BOB HERBOLD (Chief Operating Officer, Microsoft): Thank you very much for attending. And I'd like to formally welcome Secretary of Defense William Cohen. It's really a treat to have you here on campus talking about subjects of common interest and the impact technology is having not only in the military but on a global basis.

There are a few other people in the room I want to acknowledge. First of all, we have several Army IT personnel. If they could raise their hands. (Applause.) We won't clap for this bunch, but we also have a lot of Microsoft employees here -- (Laughter) -- and thank you very much for being here. The Army can clap for them! (Laughter.)

This also coincides with the Third Annual Army Conference where we get together to compare notes as to how Microsoft is doing from the standpoint of helping the Army implement technology, what kinds of things we should be paying attention to in order to improve the capabilities of our products so that they can do a better job of doing what the Army has to do. It's a ritual that has become very valuable for both organizations, and one that we truly value.

With that, I will turn it over to Microsoft's Chairman and Chief Executive Officer, Bill Gates.

(Applause)

BILL GATES (Chairman and CEO, Microsoft): Thanks, Bob. It's a great opportunity to come together and have a chance to thank what is our biggest customer in the world, the U.S. Department of Defense. You know, we often talk about how we've got 200,000 exchange seats at General Electric and 200,000 at Boeing. But both of those are quite a bit smaller than the over 300,000 that we've got at Department of Defense.

When you think of the challenge that the DOD faces in terms of worldwide coordination and critical information that needs to be kept secure, it really is the most interesting application of our software technology that there could possibly be. Over the years we've had a very strong partnership and are doing a lot of new things together.

I think it's fair to say the arrival of the PC as a standard was an incredible benefit for DOD, because in the past, their procurement cycles had been very long. If a certain system was procured, then if you wanted to have upwards compatibility, you didn't have the ability to choose between different hardware vendors. In the early days of the PC market we really started to see the impact of competition when DOD went out for very large, high volume bids. Dozens of people bidding prices that were really quite amazing, and that's spread throughout the market. And so today the base of PCs out there is pretty incredible.

Challenges we're working on together include how to get all those PCs networked together in the right way. DOD has all the challenges and opportunities of a very large enterprise, and so coordinating those activities, administering those activities, it really is a challenge that pushes our software to the limit. And it's fantastic for us to have this opportunity to find out from the people at the DOD where that's working, where it's not working for them, and how we can carry that forward.

And the concept of a digital nervous system, where everybody has the information they need, applies to all organizations. In the case of DOD, it goes as far as to even thinking about somebody who's on a foreign mission, somebody who's out in a battlefield. One of the most fun parts of my Comdex speech a year ago was having a Marine come on stage and show how he's using Windows CE to allow people to get map data and updated data. Actually, the part of the speech people liked the most was when the Marine stomped on the computer -- (laughter) -- to show how rugged even PC technology could be. And I was pleased that it kept working after that! (Laughter.)

Now, the Department of Defense is in a fascinating period in terms of the challenges ahead. You have the traditional challenges. And now we also have to think about how this information infrastructure, that not only the government but business depends on, could that come under attack? You ask, how well set up are we with our security infrastructure to make sure that even somebody who wanted to disrupt those activities wouldn't be able to do so. I think it's fair to say that this is an unsolved problem and one that's going to require industry and government to work together in some very new ways. And Microsoft is certainly very committed to this critical infrastructure problem.

There's a lot of dialogue that's been going on behind the scenes about that. And a lot of work still needs to be done there. I would just highlight that as a real priority that the country has to think about. Where the weaknesses are is very different going forward. The weakness is not only the information technology side, but also vulnerability to biological attacks and things of that nature.

Another interesting challenge that we partnered with the Department of Defense on has to do with the skills vacuum that's out there. You know, our industry has a shortage of talented workers, and yet the jobs need to be filled. And there are very interesting jobs. They are jobs that pay well. They're jobs that don't pollute; all you do is make bits that go across the network. (Soft laughter.)

And so closing that gap, both for people who are in the services or people who are moving from the services into the commercial world, has been something where we've come up with a number of programs to address, under what we call Skills 2000. And in fact, now there have been hundreds of people who have taken advantage of that and found great jobs as a result of that. We have someone here today who saw in his base newsletter some of those training opportunities and took advantage of them. I'd like to recognize Gau Karadi, who's a former member of the Army and now working with us in Skills 2000. (Applause.)

