The following is a partial transcript of the Jan. 22, 2006 edition of "FOX News Sunday."

CHRIS WALLACE, HOST: With the new terror threats against the U.S. and a flurry of activity on lobbying reform, we're joined now by Republican Senator John McCain, who's at the center of both stories.

Senator, welcome back to "FOX News Sunday", and we're delighted to have you here in studio, although I know you'd really rather be in Arizona.

SEN. JOHN MCCAIN, R-ARIZ.: Thanks, Chris.

WALLACE: Let's start with that tape from Usama bin Laden this week. Is it a failure in the president's War on Terror that the mastermind of 9/11 is still at large and still spreading his message of hate?

MCCAIN: No. I don't think it's good that we haven't gotten him. Obviously, we would have liked to. We recognize the importance that he has in the world, although there is indications that he's not able to maintain the network that he was in the past.

But look, the fact that there has not been an attack on the United States in four years is an indicator of some success. That doesn't mean there isn't going to be an attack tomorrow and that we must be on our guard.

But after 9/11, if you said well, we're going to be able to go four years without an attack, then I think a lot of people would have been surprised. So let's give the president and this administration some credit for that.

WALLACE: Some Republicans say that the bin Laden tape reminds us or should remind us why the president needs the power to authorize this NSA intercept of communications between the U.S. and foreign countries without court warrants, that he needs every weapon in his arsenal.

Now, you have expressed some concerns about the NSA program. Does this change your mind?

MCCAIN: No. But my concerns are that we should have — the president should come to Congress with a proposal as to how we can best meet these new challenges. Look, everybody's got a BlackBerry now, the e-mails, all of the new technologies for communications, as opposed to, say, 10 or 15 years ago where we all just had a hard line.

There are new challenges in the use of telecommunications that, in my view, indicate that we probably need some enhanced powers. But why not just come to Congress? Now Senator Specter is going to have some hearings on it — come to Congress, tell us what we need, what the president needs, and I am confident that he would get that authority.

WALLACE: But you do not believe that currently he has the legal authority to engage in these warrant-less wiretaps.

MCCAIN: You know, I don't think so, but why not come to Congress? We can sort this all out. I don't think — I know of no member of Congress, frankly, who, if the administration came and said here's why we need this capability, that they wouldn't get it. And so let's have the hearings.

Let's have the administration come to Congress. I think they will get that authority, whatever is reasonable and needed, and increased abilities to monitor communications are clearly in order.

WALLACE: I want to take you back to last month when you were sitting in the Oval Office with the president, and he agreed to accept your amendment banning cruel, inhuman and degrading treatment of all detainees.

But when the president signed the law, he issued a statement that said this, and let's put it up, "The executive branch shall construe the law in a manner consistent with the constitutional authority of the president."

Question, when you met with the president, did he tell you okay, I'm going to sign this law, but I want to preserve some loopholes?

MCCAIN: No, and I don't interpret his statement as being that. I am confident that it's very clear to the president and to Steve Hadley that there are no exemptions to this, and we will be in the Armed Services Committee monitoring exactly how this whole scenario takes place.

In other words, the interrogation techniques will be in the Army Field Manual, and I am confident that there will be no exemption, and I am confident the president understands that.

WALLACE: So why did he say this or why did the lawyers say this in a signing statement?

MCCAIN: I'm not sure, but the debate that went on and the discussion and everything surrounding the passage of that amendment indicates it was very clear there will be no exemptions.

WALLACE: OK. The president's top political strategist, Karl Rove, made a speech on Friday in which he made it clear that he wants to make national security the top issue in the 2006 congressional elections. First of all, how do you feel about that?

MCCAIN: National security is, in that election and previous elections, probably our number one challenge, and I believe that overall we could go to the American people and say we've done a pretty good job. Mistakes have been made, we haven't done as well as we could have in the war in Iraq, but we are making progress. We will face up to this challenge of Iran.

And so I think overall the record of this administration is quite good on national security.

WALLACE: Well, what do you think of his comment that the Republicans have a post-9/11 world view and Democrats are stuck pre- 9/11?

MCCAIN: Oh, I work very closely with a number of Democrats on national security issues. Do I think that the president's leadership has been worthy of support of our party and our leadership? Yes.

But I'm not — there's too many good Democrats over there who are as concerned about national security and work just as hard as I do.

WALLACE: Do you see a difference — kind of philosophically, do you see a difference between Democrats working to change the Patriot Act or raising deep concerns about the NSA surveillance program and you working to, in effect, tie the president's hands on torture?

MCCAIN: Well, I would hope not. I think it was very clear when people like General Colin Powell and every former secretary of state, every former national security adviser and everybody else supports our amendment, it's because, one, we realize what's happened to our image in the world, and, two, we know that when another American serviceman is captured, under this scenario he would be turned over — he or she would be turned over to the secret police.

So I think there's some difference. But look, there's nothing wrong with disagreeing, with questioning, with debate and discussion. I mean, that's what democracy is supposed to be all about. And I welcome people who have differing views, and I'll be glad to debate these issues in open forums around America. We're patriots. We love America. And we may have different views as to how to do that.

WALLACE: According to some reports, Iran is already starting to move some of its money, its currency, out of European banks. They've apparently approached OPEC about cutting oil production.

Do you really believe that the diplomatic track going to the U.N. Security Council, trying to get Europe and Russia and China to agree to sanctions, then getting them to enforce the sanctions they agree to — do you really believe that's going to stop Iran from developing a nuclear capability?

