECIAL REPORT, ending the w orst week for the Dow Jones Industrial average in nearly five years, President Bush tells Americans to take a good look at the economy because it is really on a roll.

Astronauts reportedly dr unk before takeoff? Scandals are adding up for NASA, and tonight there is word of internal sabotage on the next space flight.

Good news from Iraq; U.S. commanders say there are new signs that Iraqi reconciliation may be starting to take shape.

And our all-star panel looks at the Clinton-Obama war of words over which leaders they would meet with as president. All that right here, right now.

Welcome to Washington. I'm Bret Baier, in for Brit Hume. President Bush today sought to take some credit for what he called a robust and resilient U.S. economy after the Commerce Department released new figures this morning showing the economy grew at the strongest pace in more than a year. White House correspondent Wendell Goler has details.


WENDELL GOLER, FOX NEWS CORRESPONDENT (voice-over): The president gathered his economic advisers to shout the good news about an economy aides say has long performed better than he has gotten credit for.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: People are working. Our unemployment rate is down. Wages are increasing. And so, I want the American people to take a good look at this economy of ours.

GOLER: Fueled by a 22 percent increase in spending by businesses on plants and other commercial construction, and a rare three-month period in which this country sold more goods abroad than it imported, the economy grew at a 3.4 percent rate the second three months of the year, it's strongest showing in more than a year.

BUSH: When we are able to sell products over seas, or goods and services over seas, it means that Americans are more likely to find a job here in America.

GOLER: But despite his good news, the Dow Industrial Average continued to slide, falling more than 200 point for the day, which combined with yesterday's 311 point drop to make the worse week in five years. Investors are concerned about a warning that home loan defaults may be far from bottoming out and that home prices may continue to slide well into next year. Experts say it is the price the country is paying for cheap credit.

JOSH BIVENS, ECONOMIC POLICY INSTITUTE: There's been lots of stories now about lenders offering loans and borrowers taking loans that probably never should have happened.

GOLER: Josh Bivens says a lot of lenders made the bad decision that home prices were going to rise fast forever. Now prices are falling and adjustable loan rates are rising, which leaves people owing more than they can pay, or leaves lenders with loans that are more than the homes are worth. Treasury Secretary Henry Paulson says it's a wakeup call for investors, as tighter credit likely to follow. But Bivens says that will affect more than just marginal home buyers.

BIVENS: The big issue going forward is not just going to be the sub prime market and people foreclosing on homes. It is going to be people sort of up and down the mortgage market who no longer can use that home as ATM machine.

GOLER: It means fewer home equity loans to finance home renovations and to use to pay off credit card and auto loan debts. Consumer spending has been the engine of the economy's growth. But the White House isn't worried.

TONY SNOW, WHITE HOUSE SPOKESMAN: We just got a report that indicates there is, in fact, extraordinary strength in the American economy, something that would be the envy of the rest of the industrialized world.


GOLER: Inflation was low in the second quarter. And economists say that is good news. But the inflation rate they are talking about doesn't include food or energy, and higher are food and gasoline prices are part of the reason consumer spending actually declined from April through June. If that continues, business spending is sure to fall as well. Bret?

BAIER: Wendell, thanks. The House today voted 371 to 40 to implement the recommendations of the 9/11 Commission. Last night, the Senate approved the package of security measures that shifts more federal money to high-risk states and cities, and requires more stringent screening of air and sea cargo. The White House has expressed opposition to several provisions, particularly one that will eventually require all ship containers to be scanned for nuclear devices before they leave foreign ports for the U.S. Despite the objections, the president is expected to sign that bill.

Meanwhile, on Capitol Hill today, a key House Republican warned Congress the longer it waits to fix a law that prevents U.S. agents from eavesdropping on terrorists, the greater the risk of another attack on U.S. soil. Chief Washington correspondent Jim Angle explains.


JIM ANGLE, FOX NEWS CHIEF WASHINGTON CORRESPONDENT (voice-over): Some lawmakers turned up the heat today as the ranking Republican on the House Intelligence Committee sent a letter to the chairman, saying our country is at enhanced risk of terrorist attack and the time for dodging and excuses is over. Republican Pete Hoekstra, echoing warnings from Director of National Intelligence Mike McConnell, is insisting that before it leaves for August recess, Congress must fix the law governing electronic surveillance, which officials say is hampering efforts to eavesdrop on terrorists.