So that's another place where the partnership is working. And we're really scaling up what we do there, because it's truly a win-win opportunity.

So in closing I'd just like to say once again we really appreciate the relationship we've had with the Department of Defense. I'm very impressed with the leadership that Secretary Cohen is providing in getting people to think about these future challenges. And we'll certainly do our part in contributing to those things. And so I want to thank him for that leadership and thank him for coming. (Applause.)

With that, let me ask him to come on up, and I'll turn the podium over to him. Thanks.

DEFENSE SECRETARY WILLIAM COHEN: Thank you, Bill. (Applause.)

Bill, thank you very much. And Bob Herbold, thank you for inviting me to come here today. (The next comment refers to the former Army officer who is now in MS training) I had mixed emotions about you leaving the military and coming to work here. (Laughter.) And I'll tell you, I gave you mild applause. (Laughter.)

I might also point out that we have some seats that say, "Reserved for the Cohen staff," that anyone who does not want to stand up can use. Though I like the notion of having standing room only -- (laughter) But if you'd like to have a seat, we have plenty of room up front.

Coming to the Microsoft campus was something of a unique experience, as we landed in a big helicopter and I was commenting that they probably think this is "Red Dawn" -- (laughter) -- or an invasion by aliens, coming in this large helicopter.

But I always think, when I go to a campus, of my oldest son when he graduated from Bowdoin College so many years ago. He always told me about the story of the most popular professor on campus. He was popular -- he was a religion professor -- but he was popular because he always asked the same question every year on the final exam -- (laughter) -- "Discuss the wanderings of St. Paul." And the students, of course, loved him because they would wait until the final couple of days, they'd cram and they'd ace the exam the next day. Except my son's final year, when all the students walked into the classroom, they sat down, and they looked at the exam question and, you know, you could see the hands started to shake, butterflies, some became ill, and they all walked out of the room within about three or four minutes, totally dispirited, except for one student, who sat there and wrote and wrote and wrote.

The question on the exam was, "Discuss the meaning of Christ's Sermon on the Mount." And so the student took the full three hours to fill out his blue books. He finally handed them in to his professor and he walked out the center aisle with what Mark Twain would call the "calm confidence of a Christian holding four aces." (Laughter.)

And the professor looked down at the exam book and it said, "To the experts I leave the meaning of Christ's Sermon on the Mount. As for me, I should like to discuss the wanderings of St. Paul." (Laughter.)

So, I thought I might wander a little bit with you this afternoon, and take you on a journey perhaps that some of you have not experienced. But to talk certainly about the cutting-edge world of information technology, you receiving a Secretary of Defense is quite unusual. It's expected that if a Secretary of Defense visits Seattle, he'll be walking the assembly line at Boeing -- I've done that this morning -- but highly unusual to show up at Microsoft campus.

But I came here as part of a continuing effort to try to strengthen the connection between the military and the citizens they serve. I think when Americans think of the military, they tend to think of Washington or the Pentagon, but in truth, the military is simply an extension of the people. It's your military.

The men and women of the armed forces are your neighbors and cousins and sisters and brothers. The security they protect is your security. The prosperity that they ensure through you is your prosperity, and they look to you for support in times of need. And so I began this address last month. It was an address to the Illinois state legislature and I really wanted to come here today to spread this message through you to another important segment of American life, and that's the high technology industry that you lead.

And I might point out that the roles in which we operate are quite similar. They are, perhaps, two of the most striking examples of American success, because they are areas where the United States holds unquestioned, unparalleled, superiority. And I think about the innovation, the creativity, the economic dynamism of the American information and technology, it's the marvel of the global economy, and it's your intellectual endeavor that has reduced our oceans from being vast oceans to mere ponds. And I'd like to think that it has been technology that has miniaturized the globe. It has reduced it to a small ball spinning on the finger of science.

And so your contribution to the world's productivity and the changes that you have brought to everyday life, I think, astounds even the most modern of minds. And because of who you are and what you do, the United States is the unquestioned leader in what may be the most energetic and important industry of the 21st century.

