REDMOND, Wash. — On his final full day at Microsoft Corp., Bill Gates went on stage to reminisce with his longtime friend Steve Ballmer, and neither man could hold back tears as Ballmer handed Gates a large scrapbook as a farewell present.

Gates, who is stepping back to focus on his philanthropy, sat with CEO Ballmer in a Microsoft conference room and meandered through moments in Microsoft's history. They stopped to get in a few good digs at IBM Corp., whose first personal computers were loaded with Microsoft's DOS operating system before IBM adopted its own operating software and their relations strained.

"They went off with OS 2, we were left with good old Windows, and sure enough the David versus Goliath story came out with the right ending," said Gates, eliciting laughter from the crowd of 830 Microsoft employees.

Gates, who founded Microsoft with Paul Allen in 1975, admitted that Microsoft has faltered along the way, and certainly isn't perfect today.

"When we miss a big change, when we don't get great people on it, that is the most dangerous thing for us," Gates said. "It has happened many times. It's OK, but the less the better."

Gates, who will remain Microsoft's chairman on a part-time basis, said he would still take on Microsoft projects picked by Ballmer and two other executives who have assumed most of his day-to-day tasks, Craig Mundie and Ray Ozzie.

One of those will be Web search, where Microsoft lags far behind Google Inc. and Yahoo Inc. in market share. With an acquisition of Yahoo now again apparently off the table, Gates threw his weight yesterday behind a strategy of assembling a team of smart people and combining Microsoft's own breakthroughs with what competitors are already doing.

"Search is the place where people probably really think, will Microsoft ever do anything there? We'll be the very best," Gates said. "That is in full motion."

Gates also reinforced his intent to stay out of the company's day-to-day affairs.

"I do think with my not being here full time there is some opportunity that people will really step up. There's somewhat of a vacuum created there," he said. "I have got to get out of the way, and let that new thing step in there."

The most poignant moments came when Gates dropped out of technology prognostication mode — the coming switch to using ink, voice and gesture to interact with computers, for example — and shared candid and sometimes self-effacing banter about his early days with buddy Ballmer.

Freshman year at Harvard, Gates said, "I was in this dorm up at Radcliffe, where the anti-social math types hung out. I belonged there."

He was introduced to fellow freshman Ballmer by a mutual friend. On their first outing together, they went to the movies to see an unlikely back-to-back showing of "Singing in the Rain" and "A Clockwork Orange."

Ballmer, who has famously danced and jumped around stage at conferences, described a similarly silly and uninhibited Gates that evening.

"So we come back from the movie, we're kind of dancing, we're both kind of playing Gene Kelly, and some guy wrestles me to the ground in our dorm," Ballmer said. It fell to Gates, who hardly qualifies as burly, to fend off the fellow student.

Ballmer also gave Gates grief about leaving for vacation in the middle of Ballmer's job interview, and forgetting to pack a tie for their first meeting with IBM.

Gates, playing up his absent-minded professor side, cracked up the employees in attendance — they won a seat at the event in a lottery — when he said Microsoft was so central in his life that he often found himself driving to its campus even when he was supposed to be headed somewhere else, like delivering his kids to school.

When it came time for Ballmer to make his public farewell to Gates, he joked about the inevitable inadequacy of a thank-you gift, and presented him with a large scrapbook embossed with Gates' signature. Then, the tears came.

"We've been given an enormous, enormous opportunity. And Bill gave us that opportunity," Ballmer said, his face reddening. "I want to thank Bill for that."

As the employees rose to their feet, Gates swiped at tears of his own.