REP. PETE HOEKSTRA (R), MICHIGAN: We have been very fortunate that al-Qaeda has not used this gap over the last four or five months, exploited this gap to attack the United States. But I don't think we can wait another two months, as some have suggested, saying oh, we will deal with this in September when we get back. Al-Qaeda is not going to take August and September off.

ANGLE: The problem is that the law governing eavesdropping was passed in the 1970's, long before cell phones or e-mail. The law required warrants for any signals that went through a wire, a definition aimed at protecting Americans who talked on old fashioned telephones.

VICE ADM. MIKE MCCONNELL, DIRECTOR OF NATL INTELLIGENCE: In those days when we did collection, almost all international communications was wireless. And today, almost all, 90 percent of all communications is wire.

ANGLE: Meaning that intelligence officials have to seek warrants to eavesdrop on two terrorists, both overseas, if, for instance, they are emailing each other through computer servers located in the U.S., creating what DNI Director McConnell calls a huge backlog in getting warrants.

Republican Heather Wilson, a former intelligence officer offered legislation to fix it, which her colleague says is simple.

HOEKSTRA: We don't need to do a warrant for surveying someone who is overseas. And if we are going to survey someone in the United States, they are protected by U.S. laws; we need probable cause.

ANGLE: Fox called five Democrats on the House Intelligence Committee, including Chairman Sylvester Reyes, but none would do an interview on this question. But Reyes did send Fox a statement, saying "we are holding hearings, meetings and conducting serious investigative work on FISA. If changes to the law are required, we are prepared to do so. However we want to avoid repeating the mistakes made by rushing the Patriot Act into law."

As Democratic leaders hailed the vote passing the recommendations of the 9/11 Commission, they too warned the U.S. faces a real threat of terrorist attack.

REP. JERROLD NADLER (D), NEW YORK: We are, as everybody has said, under threat of attack from al-Qaeda.

ANGLE: Given that, Speaker Pelosi was asked whether the Democratic leadership intends to take urgent action to fix the law on terrorist surveillance.

REP. NANCY PELOSI (D-CA), HOUSE SPEAKER: We know what the challenges are in FISA, and I think that short term -- the short term legislation that can make us safer.


ANGLE: House Democrats had not intended to act before the break, but one source says they were sobered by DNI Director McConnell's warning this weak and that there has been a sea change in the last 24 hours. Pelosi suggesting an announcement could come early next week. Bret?

BAIER: Jim, thanks. The House today also passed legislation that combined billions of dollars in aid for farmers with money for low income nutrition programs. It sets up a clash with President Bush who has threatened to veto. The measure denotes money not included in past farm bills to conservation, renewable energy, nutrition and specialty crop programs. The Senate takes up its version of the farm bill in September.

NASA is dealing with another black eye, this time over revelations of boozing astronauts and computer sabotage. This follows a scandal over a sordid love triangle a few months ago. Correspondent James Rosen reports on the latest problems for the embattled space agency.


JAMES ROSEN, FOX NEWS CORRESPONDENT (voice-over): Like the plumes of smoke from a Space Shuttle launch, scandals are now mushrooming at National Aeronautics and Space Administration, or NASA. An independent panel has found evidence alcohol is used, quote, freely in crew quarters in the periods preceding flight launches, and that on at least two occasions, astronauts were so intoxicated prior to flights that colleagues raised concerns on the spot; yet the astronauts, names unspecified, were still permitted to fly, one of them on the Russian spaceship Soyuz.

At a hastily called news conference in Washington, NASA officials said the panel, which interviewed 14 astronauts, five family members and eight flight surgeons, has not shared its evidence with the space agency.

SHANA DALE, NASA DEPUTY ADMINISTRATOR: We have already initiated an internal safety review to determine if these events occurred. And if they did, what was the scope; what were the causes, what are the facts and circumstances surrounding them?

ROSEN: On Thursday, NASA confirmed it had discover an apparent act of internal sabotage, the cutting of wires in a piece of equipment that was to be placed aboard the Space Shuttle Endeavor, set to embark early next month on its first space flight in five years. The non-critical equipment, which transmits sensory data back down to Earth, was ultimately to be installed at the International Space Station, Endeavor's destination.

