The President said she had informed Bush in their one-on-one talks during the eight-hour visit of the US leader last Saturday.
Mrs. Arroyo said chief presidential legal counsel Avelino "Nonong" Cruz has completed the draft of the controversial Terms of Reference (TOR) for Balikatan which was originally proposed to be held in Sulu.
"I told President Bush that Nonong Cruz has a formula which he believes will conform with the provisions of the Philippine Constitution and fall within the language of the US budget law," Mrs. Arroyo told the Philippine media delegation here at the Oriental Hotel late Monday.
"He (Bush) told his officials to look at Nonong’s draft," she said.
Palace sources revealed the draft TOR includes the Philippine National Police (PNP) in the joint RP-US military training exercise.
Since the PNP is a civilian agency, this means the Balikatan will no longer be a purely military operation and cannot be defined as combat.
As presented to Mrs. Arroyo, the draft TOR is divided into training exercises and security assistance.
The conduct of Balikatan was deferred over the constitutional issue of providing combat role to US troops in assisting the Philippine military in their operations against the terrorist group Abu Sayyaf in Sulu.
Critics have threatened to question before the Supreme Court the legality of conducting the Balikatan in Sulu, particularly on giving active combat role to US troops.
Mrs. Arroyo then conceded there must be a new TOR that should govern the conduct of the military exercise.
She said the new TOR should be separate from the Balikatan exercise conducted in Basilan and Zamboanga last year.
"I’m not keen in having Balikatan in Sulu. To me, training is training. It doesn’t have to be called Balikatan (03-01)," she said.
Mrs. Arroyo said the Joint Defense Assessment (JDA) that she and Bush agreed to adopt during his state visit in Manila would serve as the framework for the new Balikatan.
Mrs. Arroyo said the JDA is a long-term project which provides the US to extend military assistance for the modernization of the Armed Forces of the Philippines.
This is one of the privileges enjoyed by the Philippines after it was designated a major non-NATO ally by the US in this part of the world, she said.