**INTRODUCTION: MR. TOLMAN**

It is with great pleasure that I introduce our next speaker Mr. Vinod
Khosla. Mr. Khosla was a Co-founder of Daisy Systems and a Founding
Chief Executive Officer of Sun Microsystems, where he pioneered open
systems and commercial risk processors. While an Affiliate Partner with
Kleimer, Perkins, Kaufield & Byers, Mr. Khosla established Khosla
Ventures, which will focus on alternative fuels, affordable housing,
micro-financing and other technologies.

He was recently featured on Dateline NBC, where he discussed the
practical use of ethanol and how it can impact our energy future. He's
been featured in quite a number of recent business publications. In
fact, I just got my Smart Money Magazine this weekend, and Mr. Khosla
was profiled there as one of the Power 30.

On a personal note, I had the pleasure of becoming acquainted with Mr.
Khosla earlier this year at an Aspen Institute seminar, and I was quite
intrigued with the prospective that he brings. He has brought a welcome
breath of fresh air and energy and enthusiasm to renewable energy; the
debate. But what I really like, is he brings a sense of credibility and
respect by the business community and some of our national media, that
others that are in this debate can't quite command. Ladies and
gentlemen, please welcome Vinod Khosla.

**THINK OUTSIDE THE BARREL**

**BY MR. VINOD KHOSLA**

Good morning everybody. It's exciting to see so many people have a
renewed interest in renewable energy.

Eighteen months ago, nobody wanted to talk about this topic, but today
there's so much excitement, and everyday I spend in this area I get even
more excited. In fact, last night reviewing some cellulosic ethanol
technologies, I got so excited, that after three glasses of ethanol or
wine, I restructured my presentation to start with my bottom line first.

So, let me take this moment to first thank everybody and thank the DOE
and the USDA for inviting me here and hopefully you'll bear with me. I
will use slides and go through them relatively rapidly. Don't bother to
read all the details, they're not meant to be read now. They're all on
my website, at KhoslaVentures.com. But let me start with the vision, for
what I believe is possible.

That's a slide in June of this year in Aberdeen, South Dakota, and I
believe it's possible everywhere in this country in the near term. In
fact, my dream would be a \$1.99 gallon ethanol at every Wal-Mart in
America, and I believe this is entirely feasible. It takes a few simple
things.

I'm a Republican, a life-long Republican, but this is something both the
Democrats support and the Republicans support; the farmers support and
the environmentalists support, and I'll come back to this issue. And my
approach is it should not take any extra money from the Federal
Government. There are some mandates we need, and if you do these three
simple things we will go a long way towards ensuring our future.

First, we should mandate that 70 percent of all new cars, made in
America, should be flex fuel cars. It costs only \$35.00 to take a
standard gasoline car and make it capable of flex fuel operation. For
the fifteen years that a car is going to be on the road, be ensured that
the consumer can pick the cheapest fuel that's available. That \$35.00
is not too much to buy a fifteen-year option.

Second, despite nice words from the American Petroleum Institute, make
no mistake about it, they are not interested in a rapid transition. In
fact, we have a valuable proposition in California called *\"Proposition
87\"* and the oil industry has spent 57 million dollars in a despicable
campaign of misinformation and lies, trying to threaten consumers that
they will break the law and raise gas prices.

We should mandate that at least 10 percent of gas stations in this
country, either owned or rented by any of the major suppliers; that
leaves out the mom and pop stations, offer E85. Sweden has effectively
mandated that 60 percent of its gas stations offer E85 by 2009. Why
can't we ask for 10 percent? It's a minimal level.

The third piece is very important. There is no question that the oil
interests have a strong interest in keeping us addicted to oil. In fact,
the Vice-Chairman of a major national oil company came up to me in
January, after I gave this talk in Dallas, and said, *\"We can drop the
price of oil\"*. They will drop the price of oil, as was done in 1985,
and we have to ensure against it.