NASA officials said this case too is under investigation, but, as clouds go, has a silver lightning.

DALE: This quality unit that was sabotaged, apparently, was detected. So I think that is an indication that quality control is working.

ROSEN: The independent panel that found evidence of alcohol abuse was created in the wake of still another scandal, last February's arrest of Lisa Nowak, the astronaut who faces criminal charges for allegedly attacking and trying to kidnap a female Air Force captain, who prosecutors say Nowak regarded as her rival for the affections of a fellow astronaut.

The panel found the opinions of flight surgeons, who evaluate astronauts' fitness for duty, flight safety and mission accomplishment, were often dismissed by their superiors at NASA when those evaluations proved critical or threatened to delay launches.

COL RICHARD BACKMANN JR, USAF: They were demoralized by that disregard to the point that they felt like they would be less likely to report concerns of performance detriment in the future.

ROSEN: NASA performs no periodic psychological evaluation or testing on astronauts, no routine behavioral heal assessment for commonly occurring issues, such as depression, anxiety, relationship stress or substance use.

In Washington, James Rosen, Fox News.


BAIER: Vice President Cheney will undergo a minor surgical procedure Saturday to replace the special pacemaker he has in his chest. Cheney's spokeswoman says the device's battery is due for replacement, and that means the entire pacemaker must be switched out.

Later on SPECIAL REPORT, we will tell you about a police commission president like you have never seen before in San Francisco. We will have the gender-bending story. But first, some encouraging news from U.S. commanders on the ground in Iraq as the Iraqi prime minister reaches out to Sunnis. Details on that right after the break.


BAIER: A fierce gun battle broke out today after a joint U.S./Iraqi force arrested a rogue Shiite militia leader in the holy city of Karbala. Military sources say an air strike followed and a total of 17 militants were killed. Officials say the number of insurgent attacks is actually dwindling. But as national security correspondent Jennifer Griffin reports, while coalition forces make progress, even one terrorist can cause problems.


JENNIFER GRIFFIN, FOX NEWS NATIONAL SECURITY CORRESPONDENT (voice- over): An Iraqi insurgents spotted firing mortars at a U.S. base north of Baghdad; the same kind of attack American commanders have seen in the Green Zone in Baghdad; attacks they say that are made by Shiite militiamen trained by Iran. Moments later, U.S. forces take out the one-man cell north of the capitol.

Meanwhile, Iraqi leader Nouri al Maliki made his first visit as prime minister to the troubled Sunni dominated Diyala province where al-Qaeda in Iraq set up bases after being pushed out of Anbar Province and Baghdad. There are signs in Diyala Province that reconciliation is working from the bottom up. In Taji, dozens of Sunni and Shiite sheiks met recently and pledged to fight al-Qaeda.

BRIG GEN KEVIN BERGNER, MULTI NATIONAL FORCE IRAQ: They actually signed their names to a map next to the location of their community on that map as a visible commitment on their part to work together.

GRIFFIN: In northern Iraq, another U.S. commander described how attacks per day in his area of operation, near Mosul, are less than half of what they were when his troops arrived in December.

COL STEPHEN TWITTY, FIRST CAVALRY DIVISION: If we can continue on this trend, these numbers, the seven to nine attacks that I spoke of earlier, we should be rotating out of here about the December timeframe.

GRIFFIN: All of this as Congress considers two measures today that would bring the troops home. One would force the administration to present its redeployment plan. The other would require rest and recuperation time at home equal to time served in a combat zone. The Army's former vice chief, an architect of the surge, balked at assertions that right now the Army is broken.

GEN JACK KEANE (RET), FMR ARMY VICE CHIEF OF STAFF: They are not broken and it is not even close. I can't, for the life of me, believe that we would bring an Army home and lose a war because it is under stress and strain.

GRIFFIN: But Democrats were on the war path.

REP. ELLEN TAUSCHER (D), CALIFORNIA: This is the time, ladies and gentlemen, for us to take our spine stiffening medication and stand up and do the right thing. Now General Keane, I honor your service, but frankly, back in 2005, you were very optimistic like you are right now. With all due respect, sir, you were wrong then and you are wrong now.


