In a huge deal worth up to £15.9 billion ($21.9 billion) over a decade, the headsets are based on the tech giant's HoloLens product and will let users see holograms on top of the actual environment.
The devices will be made in the US, with the contract calling for more than 120,000 headsets.
As it stands, HoloLens can be bought commercially for $3,500 per unit, and Microsoft has primarily been selling them to businesses.
In a blod post, the company said: "[The headsets] will keep soldiers safer and make them more effective...
"The program delivers enhanced situational awareness, enabling information sharing and decision-making in a variety of scenario."
Users include car manufacturers, universities, hospitals and NASA.