And I would say, in a similar fashion, there is no nation that can match the military power of the United States. We have the most highly skilled, the most well-trained, service members in the world. And I am glad to see -- I didn't try to fill the auditorium here today -- but I am delighted to see so many of our military that are here with us.

Our weapons and our military capability today are without peer. And you look in the daily news reports. Day after day, mission after mission is carried out with absolute precision and professionalism. I think that is astounding to friends and foes alike. And so we represent the two preeminent pillars of American prestige and talent.

And at the same time that I mention this, there is also a gap that exists by some in this industry and our military. And it's gap that is not unique to this industry but I think is somewhat indicative of that in our country. There is a sense that in many places beyond this campus, from Sunnyvale to Silicon Valley to Silicon Alley, that there are some in the digital world who dismiss the importance of national security, that some soldiers in the high-tech revolution don't fully appreciate or understand the soldiers in camouflage, that tanks and guns are somehow rusty relics of the past and may be obsolete in the new information-based world that is going to carry us into the future.

I think of this because there is one Silicon Valley executive who said about as much in an interview that he granted to the New York Times columnist Tom Friedman. He said that: "We don't even care about Washington." He said: "Money is extracted from Silicon Valley and then wasted by Washington. And why would I care about wealth destroyers?"

I am not even going to bother turning around to see if there is any kind of receptivity behind my shoulder. (Laughter.)

But we do live in a world where the private-sector innovation is so powerful that it's tempting to view the world through that lens alone, where the intellectual property and the virtual assets of Yahoo! are more highly valued by Wall Street than the oil reserves and supertankers of Texaco. So I think it can be easy to forget that this global marketplace was neither created by magic nor will it be kept by marketing.

And I wanted to be here today because I believe that Microsoft does understand the crucial connection between our national security and our national prosperity. And Bill Gates a moment ago talked about the connection that we do in fact have.

You do work on information and issues that are of critical importance to us. Critical infrastructure is something that we have to devote more and more time and thought and resources to. We have a new initiative to train those who are departing service members for information technology careers. It's very important to us, as it is to you; and even your support for the restoration of the historical battleship Missouri. So I think you appreciate the connection perhaps more than others do.

And as an icon of the Information Age, I believe you are in a very unique position to engender greater understanding of the central role that our military plays in our lives.

And I think that few appreciate more the interdependence of the global economy than you do. Your products are sold the world over. An incident in Jakarta or Dublin affects your business as surely as if it took place in Jacksonville or Denver. It was President Eisenhower some 40 years or more ago who said that what happens in Indonesia is going to have an impact in Indiana. And that was long before the computer really arrived.

So peace and stability are the very cornerstones of prosperity. And when we have our diplomats and our military forces are working together to create stability and security in a nation or area, that same stability and security attracts investment. Investment in turn generates prosperity. More prosperity in turn reinforces the stability and security and democracy. So it is one of these circles that we continue to reinforce.

And I should know, when we talk about real stability we're talking about predictability, about predicting secure borders, threats that don't suddenly emerge unexpectedly, a confidence that opposing or competing interests are going to be resolved peacefully. And there's only one nation in the world that has the power and the reach to fill this role, and that's the United States. So we have to be mindful that this prosperity that's derived from this vibrant world economy, that stability that allows this kind of vigorous trade, and the economic and intellectual freedom that enables innovation, it would be impossible without the persuasiveness of our ideals, the persistence of our diplomacy, and the power and actions and sacrifices of our U.S. military.

And so I would ask you to remind your colleagues and your friends about the role that the military plays in our lives, and the sacrifice that 1.4 million men and women who are serving all across this globe make day-in and day-out. They're keeping a very fragile peace in the frozen hills of Bosnia. They're standing watch on the tense Korean peninsula. Think about it; you've got almost a million-man army poised just 26 miles from downtown Seoul, about the fourth-largest city in the world. They're on station in waters in the Persian Gulf. I was over again, my fourth trip this past year, just to the Persian Gulf. They are prepared to conduct air operations in Kosovo if they ordered to do so. And they are all living without the comforts and the freedoms that we take for granted. And they are always prepared to offer the ultimate sacrifice any given day.