GRIFFIN: The two legislative measures passed the committee today. Both potential veto bait for the president. The one dealing with redeployment was watered down. The one dealing with rest and recuperation; it identical to the one which failed to the pass the Senate earlier this month. Bret?

BAIER: Jennifer, thanks. Later on SPECIAL REPORT, a pilot in the Vietnam War suits up again, answering the call to fly missions in Iraq. But first, San Francisco is one of the most liberal cities in the country, no surprise there. But the election of that city's police commission president is breaking new ground. We will tell you why next.


BAIER: She is San Francisco's new president of the police commission, the city agency overseeing police department policy. But there is something different about Teresa Sparks. Not only is she the CEO of a sex toy company, but she used to be a he. Correspondent Claudia Cowan has more on Sparks and her success.


CLAUDIA COWAN, FOX NEWS CORRESPONDENT (voice-over): In some communities, the election of a transgender woman to head the police commission might have generated some controversy. But here in San Francisco it barely raised an eyebrow.

THERESA SPARKS, SF POLICE COMMISSION PRES: They looked at my record. They looked at my accomplishments. They looked at what I have accomplished and what I do and my stances on issues, and that was the dictating factor, as opposed to being transgender. I mean, I like to think that I was appointed to the commission and then elected as president in spite of being transgender, as opposed to because I was transgender.

COWAN: A Vietnam War veteran with three grown children, 58-year-old Theresa Sparks had a sex change seven years ago, became active in city politics, and in 2003 was named woman of the year by the California Assembly.

SPARKS: Just about everything you ever wanted to know about sex in here.

COWAN: Sparks' day job is running Good Vibrations, one of the largest purveyors of sex toys in the country. And now she heads the often controversial commission that provides civilian oversight of the police department. The transgender community calls it a milestone and Mayor Gavin Newsom agrees.

MAYOR GAVIN NEWSOM (D), SAN FRANCISCO: We look at people's qualifications, not their sexual orientation, not their gender identity. We look at substance and we move beyond those stale debates. And that's why I'm proud to be a San Franciscan.

SPARKS: There's not a lot of us out there. Hopefully it will show people that if they are true to themselves, they can achieve leadership positions.

COWAN: Sparks' top priorities are reducing gun crime, getting rid of problem cops and increasing the size of the force. The head of the police union says he is open to anything, but wants to make sure Sparks can be fair.

GARY DELAGNES, SF POLICE OFFICERS ASSN PRES: When you are a transgender person, you are going to bring a certain agenda to the police commission. And part of that agenda is how transgendered people or gay people have been treated by cops.

COWAN: Sparks says her unconventional life has prepared her for critics attacks and to prove them wrong.

SPARKS: I want to help the department. I want to help the community. I want to serve San Francisco. And I want to show people around the country that you don't have to be out of a cookie cutter mold to accept leadership positions. And if I can accomplish that, it's been a successful time.

COWAN (on camera): San Francisco and their politicians like to see themselves as trailblazers. But it remains to be seen if transgender people are on the verge of becoming more visible in American public life or if Sparks position is a unique example of all politics being local.

In San Francisco, Claudia Cowan, Fox News.


BAIER: Prosecutors in Seattle have filed felony charges against seven people in what is being called the worst case of voter registration fraud in Washington state history. The workers were employed by the Association of Community Organizations for Reform, a liberal group that has faced allegations of fraud in several states. Officials say the workers submitted 1,800 false registration cards. They say the workers were motivated by the desire for money, not by politics.

Well, political free speech is a cornerstone of the American way of life. So imagine the surprise when some Colorado home owners found themselves being sued for taking a stand against the local government. Correspondent Alicia Acuna explains.


ALICIA ACUNA, FOX NEWS CORRESPONDENT (voice-over): When this group of neighbors in Parker, north Colorado decided they didn't want their subdivision annexed into the nearby town of Parker, they started talking. Talking turned to letters, which led to yard signs, which landed them in court.

LOUISE SCHILLER, PARKER NORTH RESIDENT: Apparently we violated a campaign finance law because we failed to register as an issue committee.

ACUNA (on camera): In Colorado, when two or more people get together and spend more than 200 dollars on any one issue, under the law, they are required to register with the state and fill out one of these 14-page disclosure forms, which tracks all of the money coming in and out.

When the folks in Parker North failed to do this, a couple of their neighbors on other side of the issue sued them, using this law.

