(FORTUNE Magazine) – ABOUT A DOZEN years ago, way back when Steve Jobs still ran Apple Computer, an irreverent underling first used the expression "reality distortion field'' to describe the beguilingly rosy scenarios his boss could conjure up to push his product and business strategies. It's the kind of clever and disarming rhetoric required of promoters and dealmakers in more speculative arenas: In Hollywood and politics they call it spin.

But in the binary business of computers, Jobs' salesmanship cuts both ways. While still in his 20s, Jobs combined it with an uncanny knack for exploiting underappreciated technologies to bring to market three of the late 20th century's watershed products: the Apple II and Macintosh personal computers and the laser printer--devices that truly have changed the way we work, learn, play, and communicate.

After he turned 30, however, Jobs' gift for hyperbole boomeranged. He wore out his welcome at Apple, bolting in 1985 after losing a nasty power struggle with John Sculley. Almost simultaneously, Jobs founded Next, vowing that the iconoclastic venture would revolutionize not only PC hardware and software, but also manufacturing technology and higher education. Alas, only now, after trying and junking a decade's worth of business plans and burning through more than $150 million from Ross Perot, Canon, and others, can Jobs truthfully claim that Next is consistently profitable. It is but a shadow of his original vision, a tiny purveyor of esoteric software whose annual revenues amount to less than a rounding error for his old nemesis, Microsoft.

Perhaps it's no wonder that Jobs has kept a low profile for the past few years, trying quietly to buff up his tarnished credibility in Silicon Valley by sticking with Next through thick and thin. Moreover, since getting married in 1991, Jobs has mellowed a little. Rather than jet off to his Manhattan penthouse to hang with the glitterati, he stays home in Palo Alto to putter around in his vegetable garden and kick back with his wife and three kids (including a teenage daughter from a previous relationship). Having turned 40, the father of the personal computer industry has traded in his black Porsche for a cherry-red Jeep Cherokee and settled into relative obscurity.

Until now. Starting this fall, the computer industry's original impresario of virtual reality will be back in your face. This time it's not a paradigm-busting computer or novel operating system Jobs is talking about. This time he's touting a new kind of movie.

No, Jobs hasn't gone Hollywood--not exactly. If anything, he's gone "Siliwood," geek shorthand for the ballyhooed "digital convergence" of Hollywood and Silicon Valley. The term is appropriate because Jobs' new movie is the world's first completely computer-animated full-length feature film. The name of the movie is Toy Story, and it was made by Jobs' other major investment since leaving Apple, a Bay Area computer graphics company called Pixar.

Financed, marketed, and distributed as part of an unusual deal Jobs cut with the Walt Disney Co., Toy Story will play in hundreds of cinemas across America during the Thanksgiving and Christmas holiday season. Its release marks the first time Hollywood has turned to Silicon Valley not just for gee-whiz technology or a few minutes of special effects but for an entire movie--screenplay, direction, staging, filming, editing, and post-production. Disney, which coached Pixar throughout the film's four years of development and production, is marketing Toy Story as its year-end animated blockbuster, with licensing deals for spinoff toys and a promotional campaign at Burger King.

The film has the makings of a hit. It features the voices of Tom Hanks (he plays Woody, an old-fashioned, floppy cowboy doll), and Tim Allen (Buzz Lightyear, a plastic space-ranger action figure). These playthings, as any kid could predict, lead exciting lives when humans aren't around. They act out a classic buddy adventure, complete with jealousy, breathtaking chase sequences, and a bad guy--a 10-year-old neighbor boy who likes to blow up toys with firecrackers. But what should really grab the audience is the movie's stunning three-dimensional look. "We believe it's the biggest advance in animation since Walt Disney started it all with the release of Snow White 50 years ago," gushes Jobs. Adds Disney chairman Michael Eisner: "It's both a spectacular movie and a lovable movie." THE STORY BEHIND the making of Toy Story is in its own right a fascinating tale of business and technology. The movie represents the splashiest of debuts for Pixar's techno-artists, some of whom have dreamed, schemed, and invented for 20 years to reach this heady moment. It also represents payday--the company plans to make its initial offering of shares to the public this winter, while the movie is in theaters.

