(FORTUNE Magazine) – Bill Gates has a lot on his plate. As Microsoft's chairman and CEO, he's managing a galloping company that sees no bounds to its growth. There's also the pesky distraction of the company's ongoing antitrust trial in Washington. Being steward of the world's largest personal fortune--more than $80 billion and counting--has its demands too. And don't forget fatherhood: Gates and his wife, Melinda, are expecting their second child in June. So who would think Gates would have the time to write a book?

But that's what he's done, with the help of Collins Hemingway, the Microsoft employee who works with Gates on his syndicated weekly newspaper column. It's a bouncing 455-pager called Business @ the Speed of Thought, and as the @ sign implies, it concerns Bill's take on the Internet and how it can transform your business--especially if you use Microsoft products. You can get a taste of the book by reading the accompanying excerpt.

Gates, who has been keeping a low profile lately--he has declined to comment on Microsoft's legal troubles ever since getting brickbats for holding a video press conference in December--sat down with FORTUNE to discuss this, his second book, on the eve of its publication. (The Road Ahead, in which he predicts the future of information technology, came out in 1995.)

In the accompanying interview, Gates explains why Business @ the Speed of Thought is, more than anything, a textbook for business decision-makers who are interested in using information technology to create "digital nervous systems" in their companies that will facilitate a "Web workstyle." Gates relates through anecdotes some of Microsoft's ups and downs in embracing the Internet. He also provides detailed descriptions of the experiences of many of Microsoft's biggest customers.

Business @ the Speed of Thought shows what a business wonk Gates is: He describes with relish how he personally supervised the elimination of hundreds of paper forms at Microsoft by putting electronic versions on internal Websites. The book also reveals him as something of a philosopher. Internet technology, he contends, is about empowering individuals. "You can give people responsibility and authority, but without information they are helpless," he writes. "Knowledge is the ultimate power tool." He would know.

What are you trying to accomplish with your book, and what audience are you aiming for?

I meet with customers a lot, and they are uniformly interested in how the Internet is going to change their businesses. Sometimes I hear them focus on just Websites and doing transactions, and not on how the Internet changes the whole way that information moves inside their companies. So I'm trying to show that it's not just the transaction, it's the customer service, it's the collaboration at a distance, it's the decision about what skills you need inside your company vs. what things can you go out now on the Web to take advantage of. The book raises some pretty deep issues for virtually all the businesses out there.

From time to time you run into examples where people do something great; where they've taken the fundamental infrastructure--the PC, the Internet, e-mail--and built on top of that something that really makes a difference in that company, whether it's customer tracking, or project management, or the way they analyze decisions they're going to make, or simply eliminating paper forms.

As you do these projects, it raises people's expectations. They say, "Gosh, I should be able to take our sales figures that are up-to-date, dive in, and see them in different dimensions, and compare them with those of our competitors, and compare them by geography. I should be able to look at our businesses and see which ones are more profitable than others and try to analyze why." I'm not just talking about executives; I'm talking about the knowledge-worker level, where you want the good ideas to come up from.

As it is, they've been so accustomed to information impoverishment.... Every month you hand them a piece of paper that just has summaries printed on it, and they say, "Oh, thank you for giving me the summary data!" But it doesn't let you do this kind of navigation or hypothetical modeling with it; that doesn't let you mail it around to somebody who might see it in different ways.

So I wanted to paint a view--taking corporate "digital nervous systems" as a given--of what the benefits could be and how the processes of a company would look different.

In the back of the book I segregated noncorporate cases--government, education, health care, and defense. Among them, those are a third of the economy. There's nothing small about them. And because government is so information-intensive, the opportunity to do better is more dramatic there than in the corporate case.

Again, it's a positive, optimistic message about what's possible, like in my first book, The Road Ahead. But this time it's really aimed at business decisions. I'm sure some kids who are interested in technology might find it interesting, but it's really about and for business people.

We made a real effort to make it actionable. At the end of each chapter we put together a checklist for a typical business to implement some of our ideas.

When my co-author, Collins Hemingway, and I first did these checklists, I thought, "Oh, gosh, this is a textbook. It's like homework. Six points for getting this one right, ten points extra credit here." But in a sense, if you really want people to consider something new, that's probably a pretty good way to do it.

You've talked about the frothy nature of this whole Internet phenomenon in terms of the valuations of startups. How does that square with your very optimistic view of the potential of the Internet?

Okay, three things about that: First of all, the froth is mostly good. It means that there are high levels of investment, and therefore there's a heightened pace of innovation and a corresponding fear of being left behind. That's almost a fad-type effect, but in this world there's a real phenomenon behind it that's pulling people into it, and that's good. So the froth is not all bad.