MCCAIN: I don't know. I believe we have to exhaust all those options. But we cannot take the military option off the table. But we have to make it very clear it's the last option. There's only one thing worse than the United States exercising a military option, and that is Iran having nuclear weapons.

They already have the missiles to put them on. It would be incredibly destabilizing. And by the way, there's two other points here. One is we have to embark on a long-term pro-democracy movement in Iran. Those people are living under — the Iranian people are living under an incredibly oppressive and repressive government.

And the second lesson we should have learned from this, and what's going on in Venezuela with Mr. Chavez, and what Putin did vis-a-vis the Ukraine, we've got to get quickly on a track to energy independence from foreign oil. And that means, among other things, going back to nuclear power.

But we better understand the vulnerabilities that our economy and our very lives have that when we're dependent on Iranian mullahs, and wackos in Venezuela, and now Mr. Putin obviously deciding at least under one occasion to exercise the oil card, which never happened in all the days of the former Soviet Union.

WALLACE: So are you saying that a nuclear capability in Iran is unacceptable?

MCCAIN: I'm saying a nuclear capability in Iran is unacceptable.

WALLACE: And how long would you wait before you would exercise the military option?

MCCAIN: I think you would have to exhaust every other option. And I don't know...

WALLACE: It's gotten pretty exhausted already, hasn't it, Senator?

MCCAIN: Listen, it's very tough. And you also have to worry — there was something right on FOX just a few minutes ago about the Israeli defense minister and his concerns.

Look, put yourself in the position of the Israeli government. Your first obligation is defend your people, and here's a country whose president calls for the eradication of your country from the map. This is the most serious crisis we have faced outside of the entire war on terror since the end of the Cold War.

WALLACE: So how long do you give diplomacy? Weeks? Months?

MCCAIN: It's not so much the amount of time as the progress as we go through the various machinations. In other words, I would be pressing now, and I think the administration will be very soon, to go to the Security Council.

If China and Russia want to be on record as being supportive of Iran and their nuclear ambitions, then I think that obviously has consequences as well.

WALLACE: New subject. Are Jack Abramoff and his influence-peddling a Republican scandal?

MCCAIN: No, I think it's a bipartisan scandal, because the lobbying is out of control. But the reason why the lobbying is out of control is because of the process, the system that prevails here on Capitol Hill between Republican and Democrat, and that's a thing called earmarking or pork barrel projects.

When one lobbyist can get close to one congressman, in the case of Duke Cunningham, and millions and millions of dollars can be diverted to one of those enterprises in the middle of the night...

WALLACE: And let me just — earmarking is that a single legislator can sneak in a single provision...

MCCAIN: A single provision in a line that nobody's ever seen or heard of, and most times we don't find out until days or weeks afterwards. Then you've got a process that breeds corruption. And it makes good people do bad things.

WALLACE: So why is it that the...

MCCAIN: You have to fix the earmarking.

WALLACE: But why is it that the Republican plans we saw this week, the Democratic plans we saw this week do nothing about earmarking?

MCCAIN: Because it is the bread and butter, or at least perceived to be by many politicians as their bread and butter, and preserves their incumbency. We've got to reject it.

WALLACE: So are you saying that all of this reform we saw this last week is a sham?

MCCAIN: No. We need to have the lobbying reform. We need to close those loopholes. And we need to — look. And by the way, it's time we sat down together, because both Democrat and Republican proposals are very similar. I've been working with both Democrats and Republicans.

But you're not going to fix the problem until the cause of the problem, which is this — Ronald Reagan vetoed the highway bill in 1984 because it had 152 pork barrel projects in it. He said I haven't seen this much pork since I gave out blue ribbons at the Iowa State Fair. OK?

You know, 6,140 were in the last highway bill. In 1994, when we took control of Congress, there were 4,000, quote, "earmarks, pork barrel projects." This year there's something like 15,000, in the tens of billions of dollars.

So we've got to fix the earmarking, and if we don't fix the earmarking, then I can assure you the corruption will go on.

WALLACE: All right. There's a new Hotline poll out this week. And let's put it up. It shows you crushing — I think that's the only word you can use for it — crushing Hillary Clinton by 16 points, 52 percent to 36 percent. Senator, does that get your heart beating a little faster this morning?

MCCAIN: No. It means that my name I.D. is up, and it means that all of this is ephemeral, and anybody three years before an election who is looking at that election is only a political junkie like you and me.

WALLACE: But have you insisted your staff start calling you Mr. President?

MCCAIN: I make them sing "Hail to the Chief", but I haven't gotten to the Mr. President. Most of them still I allow to call me John or Your Majesty.

WALLACE: Senator Clinton had a busy week this last week. She said that Republicans in the House are running it like a plantation. She basically accused the president of wasting time on Iran, saying that he has outsourced diplomacy to the Europeans. Would you like to run against that?

MCCAIN: Oh, not particularly. But on the subject of the plantation, those words are not — we all know how explosive those words are. I certainly would hope she would use different language. There are just certain key words that get everybody's adrenaline going.

On the case of Iran, most Democrats that I know have wanted the president to go through the international organizations, go through the process, the IAEA and other organizations, before pulling the trigger. But again, open and honest debate is good for America on these issues. And because we disagree does not mean our opponents are unpatriotic.

WALLACE: Senator, we're going to have to leave it there. Thank you so much for coming in today. We hope to have you back again soon.

MCCAIN: Thanks, Chris.