(FORTUNE Magazine) – When Jerry Breslauer first visited a small educational-software company called Knowledge Adventure, he didn't mention that he was scouting the place as a possible investment for Steven Spielberg, whom he has served as business manager for two decades. Figuring Breslauer was just another of the pesky investment bankers who regularly drop in hoping to buy a stake in his startup company or take it public, founder Bill Gross said he had no time. His sister, Marcee Kleinman, who supervises the writers and artists, said she had no time either. Only one of the Grosses was free. Breslauer, 65, took a meeting with Bill's son, David, 8, who, when not attending third grade, serves as the company's No. 1 product tester. David demonstrated some of Knowledge Adventure's CD- ROMs, which use animation and video clips to explain topics such as dinosaurs, space, the human body, and American history. Breslauer was apparently impressed: He called back to say Spielberg not only wanted to invest but was also offering his creative talents. That got everyone's attention. THE SPIELBERG CONNECTION has turned a spotlight on Knowledge Adventure, a privately held company started in 1991 by Gross, 36, a Caltech graduate who had owned a stereo store and worked as a programmer at Lotus Development. The company has 300,000 registered users and annual sales of over $35 million. You know this is an unusual operation from the moment you drive up to its nondescript two-story headquarters in La Crescenta, California, a hillside town near Pasadena. A sign reads: KNOWLEDGE ADVENTURE VALET PARKING. Surely a joke played by mischievous programmers? It turns out to be true. The company was growing so fast that employees' cars took up all the parking spots in the neighborhood, irritating residents. So it hired a full-time attendant who artfully arranges the cars three deep in a long, narrow lot. Inside is a high-tech sweatshop. Three or four people share a cubicle that seems smallish for even one. The hallways are lined with workers at PCs, making it hard to get from one place to another. There are no real desks; doors from Home Depot lay across filing cabinets. The sole "conference room" doubles as a day-care center: Kids crawl around as their parents try to conduct meetings. Beyond the obvious cost savings, there's a theory to the cramped conditions. They forge closely knit, fast-moving teams. Employees even talk about experiencing "brain melds" with colleagues working at their sides. Every day the company provides free lunch and dinner, served buffet style in -- where else? -- a hallway. The company's newest creative talent, Spielberg, sometimes confuses a hard disk with a floppy disk in his talks with Bill Gross. No worry: Spielberg has his own staff of techies who sweat the details of configuring PC systems or installing tricky CD-ROMs. The filmmaker focuses on content. Gross thinks that Spielberg is trying to amass the same kind of encyclopedic knowledge of educational software and computer games as he has of motion pictures.

SPIELBERG WANTS to improve Knowledge Adventure's products by creating memorable characters. For example, a program shows a graphic of a human skeleton. Spielberg suggested turning the skeleton into an animated character who would then literally step into his skin. The most intriguing aspect of Spielberg's involvement is his role in . conceiving and creating original software projects. His first two or three titles are due for release next year. Though interactive software in general allows users to pick alternate endings, Spielberg wants to control the story lines himself through compelling characters and special effects. Spielberg's lack of technical training in computers may prove a benefit, since his artistic vision is neither driven nor constrained by an appreciation of what can or cannot be done with today's PCs. In one instance, Spielberg told Gross that he wanted to paste images of his children's faces onto figures on the PC screen so that his daughter could envision herself as a ballerina. Can't be done now, Gross explained. But with someone like Spielberg pushing to make it happen, Gross and his programmers will certainly try to find a way.