Where is it bad? Well, if you get hype and you get froth, as it cools off, people might say, "Oh, this was all overblown." It's like when somebody says to you, "Hey, the Internet will put you out of business in two years." Then two years pass and you're still in business, and you think it was a complete lie. Well, the fact is, maybe it will take five years, but the Internet is a change agent, and it will reorder things. It's like crying wolf--you don't want to use up all your credibility.

The final point about froth is that people can confuse the idea that something is going to be super-important and super-beneficial to consumers with the idea that everybody involved in it is going to have high profit margins. Some of the hype does that by saying any company that opens up in this space is worth billions of dollars.

We do have incredible opportunities that are related to the Internet. For example, when air travel exploded, it turns out it was smart to invest in real estate near airports. But actually investing in airlines--say there had been an airline mutual fund back then--you would have lost money over the years, even though there is no question of the benefit to mankind of all this air travel.

I guess you could say I'm an old man in my 40s, but I just don't see where the profits will be in some of these new Internet-oriented businesses. I don't claim to have perfect judgment about which ones will do well and which ones won't, but it is a little scary to me that people aren't distinguishing change from sustainable business value.

That brings us back to the textbook nature of Business @ the Speed of Thought. You describe ways in which a company's information technology, its "digital nervous system," can wring waste out of mundane but necessary business processes.

A lot of the book is about what I call the Web workstyle. It's not as visible as having a cool Website, but the fact that you can move information in your company in a new way is what's important. The analogy to the value chain is a good one. Every worker, in a sense, is trying to add value, but your way of getting information to those workers--at meetings or via paper memos--we've taken as a given. Now that you can instantly provide all this information to these workers inside and outside your company, you get to rethink the way everything works.

In the 1980s there was that whole process-reengineering movement, but it involved writing new mainframe applications and using paper to allow fewer handoffs and things. Now with this PC/Internet/e-mail infrastructure, the time it takes to create new digital processes is a matter of months. So you very quickly start to get the knowledge workers more empowered and, in turn, get more value out of them. You can redefine customer service; you can redefine how you plan products and get lots more input and feedback along the way; you can respond more quickly when you perceive the marketplace telling you to do something.

The real lesson of the book is to step back and think about how information moves inside your company. That's what I mean by the company's digital nervous system. From the workers' point of view, I call the phenomenon the Web workstyle.

The Web workstyle will come about faster than what everybody is calling the Web lifestyle. That's because the Web workstyle is driven by business imperatives to become more competitively efficient. That's why PCs took off in business and only came down to the broader consumer market later. The people who live the Web workstyle will be very likely in their home activity to live the Web lifestyle as well. But it's the Web workstyle that will be the social driving force.

Your competitors are starting to talk about browser-based and server-based applications that don't really even need an operating system on the PC per se and that don't need productivity software like Microsoft Office. They're also touting the idea of hosting, via the Web and browser-based applications, the lion's share of a company's IT functions. Are you afraid that Web-based IT services will render many of Microsoft's most important products extraneous?

The accuracy of our competitors' predictions continues to plague them.... Our competitors are trying to create an argument where there is no argument. I mean, How good is their browser? They're not even doing it.

We are the most successful browser company, and as we innovate, we make it possible to do more and more with browser-based applications. But there are things like productivity software and speech and handwriting recognition where you really need self-contained computing power.

We're the only people who have a model where you can write an application that can run on the server and be controlled remotely by a browser, and that also can run on your desktop or on that portable machine out there. That's why we are innovating in the browser, and why it is becoming a very important part of the operating system.

In terms of hosting IT services and applications on servers, certainly you can do that. Windows NT is already winning a lot of that business, and the direction we're going with Windows 2000 should let us do even more.

But the notion that you're going to take away from people the rich capabilities of their PCs--well, that's nonsense. That's because the main applications you run on your PC have to do with your creativity; the ones you use to annotate and create documents. Photoshop will not run on a server. Microsoft Excel will not run on a server.

We're just now starting to get digital video, music, and books; we're only now getting enough richness on these client devices to do these things. Just to run the browser you need very rich capabilities. The irony is that the people who are saying that the browser is the key--well, I'm working on the browser and they're not. They also say maybe a TV-based device is an important alternative to the PC. Well, I'm working on that with WebTV, and as far as I know, most of them are not involved in that.

Finally, there have always been terminal-based applications, like what people used to run on mainframes before the PC. The applications they're talking about never have run on the PC--when you want to choose your health benefits or your 401(k) investments, that was never actually accomplished on your PC. It was on the server.

What other products are on your mind?