And so we tend not to think about this. We are enjoying the fruits and the prosperity. But it's the people who are out there on the front lines and on the flight lines, and cold in hot weather. When I was in the Persian Gulf the last -- well, the first time in the fall, it was 130 degrees temperature, combined heat and humidity. And that was 20 degrees cooler than it was in September and August. It was 150 degrees on the deck of the USS Lincoln. And if you imagine, consider that kind of an environment. At the same time you have that kind of heat and humidity, they were launching 2,000 sorties during the month of August alone. So you've got all of that blast coming from those jets that were taking off. And what they were doing is doing their job. They're out there patrolling the no-fly zones in northern and southern Iraq.

So this is the kind of sacrifice that our men and women are making every single day. Bill Gates talked about a couple of them, but let me just recite a couple more. North Korea -- North Korea launching new and powerful missiles over Japanese airspace has caused quite a bit of turmoil in that part of the world. We have Iraq developing and concealing deadly vessels of chemical and biological weapons. We have a growing list of nations who are grasping at the nuclear genie. We have instability that flashes all the way from Serbia to Central Africa, fueled by those who would prefer to dig fresh graves than heal old wounds. And we have the specter of increasingly lethal terrorist attacks; such as those we witnessed last summer in East Africa against our embassies.

So we have moved from what we call a Cold War perhaps to something of a "simmering peace." And to maintain peace and stability in this uncertain world, we've mapped out a strategy that's defined by three words. It's called shape, respond and prepare. That is the essence of our strategy. We want to be forward deployed. We have roughly 100,000 personnel throughout the Asia Pacific region. We have roughly the same amount in the European theater. We have another 20,000 or so deployed throughout the Gulf region. We are forward deployed in order to influence people's judgments about who we are and what our capability is, and we are doing so in ways that are favorable to our interests. And so that's part of the shaping of the environment.

We also should imagine what would happen if we didn't have this sort of stabilizing influence in the world. If you would consider, for example, what would happen if the Asian situation, where the economic crisis has really pushed millions into poverty and humbled proud nations, you consider what would happen with the deployed troops if we didn't have those troops up near the DMZ in Korea, where you have that million-man army that's poised, armed with chemical and biological weapons, and very heavy artillery and Scud missiles targeted upon Seoul, again, the fourth-largest city in the world, if we didn't have our troops there. If you consider all the productive and technological progress of that once and, I would say, future Asian tiger could be destroyed in a matter of hours, the economic costs would defy calculation; the human costs would defy imagination.

So at the same time that we have to be able to deal with shaping the environment, we also have to be ready to respond to any kind of a crisis, either here, at home, or abroad. Again, think about, if we didn't have a military force, what would have happened after Hurricane Mitch devastated Central America -- the millions of people who suddenly were without homes, without supplies, food and water. Or think about Iraq attempting to develop and deploy chemical or biological weapons, or the conflict threatening to spread from Bosnia throughout the heart of Europe. And I would say, indeed, in the gleaming towers and the sterile workrooms of the modern world, they remain vulnerable to the deadly virus of medieval hatreds today.

But in each of these cases, our military has been out there being capable of responding to a rescue mission in Africa -- what they call a non-combatant evacuation -- you know what that means, a NEO -- all the way up to peacekeeping operations in Bosnia, up to dealing with Saddam Hussein, or possibly North Korea. We have to have all of this flexibility being able to respond.

The next part is what Bill Gates was talking about, and that is, how do we prepare for the future? How do we still deal with the threats that we face today and tomorrow but then look 10 or 15 years in the future, and maybe not that long, and look at the nature of the threats that we are facing?

I talked a moment ago about facing chemical or biological agents that could be released in our society, causing untold thousands and perhaps even larger numbers of deaths. But there's also something called cyberterrorists, and it's something that we are very conscious of. We have become so interdependent, so linked through the Information Age technology, that we're also increasingly vulnerable. The very same sword that we can wield, in Toffler's phrase, in war and anti-war, the very same sword that gives us the cutting edge technology, also is increasingly vulnerable. The same sword can cut off the hand that wields it. Because if we don't take care to protect that information, then it can be distorted, it can be dismembered, it can be destroyed in a matter of a nanosecond. And suddenly our dependence reveals our nakedness at that point.

So we've got to develop systems that also protect the information itself. And we don't have the answers in Washington or in the DOD. We need to work with the private sector. We need to take the best minds that we have to come up with solutions to how we reconcile the need to have more and more information with the need to protect that information.

