Following is the full text of California Gov. Gray Davis' State of the State speech, delivered January 8, 2003.

Tonight, I come before you with a challenge as great as any in our state's history - and a real plan to meet that challenge.

When Governors speak from this podium, they ordinarily discuss a range of issues.

But these are not ordinary times. We have one overriding task before us.

We must come together to create new jobs and get our economy back on track.

This task will not be easy. But it is essential if we're going to continue moving forward.

And, together, my friends, we've made real progress.

Today, our student's test scores are up four years in a row. One million more children have health insurance than four years ago.

200,000 Cal Grants for college will be awarded this year - a 53 percent increase. 220,000 Governor's Merit Scholarships have also been earned over the past two years.

Three thousand more police officers are on the street. Three thousand miles of freeway are being improved.

500,000 more acres of precious land have been protected. Prescription drugs for seniors are being discounted. Services to our veterans are being improved. Five more veterans' homes are being built.

We've healed old wounds with Mexico. Recognized the rights of domestic partners. Passed the first significant laws in America on stem-cell research, global warming and paid family leave.

Together, we've made California stronger and better.

But, now, much of what we've built is being threatened by a struggling national economy and declining stock market.

The conditions which have brought us to this point are well known. Personal income is down. Employment is down. Retail sales and manufacturing are down.

This national recession has forced nearly every state in America into the red.

These are tough times. But Californians are made of tougher stuff.

On Friday, I will send you one of the toughest budgets ever presented. It will be balanced. It will be responsible. It will make significant cuts in nearly every program. And it will restore this state to sound financial footing.

My budget will protect, to the extent possible, our progress in public education, public safety and children's health insurance.

But make no mistake: my budget makes hard choices. We have faced the problem head-on. There are no tricks. No gimmicks. No evasions.

In short, my budget will erase the $35-billion shortfall and eliminate the structural deficit.

Any alternative that does less is irresponsible and a waste of our time.

Already, my Administration has begun the hard work.

We've frozen hiring and spending. Eliminated more than 10,000 positions. Identified more than $10 billion in reductions. And called an extraordinary session of the Legislature.

I urge you in the strongest possible terms to pass my $10 billion in proposed cuts this month.

State government will need to do more with less - and we will.

But, as I stated in my Inaugural Address, it's not enough to simply pass a budget that balances the books.

We must re-write the book on California budgets.

Our current fiscal structure has not been updated in 25 years to reflect either our changing economy or demographics.

Our budgets have become painfully dependent upon extremely volatile sources of revenue, constraining our ability to make long-term vital public investments.

It's high time to free ourselves of this boom-bust syndrome.

My budget will discuss several structural reform proposals for the Legislature's consideration. They include restoration of the Executive's authority to make mid-year budget reductions in difficult times.

I will convene the legislative leadership, as well as major stakeholders, to solicit other reform proposals.

Now, I don't have all of the answers. None of us do. But I will lead the discussion. And I will not sign a budget without substantial structural reform.

My friends, we must end the budget roller-coaster ride.

But we also must do more to create new jobs now and to stimulate our economy.

Obviously, the federal government can do more than any state to promote economic growth.

Washington needs to step up and pass a real economic plan. One that puts Americans back to work this year.

But, at the same time, we can't afford to sit back and wait.

My most immediate priority can be summed up as jobs, more jobs, and even more jobs.

They are the engine of our future and the cornerstone of the California Dream.

My goal is to help create 500,000 new jobs over the next four years.

I'm proposing a new California Jobs plan that will put more Californians to work - not in years, but in weeks.

We'll begin with "Build California" - a new initiative to accelerate the flow of billions of dollars into our economy.

Last November, the voters of this state did their part by approving $18 billion in bond measures for better schools, affordable housing and new water projects.

In December, I asked the State Allocation Board to expedite $5.5 billion from our new School Bond. I thank them for their quick action. These funds will finance 1,000 new schools, 1,400 modernized schools and 135,000 new jobs.

Now, I'll be calling on them to commit the remaining $6 billion in half the time of previous bonds. Specifically, I'll ask them to allocate $300 million a month until every dollar is out the door - and another 150,000 new jobs are created.

We will also fast-track our $2.1 billion housing bond. I'm asking that $230 million be made available this month. This, by itself, will create another 68,000 new jobs. The entire bond issue will produce a total of 276,000 new jobs.

I will also direct my agencies to accelerate freeway and public transit projects by one full year.

And I will appoint "Build California" Teams to reduce red tape and speed these projects through the process.

I set up similar teams in our successful effort to expedite the construction of UC Merced by one full year and bring more electricity on-line over a 16-month period than in any other time in our history.

All of these efforts add up to one thing - jobs. Not down the road, but right here, right now.

Moreover, I will recommend that the UC Board of Regents Pension Fund invest in California housing. Similar investments by CalPERS have built 32,000 homes, created 60,000 jobs and yielded a 23-percent return over 10 years.

In addition, we need to do everything in our power to support small businesses - which employ more than half of all Californians.

In my first term, we doubled the number of certified small businesses from 5,500 to 10,000.