We're making a big push into software to allow e-commerce. There's exciting stuff in wireless networking coming along. There's "wide-area" wireless like cell phones and pagers, and then there's "campus-area" wireless. This fall we'll start announcing products for campus-area computing, where you have a portable PC or a tablet machine that you can take around with you at work and be connected wherever you are. That's a fun one for us.

In the book, you describe an instance a few years ago in which you asked Microsoft's human resources department to pull together all the paper forms it used, and it came back with more than 100, which you have whittled down to about ten. Did you really do that? Is this kind of thing a good use of your time?

You should have seen the forms. The worst was this personnel form where clearly someone had tried to combine lots of things onto one form, but it was fairly opaque. I was signing the form to authorize a new hire or a promotion or a transfer or something, but when I looked at it, I said to myself, "Why am I filling this out?" It seemed strange to me that we, who believe in this digital environment, had forms like this. It was very complex, and had four carbon copies, and was loaded with special terminology.

I've always believed in a paperless office, and I always thought it would take a long time to get to that. We've been exemplary in getting our sales data off paper and online. At one point our chief operating officer, Bob Herbold, actually pulled together every form at the whole company, and he sent me about ten binders full of forms. This was about 2 1/2 years ago.

I now have a single binder that has all the remaining ones, most of which are customs or tax forms or paper for other kinds of interaction with governments. Everything else is electronic. When we're the buyer, we say now that suppliers can't send us any paper. You might ask, "Isn't that a huge mess for the small vendor?" Well, if they have a PC with a browser, they can go to our Website and get an electronic version of the voucher they need, and typewrite into it for sending it to us, and then print it out if they need a paper copy themselves.

Most of those forms were surprisingly easy to change. The most difficult were in HR, but as we got a few done, then the rest of the old paper processes stuck out like sore thumbs and got fixed. Working to reduce these forms has had a fairly profound effect on Microsoft's productivity.

The value that companies get from buying PCs for employees and getting them connected to the Internet is hard to measure, but I'd say there's up to a factor of ten improvement in efficiency. Now, most companies don't go all the way, and get less than half the value they could.

But when people ask, "How do PCs improve things?" I want to ask back, "Well, how do telephones improve things?" It depends how you use them. Could you imagine a company considering getting rid of its phones because the calls are interrupting people, or because employees are getting too many busy signals when they try to make calls? No.

Peter Drucker thinks the whole idea of a chief information officer will be obsolete soon, not because the role is unimportant, but because management of information infrastructures will play a much bigger strategic role for companies. He thinks that role will be subsumed by the CEO or the CFO or the COO. What's your take on who in senior management should be thinking about technology in a strategic way?

To me it's not so much a question of "Should the CIO exist?" He should, but the better question is whether there is a functioning relationship between the CIO and the CEO or other top executives. There's a chapter in the book that relates to this CEO/CIO relationship.

You can't have the CIO be the only senior person who thinks about how the Internet is going to affect the company, because the way you do direct marketing or track customers, and how everything is done internally, will change. So the CEO has to be involved and show leadership in terms of being a user of the Internet.

On the other hand, most CEOs aren't going to know that wireless networks have gotten cheap, and so it's beginning to make sense to get rid of fixed phones and instead have people carry their phones around. They won't know when tablet PCs will come into the mainstream; they won't track how people are using the Internet. So there is absolutely a job for somebody who looks at those expense items and makes sure the systems are very well run. Structurally it depends a lot on personalities who reports to whom, but the CEO had better have an interest or an enjoyment in those issues.

In the past the typical CEO reaction was, "Oh, jeez, you guys are asking for a lot of money--can't we get by for less?" When computing was a back-office thing, it was like that. But the PC changed all that. Believe me, CIOs weren't advocates for PCs in any way, shape, or form. It was the knowledge workers who brought them in, and eventually the CIOs said, "Whoa, there's a lot of these here, so let's control the variety of hardware and software configurations and take responsibility."

The money that companies spend on knowledge workers, when you take into account the salaries and desks and offices and things like that, well, it's a phenomenal amount. Whether those people do their jobs well is a huge part of whether the company is successful or not. So equipping them is not just a CIO thing. You've got to ask, "Are these clerk-type jobs?" Because if they are, they are likely to go away. Or "Are these thinking-type jobs?" In which case you should give the people pretty darn good tools and have the jobs be interesting enough that you can attract your share or better of the smart people to your company. That really is a business issue for the CEO.

Previously, the CEO could just tell the information technology executives, "Take care of it. Keep those databases. Print the bills. Try not to increase your costs too much." There really weren't that many examples of information technology being the source of an obvious competitive advantage. Now, though, technology really will become a differentiating factor, and we're seeing new businesses that take this stuff so much as a given that they really do challenge the established companies.