(FORTUNE Magazine) – Steve Jobs, the personal-computer industry's chief aesthetic officer, is in his element. Here in the boardroom at Apple Computer's Cupertino, Calif., headquarters, he's the only person seated. Reclining, actually. Hands clasped behind his head, he stares pokerfaced at a couple of Web pages displayed side by side on an outsized 22-inch-wide Apple Cinema flat-panel monitor. Twelve weary-looking men--programmers, marketers, graphic designers, and Web experts--stand in pensive poses, forming an arc behind him, some scribbling notes on Palm hand-held devices whenever the 44-year-old iCEO comments.

"The icon for 'real estate' doesn't do anything for me at all," announces Jobs, snapping out of his reverie and leaning forward. He points at a Web-link button on the mocked-up home page for iReviews, Apple's new Website-rating service. "That's not what a 'for sale' sign looks like. And I don't much like this 'investing' icon either. I can't tell if it's supposed to look like a dollar bill or a stock certificate. But this old-fashioned highway sign for 'cars,' now that's cool. I love it! You instantly know exactly what it means."

Jobs has been presiding over secret meetings like this several hours a day, three or four times a week, throughout most of November and December. No detail was too trivial to escape his scrutiny as he passed final judgment on the look and feel--or what he calls the fit and finish--of a series of ambitious Apple software products and Internet initiatives that he would announce in early January at the annual MacWorld trade show in San Francisco. These surprise announcements would prove more than the latest manifestations of Jobs' knack for high-tech showmanship. They would be his way of drawing a new line in the sand and daring Microsoft or Compaq or AOL or Sun or any other competitor to cross it.

Everyone expected him to unveil a new computer or two. Instead, Jobs showed off a flashy, completely redesigned Macintosh operating system called Mac OS X [ten], which, when it's delivered this summer, will put a glossy new face--graphical user interface, that is--on the Mac. "We made the buttons on the screen look so good you'll want to lick them," he says. (Some of the design elements he approved help illustrate these pages.) Just as provocative was a set of jazzy and useful free Internet services available immediately--online data-storage space, build-'em-yourself personal home pages and Websites, and a new kind of parental-control filter to keep kids from seeing the wrong kinds of Web content, to name just a few. These Web services, which Apple calls iTools, are designed to work exclusively with Macintosh computers, not PCs or any other kind of Internet device. Jobs' shrewd goal: to use the Internet to make Apple's computers show up Wintel PCs rather than merely stay even.

Yep. Once again Steve Jobs is trying to win by design--to use aesthetics and finesse instead of brute force to change the rules of the computing game. That's what he did when he rolled out the first Macintosh in 1984. He did it again upon returning to

Apple in 1997, when he coaxed engineers to come up with the sleek, colorful iMacs and iBooks, winsome machines that consumers are buying hand over fist. Now he has turned his connoisseur's eye beyond the box, hoping that a fresh approach to system software and especially to the Internet will further fuel demand for Apple's products.

And, oh, there's a soap opera subtext to all this. Most of these software and Web innovations spring from the technologies and engineers that Apple acquired in 1997 when it bought Next, the company Jobs started in a fit of pique after being cast out of Apple in 1985. Until Apple handed over $400 million for Next, that company's software breakthroughs had been widely praised, but its products had never made much of a splash in the market. Many people thought Jobs snookered Apple's then CEO, Gil Amelio, in the deal, collecting an inflated price for Next, not to mention inveigling himself into a position to commandeer Apple if Amelio stumbled.

Now it's looking like a pretty good deal all around. (Unless you're Amelio, of course.) After being repotted into Apple along with Jobs, the Next technology has had a chance to blossom. Says Jobs: "Once this all plays out, I think we'll all feel vindicated--those of us from Next and everybody at Apple too."

Steve has good reason to feel vindicated already. In four of the past five quarters, his $6-billion-a-year company has posted solid revenue gains, and it is expected to have grown by 16% in its fiscal first quarter, which ended in December. (The sole blip, in the previous quarter, was caused by a shortage of microprocessors for Apple's hottest new computer, the G4.) Profits doubled in the last fiscal year. Best of all, Apple's stock set an all-time high of $118 in early December and has been hovering around $100 ever since, eight times the price at its nadir, shortly after Jobs took over.

Those are pretty good numbers, especially considering that in a world dominated by Microsoft Windows PCs, Apple is the size of a fly. Despite the iMac's runaway success, the company still hasn't managed to push its worldwide market share--close to 10% in the late '80s--much beyond 3%. In fact, its buckets of profits seem to buttress Jobs' belief that the PC industry has grown big and varied enough to accommodate a niche for a high-end BMW-like computer maker. Nor does market share seem to matter one whit when it comes to Apple's ability to alter the course of the PC business--and that, of course, is what gives Steve his biggest buzz.