Moreover, Pixar's animation technology is a cinematic milestone, not only because it creates a slick new 3-D look for cartoons, but also because it makes possible for the first time the stockpiling of digital characters, sets, props, and even scenes. Stored in the computer, they can be reproduced and adapted economically and infinitely, in film and video sequels and spinoff products like toys, TV shows, and CD-ROM games. Pixar's techniques so dramatically reduce the amount of manual labor required to make high-quality cartoons that they may well change the economics of animation.

The release of Toy Story marks the beginning of a new chapter in the storied career of Steve Jobs. If the movie's a hit, he'll rub shoulders with the kingpins of the brave new world of digital entertainment--moguls like Eisner and Steven Spielberg and megastars like Hanks and Allen. Jobs may in fact have found, at last, his natural element--a business in which fantasy and technology actually enhance each other. With Pixar and Toy Story, the "reality" Jobs creates just might, for once, exceed his own rhapsodic rhetoric.

Point Richmond, California, home of Pixar's "digital backlot and studios," is an anachronism of a town clinging to a bluff on the northern shore of San Francisco Bay. A quaint working-class community that once earned its keep repairing sea vessels, Point Richmond now is known mainly for the big Chevron oil refinery across the freeway from downtown. It seems worlds away from Multimedia Gulch, the hotbed of CD-ROM development in San Francisco, or the chip plants of Silicon Valley, or Tinseltown itself, 400 miles down the coast. Yet, for now at least, Pixar's Point Richmond headquarters is the epicenter of Siliwood, a cluttered, quirky place where it's impossible to tell the difference between a computer hacker and an artist.

Jobs first heard of Pixar while still at Apple in 1984. Back then, Pixar was the computer division of Lucasfilm Ltd.--the San Rafael, California, outfit making George Lucas's Star Wars movies. Jobs was steered to Lucasfilm by Apple research scientist Alan Kay, whom Jobs had met a few years earlier at Xerox's famed Palo Alto Research Center, where he'd found languishing the technologies that ultimately resulted in the Macintosh and the laser printer. Lucas wanted to sell the division, and Jobs was so impressed that he tried, in vain, to persuade Apple's board to buy it.

Shortly after he left in 1985, Jobs sold all but one share of his Apple stock, raising more than $120 million. He quickly invested about $12 million in Next, but that left a lot of change jingling in his pocket. In 1986, Jobs went back to Lucas and, after haggling over the price, agreed to pay $10 million for Pixar. He briefly considered folding the Lucas team into Next, but chose instead to keep the company independent.

What did Jobs get for his money? Initially, little more than the fanciful dreams of some very smart people. Pixar was less a business than a band of idealistic researchers who for a decade had drifted like gypsies from one benefactor to another, inventing the tools of their trade along the way.

Sugar Daddy No. 1 was an eccentric millionaire named Alexander Schure, who was president of the New York Institute of Technology, more a technical school than a research university. In the early Seventies, Schure had hired a team of conventional animators to turn the story from a children's record album called Tubby the Tuba into a movie, but was frustrated by the plodding pace and graphic limitations of conventional, hand-drawn "cel animation." After hearing that the University of Utah was pioneering a new field called computer graphics, he flew in 1974 to Salt Lake City, hoping to find a whiz kid who could automate the making of Tubby. The kid Schure found was an unassuming computer scientist named Ed Catmull, a native of Utah who had dreamed his whole life of making cartoons, despite the fact that he couldn't draw well at all.

Catmull, now Pixar's executive vice president and chief technical officer, assembled a team of artistically inclined techies. For four years on the Institute's Long Island campus, they tinkered with what at the time was the largest concentration of computer graphics equipment on the East Coast. They didn't make Tubby, but some of them did produce works of video art. One of these, Sunstone, was acquired by New York City's Museum of Modern Art.

