This is a partial transcript from "Hannity & Colmes," January 9, 2007, that has been edited for clarity.

SEAN HANNITY, CO-HOST: After much criticism Toys R Us has changed their decision to deny a Chinese-American infant a $25,000 prize in a baby New Year's contest, because her mother is an illegal immigrant. Instead, Toys R Us is now awarding the prize to baby Yuki Lin, who was born at the stroke of midnight in a New York City hospital along with two other babies.

Joining us now New York City councilman John Liu, who was outspoken in getting Toys R Us to reverse their decision.

How are you doing, John? Thanks for being here.

JOHN LIU, NEW YORK CITY COUNCILMAN: Thanks for having me.

HANNITY: First of all, I'm glad the baby is healthy. I'm glad the family is happy.

LIU: We're all very happy about that.

HANNITY: There is a huge problem we have in this country about illegal immigration. People don't respect our laws and our sovereignty, and as a much broader issue to do with everybody's national security.

You agree, right? We're in agreement?

LIU: We absolutely have a problem with immigration, and the laws need to be fixed.

HANNITY: So the question is here we have this term — you've heard — anchor baby. In other words, if a baby is born, even if the parents are illegal immigrants, they're in the country illegally, the baby is automatically a citizen. I think we should change that rule, that law. Do you agree with me?

LIU: Do you really think people are coming to this country just to have their babies?

HANNITY: Yes.

LIU: People are coming...

HANNITY: Some people I think are.

LIU: People for the most part — well, you can argue that some people or a small number of people are doing all sorts of different things.

HANNITY: But there is — we all take for granted they live in the greatest country in the world.

LIU: This is the greatest country in the world, and it's great that so many people from all over the world want to be American. People come here, and then they have their kids here. They don't come here just to have their kids. They come here to live out the rest of their lives.

Now, in this case, this is not about the immigration debate.

HANNITY: Yes, it is.

LIU: Let me tell you my perspective. Let me tell you my mind.

HANNITY: All right. You go ahead.

LIU: What's happening here is the law says, American sovereign law says that if you're born here in the United States, you're an American citizen. Now, the current law is just that.

HANNITY: I understand.

LIU: If you want to change that law, we can change it.

HANNITY: I think we should. I understand your point.

LIU: The issue here is that the baby was the just born.

HANNITY: The first baby.

LIU: And Babies R Us decided to...

HANNITY: Toys R Us.

HANNITY: Yes, Toys R Us, but Babies R Us is a division, though.

LIU: Yes, that's right. Babies R Us was the division that awarded the scholarship for the little baby.

HANNITY: Let me, you see, for the little children, you're just playing on everybody's emotion. Look, I support immigration. I support immigration.

LIU: I think we all do.

HANNITY: Here is the difference, though, between your position and mine. If you don't respect our law, if you don't respect our country's sovereignty, if you don't have enough respect for this country, then I think this law needs to be rescinded about children becoming citizens. And you've got to — you can't cut in front of the line.

Do you know what it's like? It's like if we're in line for the movies and then some other people cut in front? Is that fair? It's not. There are people that wait seven, eight years to get legal entry into this country, and other people don't respect it.

And then they come, and then they can win a prize even though they weren't here legally. That bothers a lot of people. You've got to understand that.

LIU: And I think it would be great if you spent a few more segments of your show — this is a great show...

HANNITY: Thank you.

LIU: ... to talk about this debate. The issue here is Babies R Us having this contest, saying that they're going to give a $25,000 scholarship in U.S. bonds.

HANNITY: You've got to be a citizen, a U.S. citizen to apply.

POWERS: But it doesn't have to be a U.S. citizen. It was that it went to the baby. It's in the baby's name. Isn't that right?

LIU: That's absolutely right.

POWERS: And they don't get it until they're 18 years old. Is that correct?

LIU: It's an 18-year U.S. bond that matures when the baby turns 18, 18 years later.

POWERS: Right. So I think you can have a fair debate about the things that Sean is talking about, about you know, should this be the law or not. But if we're going to obey the law right now is that if you're born in this country you are an American citizen.

LIU: That is the law.

POWERS: Why do you think then Toys R Us reacted the way that they did?

LIU: Well, I think they made a mistake. And fortunately, they realized their mistake, and they decided to give the scholarship to all three babies who were born just within a few seconds of each other.

And you know, if Toys R Us or Babies R Us, their division, wanted to get into this national debate, they could have done that. But, instead, they simply promoted this contest to everybody in this — in this United States, any baby that was born...

HANNITY: They didn't think illegal immigrants were here. They weren't saying, "Oh, and including all the illegal immigrants."

LIU: They weren't. As you said at the beginning of the show...

POWERS: Why would they?

LIU: ... it's a big problem that we have in this country. I'm sure the people at Babies R Us understood that this was a problem. So why did they — they should have made it more narrowly focused. Now there's one point.

HANNITY: Should have excluded illegal immigrants? They should have put those words in there.

LIU: If that's the intent, then they should have done that.

HANNITY: That's silly.

LIU: But that's not their intent.

HANNITY: They assume people obey the law.

LIU: The law is that you're born here...

POWERS: Sean, the law is that the baby is American.

HANNITY: But they shouldn't even have an opportunity to be born here, because their parents don't belong here. They're not here legally.

POWERS: What are you going to do with them right now? Do you want to send the baby back?

HANNITY: No, no, no. Stop. Stop. The baby is a citizen. The law is the law, and you don't change the rules after the game is played.

POWERS: Right.

HANNITY: This baby is a citizen. That's not the point. The point is that Toys R Us did not assume that there would be people here illegally that didn't — that didn't — wait a minute — respect our law. This is a very, very important point.

POWERS: But — no. But the point is that they made — what about it said exactly was this will go to the first American baby that's born.

HANNITY: We'll just forget our guest. And we'll debate it.

POWERS: This was the first American baby. Doesn't matter what the parents have done. I mean, what I'm curious to know is...

HANNITY: There is a technical debate on that, though.

LIU: That's right.

POWERS: Do you know if they go and look into the backgrounds of other mothers to find out, you know, have they broken other laws? I mean, you know, I highly doubt it.

LIU: It's not clear exactly what Babies R Us does in these cases. Now you know, there's an important point that really hasn't come out. These parents, they're sitting in the hospital room. They're rejoicing over this little baby that has just been born. They didn't apply for anything. They didn't — they didn't...

HANNITY: I have got a question for you. Should they be sent home?

LIU: Listen, they...

HANNITY: Wait a minute. We're running out of time. Should the parents be sent home?

LIU: You could say that about 11 million people.

HANNITY: I didn't ask you about 11 million people. I asked should these parents — we know they're illegally here now. Should they be sent home?

LIU: These parents are here in New York.

HANNITY: Illegally.

LIU: Celebrating. I don't know that for a fact. Do you know that for a fact?

HANNITY: Well, according to every press report, if they are here illegally, should they be sent home?

LIU: The fact of the matter here...

HANNITY: Checkmate.

LIU: No, there's no checkmate. Because what we're talking about is this policy that the store erroneously made. And they corrected themselves.

HANNITY: And the little baby — you know, God bless the baby. I want the baby to be happy. I love babies. I'm a baby lover. I have two kids.

LIU: The parents didn't ask for this, Sean. They didn't ask for the money. They had no idea this was being done. They had no idea the hospital would apply on their behalf.

HANNITY: Thanks for coming, councilor.

LIU: Thank you very much.

HANNITY: Thank you very much.

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