Lots of excitement here for Ballmer’s talk—his first ever at the school, a surprising milestone considering the university’s close ties to its Redmond neighbor. The ground floor of the atrium is packed—and people are lined up on four levels of balconies. Before Ballmer started talking, I heard one girl urge her friend to skip class with her. Some highlights:

—The video cliche: Ballmer starts out by asking what the cloud is and then running a video of random people being asked what the “cloud” is. It’s supposed to be funny.

—The “cloud” has always been a source of tension at Microsoft; Ballmer refers to Microsoft Chief Software Architect Ray Ozzie’s famous 2006 memo, in which he said that advertising-supported services and software presented a fundamental challenge to the company’s business. Ballmer says that years later “there’s so much unrealized potential.” (Ozzie, by the way, is in the audience)

—Ballmer gives a shout out to Apple’s app store, saying that the company has done “a very nice job” with it

—He notes privacy issues that emerge as people move online. There was a big “internal debate” at Microsoft when it launched the most recent version of Internet Explorer with an “in-private browsing” mode

—The opportunity for progress in search: When Ballmer searches to buy flowers online, he doesn’t want to see a bunch of blue links and instead wants to immediately see where he can buy them. Also notes that when he was trying to research the U.S. healthcare debate in order to determine what society was spending (presumably on healthcare?) it wasn’t easy

—The future of social and professional interactions? “The day we all agree that virtual interaction through the cloud is as good as being here”

—Ballmer talks about the new version of Office—coming to market in June—and how it will run online as an area of “important work” at the company

—Sure browsers are important, but Ballmer says that the “devices you use to access do matter; the cloud wants smarter devices.” The previous version of Windows Mobile, for instance, was designed for “voice and the legacy world.” By contrast, Windows Phone 7 Series is designed for the cloud

—“The cloud fuels Microsoft and Microsoft fuels the cloud.” Says 70 percent of employees are doing something cloud-based or cloud-inspired. That will go up to 90 percent in a year. “We’re all in,” he says. “This is the bet for our company.”

—Is this a change in strategy for Microsoft, which has now launched a ‘Cloud’ website? For several years now, Microsoft has said it believes in a future of “software plus services” but Ballmer hasn’t mentioned that once.

—Ballmer is asked by a student whether Microsoft is being reactive. He responds, “All companies have their mix of proactive and reactive muscle; I’m keen on increasing hit rate in terms of early and often.” Yes, Microsoft is following Google (NSDQ: GOOG) in search, but he also says that Google itself wasn’t first to that market.