Today we have a credit, a .51 cent credit on ethanol that, by all
accounts we don't need. I'm recommending that we make that a variable
credit, that it be a .25 cent credit at \$75.00 oil, and it be a .75
cent credit at \$25.00 oil. So, it would be counter-cyclical with oil.
It will reduce the amount of subsidies we hand out today, entirely fund
the first two mandates I talked about, and yet, leave the Treasury with
less spending. It's a win-win. Farmers get insurance, the ethanol
producers get insurance, we get a renewable future and we spend less
Government money.

These three things will do one very important thing. It will say to Wall
Street that even though the Government is spending less money, with less
spending we are signaling that we are serious about this market. The
cars will be there if the E85 is there. There will be a long-term demand
and we're very capable of using it, though we will not let the oil
companies either keep it out of distribution or have the Saudi Arabians
manipulate the price of oil. I apologize for being so direct.

But it signals to investors that they can safely invest the billions and
billions of dollars needed in this renewable future, if they can ensure
that they will be market competitive, un-subsidized in this market
place. If they provide a cheaper fuel to consumers, we will let that
happen. We will let market forces operate.

Investors will invest the billions. They invested hundreds of billions
in the Internet and the Telecom revolution. It's entirely possible here.
This is a much more attractive and larger market and more subject to
innovation. With that, here's my forecast of what we can do.

In blue is the demand particularly for gasoline in this country,
depending upon what efficiency scenario you assume, there's a band where
either it's growing or relatively flat. And this is how much of that can
be replaced with ethanol. This is not a 10 percent solution, this is not
a 20 percent solution, this is easily a 100 percent solution. If I'm
wrong by 50 percent in my forecast, we've still almost replaced all our
imports. Even failure is success in this case.

The second thing I want to touch base on briefly and come to an
additional set of short-term recommendations, that's the additive
market. That's what the oil companies would like us to stick with. Just
be a blend into gasoline that's a 15 billion gallon market at E10. I
suggest that the real market is much, much larger, if we let an E85
future happen. And market forces can ensure that this fuel will be
cheaper un-subsidized in the marketplace. And that's the real prize, not
this 15 billion gallon additive market.

Having said that, we need to kick-start this alternative, so, I'm
proposing a compromise solution. I believe the corn farmers in this
country have served us very, very well in kick-starting this market. We
need to look after their interest. They have provided a very valuable
service and they can provide even more. So, I'm suggesting we increase
the RFS to 15 billion gallons for the blending market, for the blending
market alone. This will ensure that the current capacity being put in
place has a place in the marketplace and the farmers get their due.

In conjunction, I'm suggesting we eliminate import tariffs only for E85
use, not for the blending market, because cheap E85 will be the thing
that gets the ethanol market moving from an additive market into a
primary fuel market. This serves the purpose of the farmers, serves the
purpose of the environmentalists and serves the purpose of the
consumers. Consumers get a cheaper fuel. I have no question this will
sell for a \$1.49 or a \$1.99 a gallon.

The final thing we need to do, and I won't spend any time on it, is make
it a producer\'s credit. It's little known that almost all the ethanol
subsidies today go to the petroleum companies, not to the producers,
especially when we have excess supply, which is when the producers need
the most help. There are market forces operating where supply determines
the market price and the blender's credit makes no difference, the
producer doesn't get it when he needs it most; another nice trick by the
oil companies. There are other things and I won't spend any time on it.

Let me go back to the beginning of my presentation, having gotten
through the bottom line. Let me start by saying I don't believe we need
any oil for our cars and light trucks. And I believe this is possible
within the next twenty-five years, a relatively short period of time.
For those of you who are interested in these details there's a series of
three White Papers, the first one called, Imagining the Future, on my
website that says what do we do every single year? How many acres do we
need? What yields do we need? How much cellulosic ethanol we can produce
and how many cars should we have on the road. Those detailed forecasts
are available. We definitely don't need hydrogen; with apologies to the
Department of Energy. We don't need new cars, new engines, new designs,
new distribution; a rapid changeover is possible.

Ford and GM in Brazil went from 3 percent of all new car sales being
flex fuel cars in the first quarter of 2003. Three percent, 3 years ago,
to 80 percent in the first quarter of 2006. Why can't that be done in
this country? And as I said, it will be cheaper for consumers, almost no
cost to automakers and less subsidies from the U.S. Government. These
might seem like implausible assertions. Hopefully in the next ten
minutes, I'll convince you they are not really implausible, they are
plausible, they are even possible and maybe even probable.

