By Burt Helm

Like many fast-growing, hair-on-fire startups, Bungie has the feel of a frat house. The average employee is just 29, and only two are women. The close-knit staffers practically live in the big, cluttered room that passes for an office, working and hanging out until all hours of the night. They survive on delivery food, and think about nothing but video games. The only difference? This irreverent bunch happens to reside smack dab in the middle of Microsoft's corporate headquarters.

Having long shed its own entrepreneurial roots, Microsoft (MSFT ) bought Bungie four years ago to tap its creative energy. The result has been one of the holiday season's biggest success stories. Bungie is the brains behind Halo 2, a sci-fi epic that has become the stocking-stuffer-of-choice for the video-game set.

But for Microsoft, the 60-employee subsidiary means much more: without the demand created by Halo 2, Microsoft's Xbox game console might well have fallen flat just a few years after its launch. "You just can't understate the impact of Halo 2 on the home-entertainment group at Microsoft," says Jonathan Rudy, an analyst for Standard & Poor's.

SELLING POINT.  In a market driven by hit games, where avid fans will shell out for an entire system just because a certain game is compatible, Halo 2 is an uber-hit. In its first day, Nov. 9, the game grossed over $125 million. (For the record, nearly double what Lord of the Rings: The Return of the King did in its opening weekend at the box office.)

"If you talk about dollars and cents, Halo 2 has basically kept the Microsoft [game] publishing business near profitability," says Evan Wilson, an analyst with Pacific Crest Securities. Analysts say the game has been a big factor in driving up sales of the Xbox (which goes for around $200) some 50% over last year.

With Microsoft's name on the door, there have been inevitable defections, and it's safe to say that Bungie's free spirit is a more constricted these days. But the marriage has largely been a successful one for both companies.

RABID FANS.  It's no coincidence that Microsoft turned to a startup to help launch Xbox. Bungie had an essential ingredient that Microsoft did not: adoring, die-hard fans. "I still remember the first time I saw a Bungie tattoo," says Matt Soell, who did tech support, marketing, and beta testing for Bungie from 1995 until 2003.

Why the fanaticism? "It's just the Bungie spirit," says Durandal Brytting, a fan from Stockholm. In 2003, Brytting legally changed his first name to Durandal, the name of the evil nemesis in Marathon, an early Bungie game. By making games for Apple's (APPL ) Macintosh during the '90s, the outfit won over an already insular and cultish community.

That's right: The savior of Microsoft gaming once consisted of eight Mac-addicted guys in Chicago. Working out of a former girls' boarding school, they developed Marathon, where a futuristic soldier fights aliens bent on destroying mankind -- a storyline very similar to Halo's. It was a huge hit for Mac, selling roughly 50,000 copies.

COMMUNAL DIGS.  So how did Mac lovers end up in Redmond, Wash., in the heart of what many Apple aficionados call "the evil empire"? Even as Bungie began to realize success, cash problems developed. As it produced more sophisticated and popular games, it needed to boost hiring and spend more on marketing and distributing.

In search of capital, co-founder Alexander Seropian shopped for acquisition deals. In 1999, Bungie sold a 19.9% stake to New York-based Take-Two Interactive (TTWO ), giving that company sole distribution rights. But after Seropian saw a demonstration of Microsoft's new Xbox, in 2000, he knew it would need software. He contacted Bill Gates & Co. and inked a deal within four months. Though neither side would disclose the details, reports at the time pegged the cash sale, which also included Take-Two's stake, at between $20 million and $40 million.

Microsoft recognized the need to preserve Bungie's independence. So when Seropian and co-founder Jason Jones requested a setup similar to their Chicago digs, Microsoft agreed. Unlike the typical one-person offices, Bungie occupies a large open room with low cubicle walls and little personal space -- "where everybody…could motivate each other by peer pressure," Seropian says.

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