Although Catmull and company were pleased with their progress, they had no qualms about leaving Schure in 1979, when George Lucas, fresh from his Star Wars success, offered to bring them to Northern California as part of Lucasfilm. He wanted Catmull's team to design computerized equipment for combining, editing, and printing film images, and to produce special effects for his movies. Recalls Alvy Ray Smith, an early Pixarian who's now a research fellow at Microsoft: "Lucas wasn't interested in computer animation per se, but with all his glamour, it was easy for us to hire the best people in the business. We built all the machines he wanted in a few years, and he thought we were done, but we were only getting started."

Through the early Eighties, Catmull made annual pilgrimages to computer graphic conferences to show off the team's work. There he made friends with a gifted young animator from Disney named John Lasseter, who had worked on Tron, a live-action adventure (and box-office bomb) that was Disney's first major try at computerized special effects. Lasseter had studied animation at the California Institute of the Arts, where one of his classmates was Tim Burton, the director of Batman and Edward Scissorhands. In 1984, Lasseter came up to Lucasfilm to work with the computer division for a month. He never went back. Now Pixar's vice president for creative development, he directed Toy Story.

That same year, Lucas began to shop the division around. Catmull still shudders when he recalls that at one point Lucas nearly arranged to sell to a partnership of General Motors' EDS computer services company and a unit of Dutch electronics conglomerate Philips NV. When Jobs came calling, however, Catmull and company dared to hope that they'd finally found a kindred spirit who would set them free creatively. Pixar's hallways are lined with huge bulletin boards like those found at any animation studio; each is covered with dozens of hand-sketched scenes that story editors arrange and rearrange until they settle on a sequence. Says the vice president for feature films production, Ralph Guggenheim: "One beauty of the animation process is that it's the equivalent of editing before you shoot. We save a lot of film that way."

What makes Pixar animation different from the traditional kind is that characters, props, and sets aren't drawings but three-dimensional mathematical models stored in the computer. On screen, they take up space, cast shadows, and can be manipulated as if they were real. Something big like a room or a car can be created using computer- aided design programs much like those architects and engineers employ. Trees are drawn on the computer by artists. The shapes of characters and small objects are fed into the machine with the help of a special pen that plots coordinates on the surface of a physical object or sculpted clay model. Bill Reeves, Pixar's technical director, devised much of the necessary software and is one of the company's most proficient "modelers." What is the most difficult object he's ever undertaken? A hand.

"If I knew in 1986 how much it was going to cost to keep Pixar going, I doubt if I would have bought the company," admits Jobs. "The problem was, for many years the cost of the computers required to make animation we could sell was tremendously high. Only in the past few years has the price come down to the point that it makes business sense."

Since Jobs didn't buy Pixar intending to subsidize it forever, he insisted that Catmull and crew put off their ultimate goal--to make cartoons and movies--and develop salable technical products. The first was a piece of software called RenderMan, which enables computer-graphics artists to apply textures and colors to surfaces of 3-D objects onscreen. The Silicon Graphics workstations that generated the frighteningly realistic dinosaurs for Jurassic Park relied on RenderMan to create the creatures' scaly skin and ivory teeth. Pixar has sold about 100,000 copies of RenderMan, which was for many years the company's main source of revenue.

Disney was the second source of sales. Pixar created a software system called CAPS (short for computer animation production system) that helped Disney animators streamline the conventional animation process and juice up their special effects. IN TIME, it became clear that RenderMan, CAPS, and other ventures--like manufacturing computer-graphics hardware --were never going to pay Pixar's bills. Jobs decided that the company should concentrate on developing content: short films and TV commercials. Some Pixar ads are memorable. A series for Listerine includes one spot in which the trademark mouthwash bottle comes to life as Robin Hood and another in which the bottle becomes General Patton. Pixar's ads have won two Clio awards.

