What happens when hard-core ex-cons and former drug addicts sit down with Stanford Business School students? At San Francisco-based Delancey Street Foundation, the aspiring MBAs are the ones who take notes.

It wasn't always that way. When the organization was founded in 1971, it consisted of ten recovering addicts and one criminal psychologist, all living in one cramped apartment. As the ad-hoc rehabilitation program for addicts, prostitutes, and thieves evolved into an unorthodox combination of residential center and entrepreneurial incubator, the experts came calling. Their professional opinion? "I heard it over and over again," says Mimi Silbert, 56, Delancey's founder and president. " 'You can't do that. That's no way to run a business.' "

The business-school professors and criminal reformers had a fundamental objection: The center is run by its residents - by "managers" who have served an average of four prison terms, who have an average of 18 criminal convictions, and who have been addicted to drugs for an average of 10 years. What's more, Delancey has only one "professional" staffer: Silbert, who accepts no salary and who wears donated clothes.

Despite the criticism, Delancey flourished. Today the foundation has 1,500 full-time residents in five self-run facilities around the United States - including a spectacular 350,000-square-foot complex on San Francisco's waterfront, and a rural ranch in San Juan Pueblo, New Mexico. The organization operates some 20 businesses that function as training schools - from an automotive shop, to the nationwide Delancey Street Moving Company, to a hip restaurant that has become a favorite hangout for the city's political and media types.

In the last decade, Delancey has received dozens of honors - from Congress, presidents of the United States, governors, and mayors. The foundation's 12,000 graduates have gone on to become lawyers, doctors, small-business owners, restaurateurs, mechanics, contractors, and salespeople.

Silbert has succeeded where most have failed - by simply redefining the problem: "The standard debate about criminals is, Should they receive punishment - or therapy? Is it an illness, or are they bad?" In posing those questions, she says, "Nobody makes the critical point: We need these people. The country is missing something because a huge bulk of its population is not a part of it. They have talents we need."

With a combination of entrepreneurial zeal and old-fashioned tough-mindedness, Silbert set out to tap this hidden talent pool. The result? A cross between survival training and a liberal-arts education. "We try to break through the program mentality and get into a life mentality," she says. "What's holding these people back? It's everything about their lives. That's why we like to call ourselves the 'Harvard for the bottom 1%.' The people who come here need a Harvard to teach them about life."

How do addicts and ex-cons, many of them illiterate, learn and "get better" without experts to teach them? Silbert has a simple answer: "Each one teach one." If you read at an eighth-grade level, you teach someone who reads at a sixth-grade level - and that individual instructs someone who reads at a fourth-grade level. That goes for job training too. At Delancey Street Restaurant, chefs teach prep cooks, who in turn teach dishwashers. The ultimate goal is for all residents to graduate with a high-school equivalency degree and three marketable skills. By constantly teaching one another, residents learn a fundamental lesson: that they have something to offer. "They need to know that they are talented, that they can do anything anybody else can do," Silbert says.