So, what makes them plausible? First, Brazil is good proof; they've gone
to 80 percent of new car sales. Ethanol production costs are
dramatically lower than the cost of gasoline and economics is the reason
that happened in Brazil. Economics, a cheaper fuel for consumers is why
it will happen in this country.

In fact, VW is planning on phasing out all gasoline only cars, that's
pretty big news. Of course, dramatic reduction in greenhouse gases and
dramatic savings on import bills, is something we could use. We have 300
billion or more in trade deficits because of oil imports.

If that at least makes it plausible, what makes it possible? We all know
this number, but more importantly there's almost as many of these cars
on California roads today, as is diesel cars and light trucks. We have a
critical mass of cars today. We need to make sure more come on line, but
we can start today if the oil companies would only provide our allowed
distribution.

U.S. production costs are low enough to be very, very competitive
without subsidies at today's oil prices and a cheaper fuel for
consumers. The only way; and this is my contention with Proposition 87
in California, the only way we'll get a cheaper fuel, \-- a cheaper
gasoline, is if there is an alternative. And it's economically possible
today. Everybody in the supply chain of that first slide I showed you
with a \$1.78 ethanol in Aberdeen, South Dakota, every single person in
that supply chain is making money.

So why ethanol? It's obvious, today's cars; today's liquid fuel
infrastructure; cheaper to produce; leverages; current trends. If we
have hybrids, we'll need far less fuel. If you have increased CAFE
(Corporate Avearage Fuel Economy), we'll need far less fuel. All those
are great and very complimentary technologies and we should be pushing
on all those fronts.

So, how do we go from hopefully implausible, to plausible, to possible,
I want to see what makes it probably? First, we need to address these
issues. The interest groups, always a big issue, land use, energy
balance, emissions and a kick-start.

So, as I said, everybody I've talked to from Senator Reid, a Democrat,
to Senator Luger, a Republican, to Senator Chambliss in Georgia, to
Senator, you know, you name it, \-- McCain, they all support the idea of
renewable fuels and energy independence.

No matter what your persuasion, what your interests, we have one answer.
If you care about the cheapest fuels for consumer, this is the answer.
If you care about energy security, ethanol is the only answer. If you
care about higher farm incomes, ethanol is the only answer. If you care
about carbon emissions, ethanol is the easiest answer. It serves all the
interest groups.

Some of these terms are borrowed from Jim Woolsey. So what about land
use? The reality of land use, despite all the misinformation put out by
the American Petroleum Institute, the NRDC says 114 million acres will
replace all of our gasoline needs.

Jim Woolsey and George Schultz said more precisely, that *\"With
proficiency improvements, 30 million acres can replace half our
gasoline\"*. My own estimates of 40 to 60 million acres, again outlined
in this paper I mentioned. And that doesn't include wonderful sources
like, municipal sewage and other waste being converted to ethanol. The
key is energy crops. One year\'s worth of growth; lots of nice
characteristics; a little water, no fertilizer, no tillage, lots of
biomass, more income for our farmers. More net profits, per acre, for
our farmers, than with today's crops.

That sweet sorghum being studied in China, in India more extensively,
here's the key. Some small fraction of our export crop and CRP lands
without changing our food supply in the U.S. can meet all of our energy
needs. That's how little land we need and I'm happy to debate this. This
is a fun slide, because South Dakota, itself, would rank up there with
Saudi Arabia and Iran as a transportation fuel supplier, if we were to
use it for biomass, at relatively conservative yields.

So, what else? Energy balance, another (BS) argument if I might politely
excuse myself, poses the wrong question. Who cares about energy balance?
Why do we care about even fossil energy balance if it's only slightly
less wrong a question? Let me suggest the right questions.