STEVE SIMPSON, INSTITUTE FOR JUSTICE: These people were blind sided. They thought what they were doing was as American as voting. They heard about this issue. They decided to speak out against it.

ACUNA: The Conservative Institute for Justice took on the residents' case and, in turn, filed a federal lawsuit against the state of Colorado, charging in part that the law, quote, loads people down with regulations and complicated requirements, violating the first amendment right to free speech.

KAREN SAMPSON, PARKER NORTH RESIDENT: This is not trying to elect a president here. We were fighting annexation of a few hundred homes and we got sued. And we were threatened with violations or with sanctions and fines. It is ridiculous.

ACUNA: Sampson and her neighbors say what is so frightening is the fact that anyone can sue under this law, any political adversary, no matter how small the issue.

JENNY FLANAGAN, COMMON CAUSE: Courts have upheld this information for the benefit of the voters.

ACUNA: The lead proponent of the law is Common Cause, a liberal voter activist group.

FLANAGAN: It is intended to inform the voter so that we understand who is behind the campaign. So as soon as money starts flowing in and out of a campaign organization, that the voter knows who is behind that leaflet and the message.

BRADLEY SMITH, FMR. CHRMN FEC: It changes the nature of our freedom to speak.

ACUNA: Former chairman of the Federal Election Commission Bradley Smith says the reach of some campaign finances laws goes too far.

SMITH: This is a classic case of how these laws do impact every day people. We tend to think of campaign finance laws as being something that limits fat cats.

ACUNA: But in this case, the folks of Parker North say it limited neighbors talking to neighbors.

WES CORNWELL, PARKER NORTH RESIDENT: The whole point of this law is to create more transparency in the Democratic process. But what it ends up doing is silencing people.

ACUNA: Colorado's Secretary of State Mike Coffman's (ph) office says it can't comment on an ongoing legal matter, other than to say he has a duty to defend the state's constitution. The case is expected to go before a judge in the fall.

In Denver, Alicia Acuna, Fox News.


BAIER: Democratic presidential candidate Hillary Clinton will be addressing a convention of beauticians tonight. And so her exploratory committee decided to have a little fun and released these pictures of the former first lady and some of her various hair styles over the years. the website HillaryHub.com shows the pictures with the Hillary quote, pay attention to your hair, because everyone else will. There is, however, no direct reference to fellow Democratic candidate John Edwards and the focus on his hair.

We'll take time out now to visit out sponsors and check the headlines. When we come back, the EPA takes a threat against climate change and its skeptic very seriously. That is coming next on the Grapevine.


HARRIS FAULKNER, FOX NEWS UPDATE ANCHOR: From America's newsroom, I'm Harris Faulkner.

Australia now dropping terror charges against and Indian born doctor. He was accused of supporting last months failed U.K. bomb attacks after he gave his phone card to a cousin who is charged in the case. The Australian prosecutors saying the arrest was a mistake.

A mid-air collision over Phoenix leaves no survivors. Two news choppers crashed into each other while covering a police pursuit. They were each carrying two people and belonged to KNXB and KTVK, both local TV stations. KNXB saying the chopper pilots were in radio contact just moments before the collision.

California Supreme Court striking down city laws that allow police to seize cars from drivers who are arrested for buying drugs or soliciting prostitutes, the courts saying only state law can punish those offenses. The city is arguing the law has helped them fight narcotics sales and prostitution.

Former Quest Communications CEO Nacchio sentenced to six years in prison for making $52 million in illegal stock sales. He was also ordered to forfeit that money and pay a $19 million fine. The judge denied Nacchio's request to be granted bail while he appeals.

Stocks ending the week down with another 200 plus point drop for the DOW. It fell more than 300 points yesterday. Today the NASDAQ was down as well, 37. The S&P off by 23.

The FOX Report coming your way at the top of the hour. Special Report with Bret Baier in for Brit continues.

Pakistani President Musharraf is dealing with one of the most serious challenges to his authority since he came to power in a coup eight years ago--the radicalization of Pakistan's young people.

Alex Crawford, from our sister network Sky News, takes a look at youngsters who are willing or kill or be killed in the name of Islam.


ALEX CRAWFORD, SKY NEWS: They're youngsters, two of them not yet teenagers. Yet they are already radicalized and prepared to die for their religion.