"I don't want to toot our own horn too much, because it sounds arrogant, but the rest of the industry is trying to copy our every move again, just like in the '80s," says Jobs. "Every PC manufacturer is trying to copy the iMac in one way or another. And you can bet they'll be cloning iBook next year. The same goes for our software. Our QuickTime streaming video player has this sleek, brushed-metal look on the screen, and our iMovie digital video editing software on the new iMacs lets you make your home movies actually viewable. Well, a month ago Bill Gates announced that Microsoft's next Windows multimedia player was going to feature a brushed-metal interface, and that they're coming out with Windows Movie Maker. So now we've got Microsoft copying us again too. And I don't mind. I don't mind."

Microsoft, for its part, couldn't be happier about Apple's resurgence. For one thing, its business selling Macintosh applications software is hugely profitable. And its lawyers, now in the throes of trying to settle Microsoft's celebrated federal antitrust case, can point to Apple's comeback as hard evidence that the PC industry does foster at least a little competition. Best of all, the controversial $150 million investment Microsoft made in Apple after Jobs came back in 1997--which seemed a charity donation at the time--now looks downright prescient.

So we can forgive Jobs if he gloats a little. Things are clicking in both his CEO gigs. Pixar's Toy Story 2 was the holiday season's biggest box office hit. As for Apple, Job says, "It has been a bigger company, but it has never been more capable or more profitable than today. The best thing is that we're done patching the place up. Now we're marching forward on all fronts." No wonder he used the MacWorld forum to announce that he has dropped the "interim" from his CEO title. This guy clearly plans to stick around. (For more on Jobs' thoughts, feelings, and plans for Apple and his future, including an explanation of why he still won't let the company pay him more than $1 a year, see the interview that follows this story.)

As much as Jobs loves to develop gee-whiz hardware, system software has always been what really distinguishes the Macintosh. At Jobs' insistence, the Mac was the first PC to popularize the now-familiar graphical user interface, or GUI, in which you use a mouse, onscreen windows, and icons to operate the computer. Microsoft and Sun Microsystems have openly copied many of Apple's interface innovations in their Windows and Solaris operating systems.

Apple added more and more capabilities to the Mac OS over the years to make it more robust. But the company never tinkered much with the interface. That has changed with Mac OS X, a top-to-bottom rewrite of the operating system. Mac users will see differences on their screens as soon as they load OS X and its new user interface, Aqua. The software, which all recent Macs and iMacs will be able to use, continues to employ windows, icons, pull-down menus, buttons, and dialogue boxes, but they've been subtly transformed. As with iMac hardware, translucence is a key design element--you can peer through command boxes, for instance, to glimpse the documents underneath. The interface introduces something called a dock--a band of animated icons and miniaturized windows along the bottom of the screen. Designed to cut clutter, they streamline humdrum tasks like clicking from program to program and document to document. The interface aims to be "better yet familiar," says Avie Tevanian, senior vice president for software engineering, Jobs' former chief soul mate at Next and his present one at Apple. "Aqua pushes the envelope, but it doesn't create a whole new envelope, because we wanted to preserve the best elements of the Mac OS."

The truly radical changes in OS X are under the hood. Based on Next's operating system, OS X is actually a blood relative of industrial-strength Unix operating systems like Sun's Solaris and Linux, the current freeware sensation; hence OS X is far less likely to crash than any previous Mac OS. Because of its lineage, Mac OS X may not even require a Mac; with a little fiddling by Apple, it could be made to work in Dells, Compaqs, or other Intel-based PCs. (Tevanian stresses that this is not one of Apple's immediate priorities.)

OS X handles onscreen graphics in a unique way that allows a Mac to display just about any kind of document the user might receive over the Internet, even if he doesn't have the program used to create it. Though it is fundamentally different from earlier Mac operating systems, it boasts a mode that will enable it to run most existing Mac programs (Jobs calls these classic applications) almost as smoothly as they run on today's iMacs.

The most profound advantages of OS X will reveal themselves as developers craft new software for it. There will be two ways to do that. "We've made it easy for developers to recompile their older applications so that they can run 'native' in the new operating system with much better performance and stability," explains Tevanian. "We're also providing a whole set of development tools and interfaces we call Cocoa that lets programmers build brand-new programs in about a tenth the time it would take to write them for any other operating system." Tevanian hopes Cocoa will tempt developers--who deserted by the hundreds in recent years as Apple's market share waned--to start building Mac applications again.

Jobs, as usual, has a vivid metaphor ready to explain why Apple geeks will be able to improve OS X faster than Microsoft geeks can improve Windows: "Think of Windows and our older Mac OS's as houses built with two-by-fours. You can build that kind of house only so high before it collapses from its own weight. So as you start to build it higher, you have to spend 90% of your time going back down to shore up the lower floors with more two-by-fours before you can go on to build the next floor. That leaves you with only 10% of your engineering budget to spend on actually innovating--it's why new versions of Windows always come out way late. On the other hand, OS X is like a software space frame made out of titanium. It is so strong and light and well designed that it lets us spend all of our resources innovating, not reinforcing the foundations."

As sophisticated as it is underneath, OS X is intended first and foremost for consumers, using state-of-the-art programming to enhance and simplify the computing experience. "Who says consumers don't want and need the best technology?" says Phil Schiller, Apple's vice president for worldwide marketing. "Always before, the consumer market was considered the tail of the dog. Well, we're driving advanced technology back to the consumer. That's how the whole PC business started."