What are the carbon emissions per mile driven? What else? For energy
security what is the petroleum use reduction? And the answers are
obvious. This is an Argonne National Lab study, saying, *\"Energy
balance is not relevant\"*. This is a fossil fuels use study, and again
I suggest don't worry about the details. Bottom line, fossil energy
balance of electricity is 25 percent, one-fourth of corn ethanol. Why
don't we criticize electricity? Because it's not a relevant question.

Corn ethanol is twice as good as petroleum on its fossil energy balance,
it has 20 to 30 percent reduction in greenhouse gases and it's a good
fuel. More importantly, our immediate problem is energy security and
corn ethanol results and a 90 percent reduction or more in petroleum
use. Those are the right questions. Again, these are the carbon emission
numbers.

Corn ethanol is good, cellulosic ethanol is better. In fact, these are
NRDC numbers and I would suggest you trust the NRDC a little more than
the American Petroleum Institute or the oil interests on issues like the
environment.

This is a NRDC chart that says, even corn ethanol is getting better
every year in its emission characteristics. Again, I won't go through
the details, except to say that this particular study by the NRDC says
that,

> *\"You get material reduction of carbon emissions with corn ethanol
> and dramatic reductions with cellulosic ethanol."*

This is one of my favorite new corn ethanol plants in Mead, Nebraska. It
has the same energy emission and fossil energy balance characteristics
as cellulosic ethanol. Did I say something wrong? In fact, the NRDC goes
on to say that,

> *\"Corn ethanol is energy well spent and we should not let the perfect
> be the enemy of the good.\"*

And that's the bottom line on corn ethanol.

So emissions: These are emission levels of two California 2005 model
year flex fuel cars. California has the strictest emission standards in
the country. Again, don't pay attention to the numbers, with E85 versus
gasoline, we meet the strictest emission requirements in this country;
some would say too strict, but we can easily meet them.

So, in defense of corn ethanol; and I'm a big fan of the Corn Ethanol
Initiative and what it has done for this country. I want to point out
that if corn ethanol did not create a market, I wouldn't be investing in
cellulosic ethanol. We wouldn't be seeing alternatives.

The other thing about ethanol and the reason I like it, is there's a
relatively easy path to go from today's 400 or 500 gallons of ethanol
per acre, to 3000 gallons of ethanol per acre. This is not rocket
science.

In the context of risks, we take, in Silicone Valley everyday,
technology risks; this is a moderate risk, not high risk. If corn
ethanol had not primed this infrastructure, we wouldn't be talking about
cellulosic.

So there's other alternatives and we should push on all of them, but,
there's many 10, 20 percent solutions, like biodiesel, and they're good
fuels and we should support them. But ethanol can replace, I emphasize
again, 100 percent of our gasoline needs. It puts us on a trajectory to
energy independence and we have to look beyond what is today, to what
can be. What can be, through a series of evolutionary steps? Today it's
corn, tomorrow it's cellulosic gasification.

This is a little vial of cellulosic ethanol produced from these wood
chips in a near production process. This is much more real than some
people would have you to believe. This can be productized today and
cost-effectively. I am just suggesting we not have tunnel vision.

Algae has been proposed, some pretty exciting stuff. Greg Reynolds
talked about synthetic bio-refineries and Secretary Bodman referred to
direct synthesis from sunlight. And lots of different technologies and
pieces of science can be approved and can be applied to this problem to
improve the trajectory.

Many companies working on it; many different technology options leads to
an improving trajectory. This is the last twenty-five, thirty years of
ethanol production, per acre, in Brazil. With relatively no technology
applied to the problem, ethanol yield per acre has increased
dramatically for thirty years consistently. It will happen in this
country too, just as corn yields have been increasing per acre. But with
a little bit of Brazilian technology, I've seen pieces that say we will
get 5(X) this, per acre. Suddenly all those land use argument completely
disappear. And this is very near term.

So, this is my forecast of what we will get on ethanol yields per acre,
by 2015, by 2030, both in Brazil and in the U.S., and that completely
changes the forecast you see. In fact, whenever I see a forecast of land
use, based on today's corn ethanol production, I know the person has an
agenda. They're not being truthful.

