"We made a principled decision that we're not going to withhold technology from institutions that we have elected in democracies to protect the freedoms we enjoy," he told CNN at Mobile World Congress.
"We were very transparent about that decision and we'll continue to have that dialogue [with employees]," he added.
Microsoft could supply over 100,000 HoloLens headsets to the US Army under the Integrated Visual Augmentation System (IVAS) Program, which aims to improve "soldier lethality" through "cognitive training and advanced sensors".
Nadella was at MWC to launch the $3,500 HoloLens 2, which it is betting will be the next frontier of computing after missing the smartphone boom. The headset is available for preorder today and will ship later this year.
Nadella said Microsoft's approach to HoloLens was "about putting the human first", while HoloLens boss Alex Kipman said "the goal is these things will transform humans".
Human transformation through Microsoft's wearable is the primary aim of the Army's IVAS program. The Army wants the customized HoloLens headsets to provide night-vision capabilities, real-time metrics on soldiers' physical state, low-light detection of people at a distance of 150 meters, and thermal recognition of people at 300 meters.
Microsoft at Mobile World Congress took the wraps off of its HoloLens 2 and it has some hardware upgrades that'll help enterprise usage and the front-line workers using it. But HoloLens for Microsoft is all about landing cloud subscriptions.