Still, the company has never turned a profit. While Jobs won't cite a dollar figure, he acknowledges that he has invested more money in Pixar than in Next. Others at Pixar estimate he has pumped in nearly $50 million.

As recently as last year, Jobs wasn't sure he could continue carrying the venture, and quietly sent out feelers--to Microsoft among other companies--to see what kind of price Pixar might bring. Only after Disney committed to distributing Toy Story for the 1995 holiday season did he decide to hang on.

"Let's return Mr. Potato Head's facial features to the default position, so it's easier for the baby to bite off his nose," suggests John Lasseter, as he leans over an animator's shoulder to study a two-second shot of a toddler torturing her toy. "And let's see if we can make the baby's slobber more elastic, so it sticks and stretches longer." Director Lasseter is on his daily walk-through of the animators' lair, an eerie open office lit only by glowing computer monitors and a few halogen desk lamps. A swing hangs from a crossbeam in the ceiling. Each animator's carrel looks like a shrine to a favorite toy. It is here that Lasseter helps the animators fine-tune the action of the movie. "At Pixar, an animator is more an actor than an artist," he explains. "Sure, they can draw, but the real trick is to make these 3-D characters come to life. That requires acting ability more than anything else."

Until work on Toy Story geared up in 1991, Pixar employed only a few dozen people, and Lasseter was practically the only bona fide animator on the payroll. He split his time between advising software engineers about the tools animators would need and making demo films that showcased Pixar's evolving technology.

The demos displayed Lasseter's genius as an animator. He brought to life such inanimate objects as a desk lamp, a unicycle, tacky souvenirs, and, of course, toys, in whimsical ways envied even by the animators at Disney. One film, Tin Toy, won an Oscar in 1988.

The shorts also showed off the growing flexibility of Pixar's animation system. Characters, sets, and props resurfaced in one film after another. Such efficiencies helped Pixar make Toy Story with a staff of just 110--roughly one-sixth the number Disney and others employ to make an animated feature. Disney hopes to use similar processes to cut the number of animators on its own projects. Each day about mid-morning, Lasseter presides over "the lighting meeting," the final, crucial step before scenes are released to be transferred from the computer onto actual film. Lasseter and his lighting specialists watch a handful of shots over and over again on the computer screen, trying to imagine how the lighting would work in the real world. Even after a shot is created, techies can simulate the look of adding extra lights from different angles to bring out the features of 3-D characters and props. They can even create "lens flare," the glinty effect of a camera lens accidentally aiming at a light source. Today, Lasseter is studying the refraction properties of raindrops on a window. "Each drop is a lens and should reflect everything that's going on outside," he says. "You should be able to see the moving van pulling up outside in miniature in each of these drops. Let's add 50 more so people won't miss the effect."

In 1991, Lasseter felt the Pixar technology was robust enough to make an hour-long computer-animated TV special. He pitched the idea to Disney, hoping the big studio would help fund the project. Jeffrey Katzenberg, who was running Eisner's film business, was already enamored of Lasseter's style. (Now a principal of DreamWorks, Katzenberg contends that the director is Pixar's biggest asset.) Katzenberg and Eisner came back with an unexpected counteroffer: How about making a full-scale movie that Disney would pay for and distribute?

Not surprisingly, Jobs, who'd been absorbed by the trials and tribulations at Next, suddenly started paying more attention to his other company. He got involved in the negotiations with Disney, and hired one of Hollywood's most respected entertainment lawyers to help hammer out a deal. The result was a contract for Pixar to make three feature films. Disney would pick up most of the production and promotion costs, as long as it had complete control over marketing and licensing the films and their characters. Pixar would create the screenplays and the visual style for each picture and receive a percentage of the box-office gross revenues and video sales.