I get asked, "*Why now*?" Why now is it for the first time in the
history of oil prices, we have forecasts for oil that stays well above
\$40.00 per barrel, according to the EIA? In that zone, all these
alternative technologies; and ethanol is just one of them, become viable
competitors to the fossil fuel. Why are both competitors? Because they
are cheaper un-subsidized.

So, let's look at risks. Energy security risks, oil versus hydrogen,
versus biofuels, cost per mile, infrastructure costs, technology risks,
environmental costs, implementation risks, interest group opposition,
political difficulty; time to impact. No matter what criteria you want
to use, biofuel is a better option and we should be pursuing it
aggressively. In fact, I view it as a Davidan IQ test for this country.
Do we want to feed Mideast terrorism or Midwest farmers? Import
expensive gasoline or cheaper ethanol? Create farm jobs or tycoons?
Fossil fuels or green fuels? Oil rigs or prairie grass fields? I hope
the answers are obvious to you.

Let me spend a minute on this. This is the subject of my second paper on
my website. Every single issue you've heard, energy balance, crop land,
food prices, lower energy content, lower mileage, that's (BS) too. We
don't have to have lower mileage on ethanol. No matter which myth you're
referring to there is a viable answer.

The gentleman from the American Petroleum Institute said that,
*\"Pipelines can't be built for ethanol\".* Not true. They are doing it
in Brazil today. He didn't add the caveat you can't pipeline it if
you're going to blend it into gasoline. You can pipeline it if you're
going to use it as a primary fuel; just one example of the kind of
misinformation that the oil industry loves to spread.

The other issue is being a Republican in a free market here. I don't
like subsidies. As I've said, I have suggested ways, two politically
acceptable ways, to reduce the amount of subsidies.

This is a GAO list of oil subsidies. These are direct they do not
include indirect subsidies like the defense cost of 50 billions dollars
a year to defend our sea lengths. Hundreds of billions of dollars going
to the oil industry as subsidies that nobody talks about when they talk
about subsidies to ethanol. We want a level playing field. Free markets
demand our Government enforce level playing fields; and sorry if I get
so passionate about it.

This is an important piece of a chart that is too detailed to swallow
here, but let me tell you what it says. There are new technologies, more
than one, that can be part of our renewable future, but some happen and
others don't. The Internet happened, Interactive TV did not. Why?

I've spent my life spending time on this issue of what gets accepted and
what doesn't. The oil industry is spending hundreds of billions of
dollars investing in oil, like they should, like they should compete
fairly in the marketplace, and that's a good thing. For any fuel
alternative to compete, it needs to attract Wall Street dollars. That
means in short two to three year cycles, any investment has to get a
return.

So, in this chart; and you can study it at your leisure off-line, in the
green I said, *\"What is the market phenomenon that's happening on the
horizontal tax\"?* And on the vertical, what people will invest in. I'm
sorry, it's the other way around. The vertical is the market phenomenon
and the horizontal is what investors will be investing in. This is how
we attract billions and billions of dollars to the renewable energy
marketplace, making sure that those investors are getting short-term
returns, because that trajectory is essential to deploying the
investment capital, eliminating the need for Government capital and to
just make this future happen. Ethanol is the only fuel that meets this
criteria that can compete with its fossil energy competitor,
un-subsidized in the marketplace and this trajectory makes it possible.
Having said that let me say something else, something surprising.

It's very unlikely twenty-five years from now; maybe very unlikely,
somewhat unlikely, I don't know, it's entirely possible we will not be
using any ethanol twenty-five years from now. Why? Because as soon as
you open an area for innovation our scientists, our technologists, our
entrepreneurs, start inventing solutions. The problems with oil is it's
been locked up and not subject to innovation.

R & D in this country is declining. This says that our scientists and
entrepreneurs will invent better fuels everyday. Butanol has been
proposed, others have been invented and that will happen. Not only that,
the world will be best supplied by fuel and biomass based fuel flows in
a very different and distributed way; you can see I believe America will
be independent. Thank you all very much.

**CONCLUSTION: MR. TOLMAN**

Thank you, Mr. Khosla. That was exciting and lots of energy, lots of
enthusiasm. Thank you for stretching our minds with that vision, the
plausible, to the possible to the probable.