This is a rush transcript from "Hannity," January 28, 2011. This copy may not be in its final form and may be updated.

SEAN HANNITY, HOST: Now, as we saw the president called on Egyptian dictator Hosni Mubarak to respond to the demands of his people. And Press Secretary Robert Gibbs indicated earlier today that Mubarak's response to the protest taking place throughout his country may cause the administration to reconsider American aid to Egypt, which stands now at about $1.5 billion, per year.

Now, Mubarak did come forward today to respond to the tumult in his nation. I a press conference, he announced that he was asking the member of his government to resign and he plans to appoint a new government tomorrow. From all indications, he will remain at the head of that government which will do little to appease the protesters on the street.

Now, the events taking place in Egypt are even more momentous when viewed in the context of larger changes that appear to be taking place in this region. Now, protests that began last month in Tunisia succeeded in forcing the resignation of that country's longtime dictator who stepped down January the 14th.

Now, meanwhile, protests in Lebanon turned violent just days ago when a candidate backed by the terrorist group Hezbollah gained ground in his effort to become prime minister.

And joining me now with reaction to all of these events, former National Security Adviser Stephen Hadley, and former senior Pentagon official, the host of "DefCon 3" on FoxNews.com, KT McFarland.

Thank you both for being with us.


HANNITY: Stephen, let me first start with the comment that was made earlier by Joseph Biden that this is not a dictatorship. If it is not a dictatorship, why did they shut off the internet and communications?

HADLEY: Well, of course. You know, the problem is that, you know, in a crisis like this, the options that the United States has are very limited. What should have happened, should have happened five years ago, when President Bush among others was urging Hosni Mubarak to politically reform, to support the creation of civil society and to support the creation of non-Islamic parties. Under the current configuration, there's no alternative between either the Muslim Brotherhood on one side or the governing party in the other. That's a huge mistake, because it is that middle that could take Egypt into a truly democratic future. And instead of encouraging that middle, Mubarak, unfortunately, and his regime has been oppressing it. And that is what created the crisis that we see playing out today.

HANNITY: All right. But here's my fear, do I think some of this is about the democracy movement in Egypt? I absolutely do. When you look at, you know, 60 percent of the population of Egypt is under 30 years of age and 90 percent of that, 60 percent is unemployed, obviously, people have legitimate complaints for the government. There's no hope, there's no opportunity for them.

Here's my big fear though Stephen and then we'll go to KT, if we look at the history of the Muslim Brotherhood, they are global Sunni revivalist movement, it was found in Egypt in 1928. They seek to establish an Islamic caliphate governed by Sharia or Islamic law. Their long-term objective has been to achieve that and do it and use the method of Jihad, holy war to achieve that.

So, do we not risk what I was asking Kirsten earlier that in fact, on the one hand we want regime change, but on the other hand, we don't want another Iranian Islamic state in the region?

HADLEY: Exactly right. It is a real risk. And that's why it was so foolish for the government to destroy the political center. They should have been creating a political center. Now if you want an alternative to the government, you have no place else to go but the Muslim Brotherhood. I don't think that's where the Egyptian people want to go. But they need an opportunity.

When elections come and there will be elections, there needs to be enough time, so that civil society and non-Islamic political parties can come forward and give the Egyptian people a choice that is not the Muslim Brotherhood. I think if that happens, they will take that choice.

HANNITY: Yes. KT, the fact that the Muslim Brotherhood got involved -- it tells me, they didn't get involved to help the people that are suffering from poverty. They got involved because they see this as an opportunity.

KT MCFARLAND, FOX NATIONAL SECURITY ANALYST: An opportunity to ride into town.

Often what happens in revolutions -- whether it's the Iranian Revolution in '78 which you're right to point out, even the Russian Revolution -- is there are three acts.

The first act topple the dictator. The second act, the pro-democracy, people who topple the dictator, they come into office but they're not terribly effective, they're not supported. And so, the third act is when the extremists and the people who are better organized and more ruthless and willing to use violence come in, and that's what you have around. And that's what we have to worry about now.

HANNITY: Why would Joe Biden say this is not a dictatorship? About every definition, it's a dictatorship, but it could be far worse because we could have a similar revolution like we had in Iran, so in that sense, what should the position of the United States of America be now considering we missed opportunity?

MCFARLAND: OK. We missed those opportunities, can't undo those. But what we should do is -- what we shouldn't do is topple Mubarak. We shouldn't pull the rug out from under him. On the other hand, we shouldn't prop him up, that's going to take its own course. Now within 48, 72 hours, a week, there's a new government, Elbaradei, there's some kind of coalition government, a democratic government, we should rush in with every bit of support that we possibly can. We should be their best friends because that's what the government we want to hold, that second act. We want to prevent the Muslim Brotherhood from toppling what comes next.

HANNITY: You know, Stephen, I think we have a combination here, a legitimate gripes and grievances by people that are suffering in poverty in huge percentages in Egypt -- on the one hand. And on the other hand, you have this opportunity or the opportunists now that are going to get in. The Iranians seems to have been supporting this in their state run media and some other comments that have been made. You've got to believe, knowing past history that all these terror-supporting groups that would like to see a terror regime emerge in Egypt are now jumping in to see if they can foment that.

HADLEY: That's certainly right. And that is why we have to, given the opportunity, whether it is Mubarak deciding to preside over a transition or Mubarak leading some kind of caretaker government comes in. We must not rush to elections. We need to have a period of time where we help the Egyptian people stabilize the situation, help a non-Islamic parties to emerge, help civil society to be built and ensure that there is a free and fair election. So that the Egyptian people will be able to express their true preferences.

I think what we know their preference is not to the Muslim Brotherhood. They want freedom and democracy and they know that neither the army on one side nor the Muslim Brotherhood on the other is going to give that to them.

HANNITY: What are the odds Mubarak survives, KT?

MCFARLAND: I don't think it's terribly good. Either, if he survives this all, it's because he allows all these reforms and economic political reforms. I think it is far more likely though that he's another domino to fall.

You know what, this is potential, it's like the fall of the Berlin Wall. We have dominoes falling from Tunisia, to potentially even to Iran. The question --

HANNITY: But they are falling the wrong way.

MCFARLAND: Well, that's the problem. We want to make sure they fall in our direction, not the other direction.

HANNITY: I don't see that happening.

MCFARLAND: Well, you've got make that happen, you've got to get in there and do what Jimmy Carter did not do. When the Shah of Iran fell, Jimmy Carter pushed him out and then sat on his hands. We can't allow it --

HANNITY: Yes. I don't even think Mubarak is confident because two days ago, his son and his daughter-in-law and kids with everything they have in a private plane out to England. So, I don't think he's confident he will survive. Good to see you. Thank you for being with us.

MCFARLAND: Thank you.

HANNITY: Stephen Hadley, thank you. I appreciate it.

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