Jobs' passions have always been cool hardware and mouthwatering system software. But lately he is just as smitten by the Internet's potential to add a special dimension to the Macintosh user experience. "I actually think that our new Internet services are going to be the equal of OS X in making the Macintosh stand out," he says. "They are so hot."

Of the free iTools he unveiled in San Francisco, some are improved versions of services you can find elsewhere on the Web; a couple are truly novel. All are designed to take particular advantage of Macs equipped with OS 9, Apple's current operating system, and OS X when it hits the market. Says Eddie Cue, senior director of Internet services: "We're the first to really let the operating system play a key part in Internet computing. In some cases you won't even need your browser to take advantage of an iTool." Here's a quick rundown of Apple's first batch of iTools:

IDISK Probably the most intriguing new Apple service, iDisk provides every Mac user with 20 megabytes of free data-storage space on the company's servers (if you want more you'll have to pay for it). That gives the user a place to build online archives of digital photos, documents, and even digital film clips. iDisk also provides a "public folder" so that you can make stuff available for other Web surfers to see or download. Other Internet services offer free storage, but what makes iDisk unique is that, on the user's computer screen, it looks and behaves just like a disk drive inside the machine. All the user has to do is drag and drop files onto the iDisk icon, and the next time the Mac goes online, it automatically uploads the data to Apple's servers. The iDisk is key to several other iTools.

HOMEPAGE Websites like Homestead.com and Yahoo's GeoCities offer free home pages, but Apple promises that Mac owners will get their personal Website up and running much more quickly and easily if they go to www.apple.com. Apple will provide templates and plug-in features like guest books and visitor counters; anyone with an iDisk will be able to easily and instantly update their site with digital photos, sound bites, documents, or video clips.

KIDSAFE Many parents worry about X-rated, violent, or otherwise objectionable stuff their kids might come across while surfing what often seems the Wild Wild Web. Apple's solution is radically different from conventional kid-protection software, which tries to filter out what kids shouldn't see on the fly. By contrast, KidSafe, which is controlled directly by the Mac OS, specifies what sites kids can see. To accomplish this, Apple assembled an advisory board of teachers and librarians to certify that specific Web sites are "KidSafe." The board has already approved 50,000 sites; the goal is to add 10,000 each month. Parents also may add to their children's list of permissible destinations. Because KidSafe works in the operating system and not the browser, kids can't easily turn it off or get around it.

There are other iTools. Mac.com is a free e-mail service that can be used with any e-mail application or Internet browser; iCards is a free e-mail greeting-card service. Apple has also cooked up an Internet wayfinder called iReview. Unlike conventional search engines and portals, iReview offers quality ratings for thousands of Websites in a dozen or so categories, making it easier to figure out which are really worth visiting. The service provides two kinds of ratings: It employs a panel of Web experts to review and rank sites. (Any

Internet surfer can look at these.) And if you are a Mac user, iReview also invites you to weigh in with your own opinion and keeps a running score for each site. And, like all the iTool sites, iReview has a quality that reflects Apple's counterculture roots: It won't accept advertising. Apple's own branding on the sites is discreet--usually a small Apple logo at the top of each Web page.

Offering services exclusively for Mac users raises the possibility that Apple may start a dangerous trend: breaking up the Internet into exclusive, jealously guarded preserves. Jobs insists that can't happen: "The Internet has resisted all efforts to balkanize it. The point is that iMac users can get everything else on the Web that everyone else gets, plus all these new services." You may buy that or not, but there is no question that computing's No. 1 impresario is on a roll. Talk to him a little longer and it becomes clear that while Jobs has lots he's proud of--Apple's new OS X and Internet strategy, its colorful hardware, its financial turnaround--what really gets him cranked is the buff condition of Apple itself.

It's true: Jobs has marshaled the management team, the operational prowess, and the engineering skill that enable Apple to dream up and deliver genuinely innovative products and services quickly. Long known for its melodramatic, snafu-ridden, often downright dysfunctional culture, the company now routinely meets and even beats deadlines. Most of the surprises it springs on customers and investors are of the positive kind.

That's the real reason Jobs stripped the word 'interim' from his title. "I took a walk with my wife the other night and was telling her how, the way I see it, Apple offers me a base that I would be foolish to walk away from," he says. "Think about it. By the end of this year we'll have maybe $5 billion in the bank, the Macintosh will be thriving, hopefully our Internet services will be a big hit, and our engineering teams will be operating at the peak of their games. I'm always keeping my eyes open for the next big opportunity, but the way the world is now, it will take enormous resources, both in money and in engineering talent, to make it happen. I don't know what that next big thing might be, but I have a few ideas. Whatever it is, it will be much easier and better to use Apple as the springboard than to have to start from scratch." During that same walk, he told his wife he plans to stay with Apple at least four or five more years. In Internet time, that would be forever.

REPORTER ASSOCIATE Christine Y. Chen