It seemed like a great deal at the time, and Jobs still isn't really complaining. But he now realizes that much of the profit from a successful animated film comes via ancillary merchandise--and Pixar doesn't get a cent of those revenues. Says Jobs: "If Toy Story is a modest hit--say $75 million at the box office--we'll both break even. If it gets $100 million, we'll both make money. But if it's a real blockbuster and earns $200 million or so at the box office, we'll make good money, and Disney will make a lot of money."

GIVEN THE EGOS involved, one might wonder if the Jobs-Eisner relationship has its tense moments. No, says Jobs, not yet: "You've got to believe there's some truth to Disney's reputation for being hard to deal with, but we haven't experienced that. We have found that we share the same values. We are as much perfectionists as they are. We both believe that if you produce the best-quality story and movie that you can, the rest will take care of itself, and so far it has."

Eisner too seems smitten with the movie and happy with the relationship. "I don't think either side thought Toy Story would turn out as well as it has. The technology is brilliant, the casting is inspired, and I think the story will touch a nerve. Believe me, when we first agreed to work together, we never thought their first movie would be our 1995 holiday feature, or that they could go public on the strength of it."

All gushing aside, there's still rivalry between the two companies, at least from Pixar's point of view. Employees have set up a betting pool to predict how Toy Story will stack up against Pocahontas at the box office. For what it's worth, most wagers have recently turned in favor of Toy Story.

At 8:30 each morning, people start filing into Pixar's screening room for a meeting at which Lasseter reviews the final versions of shots and scenes that Pixar's "farm" of 300 Sun Microsystems computers has rendered onto film. There's often a standing-room-only crowd when an especially popular scene is projected in full 35-mm glory. If Lasseter gives the final okay, the scenes are spliced into the master reel. Once in the can, Toy Story will have more than 1,500 different shots and about 110,000 individual frames, each of which requires two to five hours of computer time to transfer onto film.

While Toy Story is only now moving into the public eye, much of Pixar's 150-person staff has already gone on to other projects. A story team is working on the script and general design for the company's second feature--Jobs isn't saying what it's about. Another team is creating Toy Story CD-ROM games.

Yet another group just finished three new Coca-Cola commercials that were commissioned by Michael Ovitz, the head of Creative Artists Agency and soon-to-be president of Disney. Says Jobs: "Can you believe our luck? He loves the commercials we made, and now we'll be working with him on our movies."

MEANWHILE, executive vice president and chief financial officer Lawrence Levy is readying Pixar's initial public offering. Jobs, who owns 75% of the company (employees own the rest), is helping him line up a board of directors. So far, Joseph Graziano, executive vice president and CFO of Apple Computer, Skip Brittenham, Pixar's Hollywood lawyer, and Larry Sonsini, a prominent Silicon Valley attorney, have agreed to serve. Intel CEO Andy Grove reluctantly declined.

Even as Jobs promotes Pixar and Toy Story, he hints that Next may also go public soon. His wife, Laurene, gave birth in mid-August to their second child, a girl. With all this activity, Jobs seems stretched about as thin as any 40-year-old CEO should ever get. Is there anything else he would possibly take on right now? "You know, I've got a plan that could rescue Apple," he says, in all seriousness. "I can't say any more than that it's the perfect product and the perfect strategy for Apple. But nobody there will listen to me ..."

The big question, of course, is "What will kids think of Toy Story?" To find out, I took my two daughters, Fernanda and Greta, ages 9 and 10, to Jobs' home to join his 3-year-old son, Reed, for an unofficial screening. Reed's attention wanders, but my kids are transfixed, even though about 30% of this cut is in black and white storyboard form rather than in full-motion 3-D animation. When it's over, Jobs waits all of three seconds before asking: "So, whaddya think, is it as good as Poca hontas?" Greta and Fernanda, both of whom saw the Disney blockbuster the weekend before, nod vigorously. "Well, then," he asks, "is it as good as The Lion King?" Fernanda puts her chin in her hand to ponder this one, and then gives Jobs an answer that makes his day: "To tell you the truth, I won't really be able to make up my mind until I see Toy Story five or six more times."