This is a rush transcript from "Hannity," July 27, 2010. This copy may not be in its final form and may be updated.

SEAN HANNITY, HOST: The balance of power in Washington could dramatically shift just 98 days from now. Now races all around the country are beginning to heat up this summer ahead of the midterm elections and a major x-factor in many of those battles, particularly in border states, could be the Arizona immigration law.

Now the controversial measure signed into law back in April by Governor Jan Brewer is set to take effect just two days from now, this Thursday. Now that is unless U.S. District Judge Susan Bolton steps in as the Obama administration has requested and issues an injunction to delay the law's implementation.

Now this is an issue with critical national security implications. And we're going to be following it very closely over the next few days. And we'll have reaction from Senator John McCain in just a minute.

But first in Washington, concerns over a major national security breach are growing tonight. Military officials and political leaders from both parties are expressing disappointment and outrage over the posting of tens of thousands of highly classified documents on the WikiLeaks website.

Now some lawmakers are even declaring that the leak is an act of treason. Take a look.


REP. PETER KING, R-N.Y.: The fact is, what happened here - and whoever gave that information - is guilty of committing the most detestable, contemptible crime. And we have to take it seriously. We have to make clear that we're not going to allow it to happen again.

And this guy - whoever it is, if a staff sergeant - again, I don't know who is. Whoever they find out who did it has to be prosecuted and punished to the full extent of the law.


HANNITY: And joining me now from Washington with the very latest on the Arizona immigration law and the WikiLeaks situation is Arizona senator John McCain.

Senator, welcome back. Thanks for being with us.

SENATOR JOHN MCCAIN, R-ARIZ.: Thanks for having me back, Sean.

HANNITY: Ninety thousand documents, internal. Our enemies are going to take a glimpse at this. Your reaction.

MCCAIN: Well, General Mathis who's the marine general who's going to be head of our Central Command, replacing General Petraeus, today said, it was very harmful. It was very harmful to our efforts in Afghanistan, very harmful to our national security and huts relations without allies.

But remember, Sean, the interesting thing about this outfit is one that wants us to get out of Afghanistan and wants us out immediately. Ultra left, obviously with an agenda, and now we an American - American newspapers acting as willing accomplice to this - what is clearly a breach of our national security, and implementing it and abetting it.

HANNITY: Do you think it's treason?

MCCAIN: I'm not sure if that's the right word. But it's certainly prosecutable on grounds of - on several grounds. And so I think it's terrible. I think it's really awful and I think that we need to pursue whoever did the leaking to the fullest extent of the law.

HANNITY: What did you make of the report that in fact the Obama administration - they were implicated in the Lockerbie bomber fiasco and the release of this guy on so-called humanitarian and compassionate grounds? What was your reaction to that?

MCCAIN: My reaction was that it didn't surprise about BP and a lot of us at the time objected strenuously to it.

It's - it's now a situation where people can be guilty of outright murder, as this Lockerbie guy was, and somehow overtime they can go free.

But back to the leaks. Again, this is - this is really something that can impair our ability to prosecute these conflicts successfully. But it also is a fact that the president of the United States has failed to say that we are only going to withdraw under conditions based.

That is a terrible mistake. It's sending the wrong message. And the Taliban and others are emphasizing that they think we're leaving and they're going to cut off people's heads after we leave.

The president has got to say our withdrawal is conditions based and that will minimize a lot of the harm this leak has just done.

HANNITY: Senator, the people of Arizona give President Obama a 28 percent approval rating right now. A lot of this obviously I think is connected to the suit over the Arizona immigration law.

Obviously, the number one kidnapping capital in the country right now is Phoenix, Arizona. We know the impact it's having on border states, especially states like Arizona, on the educational system, the criminal justice system, the health care system. Governor Jan Brewer, she's seeking a dismissal of the Obama challenge.

Your reaction, number one, how the president played this in the public, that if you take your kids to get ice cream you're going to be asked for your papers which the law specifically prohibits, and the lawsuit that followed that didn't even mention racial profiling?

MCCAIN: I think it was just an awful thing the president said about taking your child out for an ice cream cone. I think it was just as bad when his attorney general and secretary of Homeland Security said they hadn't even read the bill before condemning it.

But I'd also like to remind you, this has now become a national security issue. Did you know last week there was a car bomb that went off in Juarez, Mexico, across the border from El Paso. The classic kind of IED situation that we've only seen in the Middle East so far.

Twenty-one bodies were found, 12 miles south of Nogales, Arizona. And Nogales police chief was told that they're going to kill his policemen because they were impeding the drug traffickers.

This has become a national security issue, not just a border issue. And so I hope that the judge will rule in favor of the state of Arizona who only acted - only acted because the federal government had not carried out its responsibilities.

HANNITY: Let me ask you about the long list of Democrats - I've often made the case, Democrats are very generous with taxpayer dollars. You have the chairman of the powerful House Ways and Means Committee where tax law is written. And Charlie Rangel has a tax problem.

The secretary of the Treasury heads the IRS, he's got a tax problem. Kathleen Sebelius has a tax problem. Tom Daschle has a tax problem. Hilda Solis - you're laughing - has a tax problem.

What is it about Democrats and their - look, why do I suspect if Sean Hannity didn't pay his taxes they'd want to throw me in the old clinker there?

MCCAIN: I think those Democrats should be strongly in favor of tax reform.


HANNITY: Well, the latest to join the list here - you know, as your friend, your colleague, Senator John Kerry avoided, what $437,500 in sales taxes in annual excise tax of 70 grand. He lives in Massachusetts. He buys the boat in Rhode Island and moors it in Rhode Island.

You know, what is the taxpayer - and they want to abolish the Bush tax cuts.

MCCAIN: Well, they should know these taxes are the reason why every yacht, every sloop, every vessel that you that's privately owned is registered in the Grand Cayman or some other places because the taxes are so unacceptably high. And that's another reason why -

HANNITY: Well, he bought it in New Zealand - but he moored it in Rhode Island and - because there's a 6.5 percent tax there. And when questioned about it he was - he was outraged that anyone would even ask the question.

MCCAIN: Well, I'm outraged, too.


HANNITY: That they asked the question or that you weren't invited on the boat?


MCCAIN: Both. Look. The tax system is screwed up all over America. But let me also remind you that one of the reasons why we didn't get the help that we could have gotten from foreign countries is a thing called the Jones Act which prohibits foreign flagships from operating in our coastal waters.

That had a real impact on our environment. And that's again a case of union control and protectionism.

HANNITY: All right. What do you think in terms of these scandals, Charlie Rangel, Congressman Massa, I think John Kerry has got a lot of explaining to do. All the tax issues the Democrats have had yet they want the Bush tax cuts to expire. The president last week played the class warfare card.

You know, do you think this has an impact on the election in 98 days from now?

MCCAIN: Well - to be very frank I think that those scandals, Abramoff and others had an impact on the 2006 elections and the 2008 elections to a much lesser degree. But I think they have an affect and I think the American people are sick and tired of this movement.

We've seen big government into every aspect of American life, including car companies, including health care, including all of those other things that we're seeing a real rebellion out there. It's a peaceful rebellion, but every weekend I go home, I see that rebellion. And it's going to be an interesting election night, my friend.

HANNITY: What do you make of the plurality of voters and one of the recent polls that came out said the country would be better off if you were elected?

MCCAIN: I was flattered and humbled, and where were they when I needed them most?


HANNITY: OK. Senator, thanks for being with us. Appreciate it.

MCCAIN: Thank you, Sean.

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