We increased small-business participation in state contracts from 12 percent to 31 percent, sending a total of $2.1 billion to small business.

And I've appointed the first-ever Small Business Advocate in the Governor's Office. Please join me in welcoming Sonya Blake.

But there's more we must do.

I will charge the Small Business Advocate with rejecting all regulations that unfairly impact small business.

I will also ask her to review existing regulations and identify changes that promote growth and new jobs.

In addition, I will ask the Public Utilities Commission to create an Office of Economic Development. It will review all major proceedings before the PUC to determine their benefit to the economy, infrastructure and job creation.

Every large economy needs a vibrant manufacturing base. So I will ask you to extend the Manufacturers' Investment Credit.

This credit is widely recognized as creating hundreds of thousands of new jobs.

We will also do more to provide a well-trained workforce - focusing on teachers, nurses and disabled workers.

In addition, we will focus like a laser on two sectors that promise high growth and high wages.

First, Homeland Security.

In the months that followed September 11th, no state in America did more to protect its people and vital assets.

State and local law enforcement have answered our nation's call without question and without hesitation - but they shouldn't have to do it without compensation.

So, tonight, I call upon the President and Congress to fully fund the cost for all 50 states of defending our freedom here at home.

We will continue to do our part. I will establish a new, permanent state Office of Homeland Security. It will serve two critical functions:

First, it will coordinate security activities throughout California.

Second, it will highlight the extraordinary technological capabilities of California's private industry to help protect all Americans.

In the coming year, I will personally lead a high-level delegation to our nation's capital to underscore how California can lead the way in keeping America safe.

Please join me in recognizing those who stand on the frontlines of homeland security - CHP Commissioner Spike Helmick, General Paul Monroe of the National Guard, Sheriff Lou Blanas of Sacramento County, Sheriff Lee Baca of Los Angeles County and Sheriff Bill Kolender of San Diego County.

Finally, I'm pleased to introduce the Director of this new state Office of Homeland Security, George Vinson. George has spent 23 years with the FBI, 10 with the CHP, and the last year as my Security Advisor.

While we apply new technology to protect American lives, we will also use it to heal them.

Every year, we lose too many Californians to cancer, Alzheimer's, Parkinson's, and other life-threatening diseases.

For those of us who've experienced the pain of watching a loved one slip away, these aren't just numbers in a ledger. They are our mothers and fathers, our brothers and sisters, our family and friends.

And their stories summon us to focus our best skills and resources on building healthier, longer lives.

California has pioneered the field of life sciences. And, over the last four years, we've strengthened our position.

We've launched four world-class Institutes of Science and Innovation.

One of them is an institute of biotechnology, where, today, top-flight scientists are developing new discoveries to improve human health.

Please join me in welcoming some of the leaders of this extraordinary field:

Dr. J. Michael Bishop - Lead Chancellor for our new UC Institute of Biotechnology and a 1989 Nobel Prize winner in Medicine.

Dr. Elizabeth Blackburn - The 1999 California Scientist of the Year and one of the world's top cancer researchers.

Dr. Cynthia Kenyon - Head of UCSF's Center for the Biology of Aging.

Dr. Sydney Brenner - This year's Nobel Prize winner in Medicine for his groundbreaking work on organ development.

To keep California on the cutting-edge of this life-saving field, we need to launch a new Life Sciences Initiative.

My Administration will focus on three things: one, increasing the number of qualified lab technicians. Two, working with the University of California to simplify the transfer of technology. Three, increasing access to venture capital and federal grants.

The true value of this industry lies not its bottom line, but in its higher purpose.

Let me tell you a story about a 10-year-old girl from Whittier named Anies Garcia.

Anies was born with non-functioning kidneys.

In 1997, she had a kidney transplant. Unfortunately, her body rejected it and she developed heart failure.

Her only hope was a combined kidney/heart transplant. But, at the time, the risk of rejection was simply too high.

So her doctor, Bob Ettenger, worked round-the-clock with a team of bio-scientists and specialists at UCLA and Mattel Children's Hospital.

Together, they developed breakthrough medicine - specifically for children, specifically for double transplants - that would stop her body from rejecting the new organs.

Because of these revolutionary drugs, Anies was able to become only the second child in America under the age of 10 to successfully receive a combined heart and kidney transplant.

Today, she's doing great. In fact, she's with us tonight. And she's here with the doctor who dedicated his life to saving hers - Dr. Bob Ettenger. Please give these heroic Californians a spirited welcome.

Theirs is a story of great inspiration. It reminds us once again how Californians have always defied the odds to triumph over adversity.

Our parents and grandparents sacrificed for us, fought and died for us, endured the Depression, and perished in the Holocaust.

Despite all of this, their generation invested in our future. They built our schools, our roads, our farms and our businesses.

They didn't fear their destiny. They seized it. They showed us how the worst of times can bring out the best in each other. And they left behind a far greater California for the generations that succeeded them. So shall we.

My friends, the state of our state has always been strong - not because of the size of our treasury, but because of the soul of our people.

Let us prove worthy of our rich legacy.

Let us rise to the challenge of our time.

Let us summon the courage to do what is right and the will to do it together.