"Which way?" they chant. And the answer is always "jihad," or holy war. These are children who have seen death, and who are convinced suicide bombings may be the only way to defend themselves against those they believe are attacking Muslims and Islam.

They were trapped in the Red Mosque in the capitol as pitched battles continued for more than a week between the Pakistani military and those inside. The shelling of a sacred place, the confrontation with women in burkes, changed them, and spawned a whole new generation of holy warriors.

This young girl is only 15. She was one of the last to leave the mosque siege alive. Now she wants to start up her own Madrasa, or religious school, and teach about jihad.

I was at the Madrasa to study religion, she says, but after what the government did, this has given us the idea of being martyrs. What has happened has made us more determined to be martyrs.

Those who carry out suicide bombings, like the one in the capital recently, are viewed by religious extremists as martyrs, guaranteed eternal paradise. The tactics more common in Iraq and Afghanistan have split the religious community. The sense that Muslims are under attack is growing, and the moderates are struggling to maintain influence.

This little boy is 11, but he says he is prepared to be a suicide bomber to defend Islam. He is still a child, too young, perhaps, to know what he is saying. But his words are nonetheless chilling.

They are young minds, ripe for manipulation, and children are have already been used by a Taliban militants. Take this video made by the Taliban showing a young boy who looks no older than 12 preparing to hack the head of hostage. The pictures are far too gruesome to show completely.

These youngsters are already indoctrinated. They are angry and impressionable. Keeping them out of the militant's clutches is Pakistan's real problem. They are just what the Taliban and al-Quida are looking for.

Alex Crawford, Sky News, Islamabad.


BAIER: Well, we move from young people bracing for holy war to an older man ready to fight in his second war. Correspondent Marianne Silber has the story of an American pilot who first fought in southeast Asia as a teenager, and is now answering the call once again in the Middle East.


SILBER: Mike Silva was 19 when he flew his first combat mission in Vietnam. Four decades later, Chief Silva is flying off to war again to conduct medical evacuations in Iraq.

CWO MICHAEL SILVA, US ARMY: The biggest hurdle was trying to convince the Human Resource Command out in St. Louis that I actually did exist, and that I actually wanted to get back in the army.

There were so few of us Vietnam, 50-something types, actually 55 plus, that are doing this.

SILBER: Silva has logged thousands of flight hours since his Vietnam days as a pilot in the National Guard, and as a news chopper pilot. But despite his experience, reenlisting for active duty wasn't easy.

SILVA: I'm proud to say at this age I can max out the army physical training test. And I'm doing well.

SILBER: Fifty-six-year-old Silva had to pass the same rigorous test as any other pilot before he was cleared for takeoff in the army once again.

Chief Silva invited us alone on a training mission with his instructor, Chief Robert Ross. Ross says other pilots with less experience look up to Silva.

CWO ROBERT ROSS, ARMY INSTRUCTOR PILOT: Sometimes it is a little intimidating, because I know he doesn't have issues with the flying, just different eras, as far as aviation operation is concerned.

SILBER: Chief Silva says that a few years have passed and technology has evolved, but the mission remains the same, and that is to provide support for our troops fighting a war on foreign soil.

And while Silva is supporting our troops in the Middle East, his wife Suzie and his three children will be supporting hip here at home. Suzie says her husband's decision to head to war again after all this time was the right thing to do.

SUSIE SLIVA, WIFE OF CWO MICHAEL SILVA: He truly is a part inform, because, if anything, it is an asset, because he is such an experienced pilot. He will know how to handle all situations.

SILVA: There is an old adage--old age and treachery overcomes youth and enthusiasm. I can do the job.

SILBER: At Fort Sill, Oklahoma, Marianne Silber, Fox News.


BAIER: Coming up, the White House says Democrats are on what he calls a crusade to bring down Attorney General Alberto Gonalez. The FOX all- stars will tell us if the A.G. can survive this latest round of attacks. Stay with us.


TONY SNOW, WHITE HOUSE SPOKESMAN: He has testified truthfully, trying to be very accurate. And what also happens is you have an interesting situation, when members of Congress knowing that somebody is constrained by matters of classification, they can ask very broad questions. And those are questions they know the person sitting on the other side cannot answer thoroughly in open session.