There's another debate that we really haven't focused on, and I won't take too much time. I think I'm already running well over my time right now. But we want to focus on the issue of how we're preparing for the future by looking at the new equipment that we have to have in the military. We have to be able to prepare for the future in dealing with new types of aircraft, new types of ships, new types of tanks, other types of things that we deal with conventional type of warfare. And so we are now seeing -- you've seen President Clinton ask for the largest increase, in recent history, at least, to support that procurement of new technology.

It was Toffler who said that we have the best-educated, the best-disciplined, the best military in the world, with the best technology available. But he said don't assume that lead is always going to be there. So we have many other countries that are trying to catch up with us; we've got to invest in the future. And so we are going to be investing more defense dollars to the procurement of higher and higher technology so that we can stay one or two generations against any potential peer competitor.

I wouldn't be asking for these increases of the Congress -- and I'll try to shorten this up right now -- I wouldn't be asking about these increases unless we're prepared to really reform the way in which we do business. If you look at the Pentagon itself -- I got a briefing in terms of how many employees are here -- we have roughly 23,000 people who work at the Pentagon each and every day. It's a very large bureaucracy that we have. And we've been doing business in the good old-fashioned way that no longer is acceptable.

So we are reforming. Just as we're looking for a revolution in military affairs, we're also looking for a revolution in business affairs. We are turning to business to find out what the best business practices are. We're trying to become a paperless society. We're trying to come into the digital age. We are cutting down the size of my office, certainly, by a third. We are trying to reform the entire way in which we do business, as compared to what it was in the 20th century. We owe that to you as taxpayers. And so the more money that we can save through more efficiency, then the more we can invest in the future.

We have overhead that we're carrying and we don't need. I could not pass up this opportunity to talk about base closures, because it's important that we get rid of unnecessary overhead. We've had four rounds of base closures to date. As a result of those four rounds, we expect to save some $25 billion, cumulative, and about 5.6 billion each and every year after the year 2001. So we're saving that money, putting it into more procurement. We need to have two more rounds so that we can save another 20 billion, plus an annual savings of 3 billion. And it's tough. It's tough because you're dealing with people's lives and their community, and it's hard to recommend the shutdown of a facility that's providing income to the community. But we have to have that, and we need your support to say: Let's take the money and put that savings into the most modern, capable technology we can, to make sure that the men and women who are serving us and putting their lives on the line each and every day have the best equipment possible.

I would just conclude my -- these rather formal comments to each of you to say that you have a military which you should be very, very proud of. Most of you don't get a chance to get out there and see what they're doing on a daily basis, and you're too busy with your own lives, trying to really take advantage of your own tremendous intelligence and hard work and endeavor to create even more technological breakthroughs for our society. But I deal with these men and women every day, and I can tell you that they are the best and the brightest. We are competing for the best and the brightest with the private sector. We can't pay what is being paid here or elsewhere.

But the people who join the military do so for different reasons. They don't go in to make money. But they do feel -- the same kind of commitment that you feel to Microsoft, they feel to this country. And we have to do everything we can to make sure that they have an appropriate quality of life, that they are well-paid, again, and we're going to be increasing the pay and compensation and retirement benefits, and try to target the pay increases to those who have certain skills, so that we take and keep that talent within the military, so we can continue to provide the kind of protection that we do.

Ultimately, because we have the military that we have, because of their dedication, because of their professionalism, because of their patriotism, you and I and all of us get to enjoy the benefit of that prosperity. You contribute to it; they help protect it. And when you have that kind of a stable environment and when the investment flows in, then it comes back to all of us in the way of a higher standard of life for us.

So I wanted to come here to talk just a little bit about what the military is doing in our lives, even though you may not see it except on a -- perhaps a CNN broadcast when we have to take on a Saddam Hussein or perhaps even have a deployment to either Bosnia or Kosovo or some other region. But you should be aware of how completely dedicated these men and women are who are serving us, how proud you should be of them, how proud I am to be in this position, to at least express my support for what they're doing, and to call upon each and every one of you to spread the word.

We need you to generate, certainly, ideas and technology. We need our men and women in the military to take advantage of that technology, but also to preserve our freedom.

So thank you very much for the invitation, and I'm delighted to be here. (Applause.)