[Michael staring] Michael to Pentangeli: "He (Vito) taught me keep your friends close but your enemies closer." [/Michael staring]
Even though the scene is great and Michael is telling this absolutely convincingly, I think the line is bullshit. It contradicts everything Vito has said and done. Vito didn't keep his enemies close. He didn't even keep his friends close. He didn't tell "anybody outside the family what he was thinking".
There's not a single example in either the book or the film that could prove Michael's statement.
Vito's enemies: Cicci, Fanucci, Barzini, Tattaglia, Sollozzo. None of them was kept close, unless you count the meeting of the families as "keeping close".

Vito's strategy in coping with enemies was different: reasoning or killing. He preferred to turn his enemies into friends.
Michael on the other hand didn't know what friendship was. There was just business and the family.

Hmm.

You could argue that Vito (and the Family) kept Carlo close. In the book he was moved back to the mall and given a better position with the union. In the movie Vito even gives him a paternal pinch on the cheek.

Clemenza and Sonny keep Paulie close. Sonny inquires after his health and Clemenza brings him along for an important mission (of course the mission is different than what Paulie expects )

Very few people ever really knew what Vito was thinking. I think Michael was just expressing Vito's maxim to play your cards close to your vest.

Vito didn't know Sollozzo was his enemy, but he suspected he might be, so he sent Luca to get "closer" to him to find out what he had underneath his fingernails. Unfortunately Sol and Tat outsmarted Vito (he was slippin) and killed Luca.

Fanucci met him for coffee and was so impressed by Vito he offered him a job. Thats close.

Cicci? How much closer do you get when you go to an old man's house to get his blessing for your oil company and then whisper your name in his ear just before giving him the shiv?

As for Barzini and Tattaglia, he made the peace with them and kept them close by vowing that HE would never be the one to brak the peace. He lulled them into complacency brilliantly.

I see that line as trying to combine all these real life mafiosis that FFC wanted Vito to be like, in this case Luciano in his dealings with both Maranzano and Masseria.

Perhaps the quote "keep your enemies close" shouldn't be taken literally.

My interpretation has always been and still is that he meant: "Don't let your enemies know that you truly think of them as enemies. Don't come out threatening or be blatantly irate with them. Keep you feelings or your thoughts of revenge to yourself. You always want to have the advantage by keeping them off guard. Always let them think that, you think of them as friends." That is, until the time is right or you can get close enough to them and just before you kill them, you tell them. Watch for the fear and know that you finally have justice.

The greatest example was killing Don Ciccio. Vito waited until the time was right. Came in as a "friend", quietly told him who he was and cut out his gut!