UNIDENTIFIED MALE: The President believes that Alberto Gonzalez's credibility is intact?

SNOW: Yes.

BAIER: There you have White House Spokesman Tony Snow defending the Attorney General. Democrats are calling for a Special Prosecutor to look into possible perjury charges against the A.G. after his testimony on Capitol Hill, that is conflicted with FBI Director Robert Muller, who said that there were some internal disagreements about surveillance programs run by the NSA.

It is pretty technical, but we are going to try to get into it. Now some analytical observations from our Fred Barnes, Executive Editor of The Weekly Standard, Mory Kondrake, Executive Editor at Roll Call, and syndicated columnist Charles Krauthammer, FOX News contributors all.

So, basically, Muller goes up to the House Judiciary Committee, says there was an internal dispute about surveillance programs run by the NSA. Gonzalez is in front of a Senate Judiciary Committee, he says there was no disagreement about the terrorist surveillance program.

Charles, are Democrats barking up the wrong tree, calling this perjury?

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Yes, because Gonzalez and Muller are talking about different aspects, different programs. Gonzalez is careful to say that the program of which he says there no disagreement is the one that the president has acknowledged in 2005 and 2006, which is the program that was narrowed in 2004, after there had been objections.

So what Muller is referring to is the original program from the 9/11 attacks, until it was changed. There were objections. The president sided with the Justice Department against Gonzalez, who was in the White House at the time.

The program was narrowed, and the program as it was narrowed, and as it is today, is not in disagreement. So, if you look at it that way, which I think is an accurate understanding of how Gonzalez has framed his responses, there is in contradiction.

The tragedy is here that National Review explained it well, Tony explained it. I think I have explained it. But Gonzalez is incapable of explaining it, and that is why he is in trouble. He is just inarticulate and can't explain how there was a real difference in timing.

BAIER: And, Mort, there is a problem with the White House, too, being able to explain it because of classification.

MORT KONDRAKE, EXECUTIVE EDITOR, ROLL CALL: Whatever it was that Gonzalez was allegedly talking about is still secret. And so you can't say well, no, this is what we are talking about, not this.

But, this could have all been cleared up today very simply if Robert Muller had come out and said, what I meant yesterday was exactly what the administration is saying about this. I'm sorry I made a mistake. If I left an impression that I was contradicting Alberto Gonzalez, I'm sorry.

Did he do that? He did not. So we still have a situation where there is a contradiction between the FBI Director and the Attorney General.

Now, is it perjury? Perjury involves criminal intent, right? You have to knowingly, purposefully lie. I don't know if they can ever prove that. But the Democrats at least have still got a trail that they can bark down.

BAIER: So the fallout here, this is one after another attacks against the Attorney General. What is the fallout? Who is winning this battle, and does the A.G. continue to stick around?

FRED BARNES, EXECUTIVE EDITOR, WEEKLY STANDARD: There is a battle, and then there is a longer war. Obviously, the Democrats are winning this battle, they are embarrassing the White House, embarrassing the Gonzalez. Tony Snow has to say the president has full confidence in him.

As Charles pointed out, he is a lousy witness when it comes to talking about classified information. And he really clutches when that happens. And somebody described it, when he is before these committees and he is asked about this stuff, and he gets super cautious, they said it was like watching the clubbing of a baby seal.

And then poor old Gonzalez is the baby seal being clubbed by all these members of Congress. He cannot--as Charles said--Tony Snow explained it pretty well. He brought into the analogy of a meal, and then all of this intelligence gathering is a meal, and Tony said he could confirm the peas but not rest of stuff on the dish. There was something else on the dish that, presumably, Gonzalez was talking about.

Bret: I think we did pretty well for a technical topic.

We will move on. Up next on the panel, the verbal sparring continues between Hillary Clinton and Barack Obama. But just who is winning this war of words? The FOX all-stars weigh in on that next.


CLINTON: I thought that was irresponsible and, frankly, naive, to to say that he would commit a meeting with Chavez and Castro and others within the first year.

BARACK OBAMA: I don't want a continuation of Bush-Cheney. I don't want Bush-Cheney lite. I want a fundamental change. It is time to turn the page on how we do business.

UNIDENTIFIED MALE: If you are looking for what's wrong in Washington, why the system is broken, why the system doesn't work, one perfect example is what has been happening just over the course of the last four days.

We have had two good people, Democratic candidates for president, who spent their time attacking each other instead of attacking the problems that this country has faced.

BAIER: Well there you get a flavor of debate. John Edwards weighing in today about this whole question of whether the next president should meet with the leaders of Iran, North Korea, Syria. Who is winning this? Clinton-Obama back and forth.

We are back with our panel. Fred, is there a winner so far?

BARNES: I'm not sure there is. I thought at first--obviously, during the debate, my reaction was that Hillary was clear winner, her answer was the right one. The notion in a we go out and talk to Hugo Chavezs of the world and the Fidel Castros is a nutty answer.

But it was a snap answer by Barack Obama. I mean, he has tried to clarify it later, and saying of course we do the diplomatic work ahead of time to find things up.

But this is one of the unusual issues, where both sides think it is a good issue for them. Hillary went out, actually to my surprise, after the debate, the next day, and was attacking Obama. He certainly fired back. And they both think they are doing it right.

John Edwards's complaint is--look, this has nothing to do with how Washington works or not. His main complaint is this is a debate that is getting up attention, and he is not getting it.

KONDRAKE: Rasmussen reports comes out today with a poll, and let's take a look at this. On this poll "Should the next president meet with the leaders of Iran, Syria, and North Korea without preconditions?" Forty-two percent said yes, the next president should meet with those leader.

Mort, is Obama touching a nerve here?

KONDRAKE: That poll--the word "without preconditions" is the key item. I don't know that half the people understand what "without preconditions" means. "Without preconditions" means that you just go in and start talking, and you don't have any agenda, practically.

And I can't believe that the American people, if they understood that, would vote that substantially in favor of it.

But look, there are two things going on here One is the merits, in which I think Clinton was exactly right. You don't go without preconditions into these negotiations. She has been around the Oval Office a lot in her husband's administration, and she knows that diplomacy works a certain way.

What is really interesting is the politics of all this, why they decided to fasten on this thing and have a donnybrook about it. And, as Fred says, each of them thinks that it is going to work for them.

I'm not sure who it does work for. After all, this is a Democratic Primary. Obama is appealing to left wingers, basically, and he may be ahead.

BAIER: In fact, Obama is running some web ads in Iowa and New Hampshire on this issue.

KRAUTHAMMER: Well, it may help him in the early stages here with the Democrats. But if he ends up as a nominee, it is going to hurt him.

This was a novice's error. You do not have a summit with the bad guys without conditions, preconditions. He cited Kennedy. John Kennedy never offered to meet without preconditions with Mao Tse Tung or Kim il Sung, who were the bad guys of that time.

He cited Reagan, who had a summit with Gorbachev in the first year of his second administration, after he held out for an entire administration, and was under attack this his re-election by campaign by Walter Mondale, who said you are the first president who has never had a summit. And he didn't have a summit because he wanted to wait until Gorbachev and the others were actually beaten and had to accept his conditions.

If Obama wants to say "I'm the candidate of change," I'm not sure that the change America wants is a man who is showing up on a stage with a clown like Hugo Chavez.

BARNES: I always liked Reagan's answer. Remember what his answer was? He said Soviet leader, he said they kept dying on me. And I couldn't meet with them because they kept dying.

Look, I disagree. I don't think how this is going to play. The American people in the polls have always showed they like American presidents talking to foreign leaders, even bad ones, whether the preconditions are looked at or not. So this may work out to his benefit.

BAIER: All right, that's the last word.

That's it for the panel, but stay tuned. The latest anti-war demonstration has taken an interesting new turn. Stay with us.


BAIER: And finally tonight, you may have heard about a very interesting anti-war rally against Senator Hillary Clinton. Our friends at late night TV have the story behind the story.


UNIDENTIFIED MALE: This week the media reported that several women infiltrated Hillary Clinton's San Francisco campaign headquarters and removed their shirts in protest of the Senator's views Iraq. Upon further investigation, however, we have found that only one person removed their shirt. And while witnesses told police that person was a female protester, it turned out it was just an overheated Al Gore.

Al Gore. Stacked.

BAIER: Stacked.

That's it for Special Report this time. Stay tuned for more news. Fair and balanced as always. Make it a great weekend.

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