(FORTUNE Magazine) – It seemed like deja vu all over again. Reverting to its Perils of Pauline mode, Apple Computer late last September fessed up that sales of its glossy, curvaceous personal computers were running off a cliff. CFO Fred Anderson, in a prepared statement, opaquely explained what had gone wrong: Apple had grossly overestimated demand for CEO Steve Jobs' pet product of that quarter--the pricey Power Macintosh G4 Cube; Apple, the erstwhile leading supplier of computers to schools, had also shot itself in the foot with a messy overhaul of its education sales operations right in the middle of the peak summer buying season; and, oh, yes, the global economy seemed to be weakening. In the same press release Jobs, the master of "insanely great" hyperbole, characterized the sudden reversal as a "speed bump." The next day Apple's market capitalization collapsed by half.

The December quarter showed how abruptly business had slumped. By the time the dust settled, revenues had plummeted 57% from the year-earlier period to a flat $1 billion, and the company was inhaling red ink. Worse, Apple, which Jobs & Co. in the previous three years had rehabilitated into a growing $8-billion-a-year concern, cautioned that revenues would probably dip to around $6 billion for all of fiscal 2001, ending next September. Some speed bump. That's about $1 billion shy of where revenues stood when Jobs marched back into the CEO's suite in 1997 and little better than half the $11.1 billion Apple rang up at its high-water mark in 1995. Moreover, Apple's solid revenue growth in 1999 and 2000 masked the fact that the company's share of the PC market had continued to erode--down to less than 4% in the U.S. and 3% worldwide. The truth about Jobs' speed bump: Apple, once a genuine power of PCdom, is shrinking again, threatening to become as inconsequential as Liechtenstein.

And that remains a fact, even after the most recent quarter, when Pauline rescued herself yet again from the edge of the abyss. Apple had predicted it would confine its losses to the December quarter but surprised even itself with the strength of its rebound into the black. For the March quarter the company posted net income of $40 million, or 11 cents a share (not counting some one-time gains), on revenues of $1.43 billion. The 26% drop in revenue from a year ago was markedly less than any Wall Streeter had expected, and the profit number, which represented an 82% drop, well, it was nearly 50% higher than the projections of the most bullish analysts. Apple stock, accordingly, sprang into the mid-20s for the first time in more than six months.

Through all this, through the ups and the downs, Jobs has remained unperturbed, as serene as any control freak can be. Sure, as CEO he cares about the numbers and wants Apple's stock to perform well. But deep down, this inveterate idealist thinks of Apple as a creative kinetic sculpture, not a mundane, conventional business. Apple is his sandbox. Life is good as long as Apple can provide him with the resources--both the cash and the engineering talent--to indulge his obsession to fashion and market the world's most stylish and clever computers. It's a high-tech twist on art for art's sake. And the reason we care is that his innovations filter into the rest of the PC world, eventually mutating their way into devices made by more mundane--and yes, more dominant--boxmakers like Compaq and Dell. "A lot of companies are great at making money, but there aren't that many that are great at opening new doors," Jobs says with his usual aplomb. "We're building the best personal computers that anyone has ever built."

Sadly, the rules of business still apply, even to what has become something of a boutique. As a public company, Apple simply must grow again. It needs an appreciating stock price to satisfy investors and to reward options-laden employees. And it must at the very least stabilize its market share in order to maintain the critical mass of users necessary to support its maverick computer architecture. To achieve those goals in the cutthroat PC marketplace, a fringe company like Apple can't afford many mistakes. So Jobs must run a very tight sandbox and draw the curtain on The Perils of Pauline.

That isn't easy--especially for Apple, with its storied history of self-sabotage and financial and operational flakiness. In the decade before Jobs returned, the company ran into a wall about every 18 months, generating piles of losses, inventory gluts, morale-sapping layoffs, knee-jerk restructurings, precipitous plunges in the value of its stock, and the ouster of three CEOs. Over the past ten years, a period during which the Nasdaq composite more than tripled, Apple's stock price has fallen by roughly a fifth.

But if you look closer, things are different now at One Infinite Loop in Cupertino, Calif. For one thing, before the December-quarter bloodbath, the Second Reign of Jobs had racked up 11 profitable quarters, earning Apple some long-lost credibility on Wall Street. Even after the stock's recent hammering--the share price fell from its all-time high of $75 last March into the low teens by year-end--Apple at its current price of around $25 is still above where it stood two years ago. Stocks of other PC makers like Dell and Gateway have lost at least 25% of their value. Meanwhile, Anderson's shrewd financial management has enabled Apple to increase cash reserves to $4.1 billion. (When Jobs took over, the company had just $280 million in the bank.)

The recent results confirm that Jobs is indeed running a tight sandbox. Starting in November, he and his team sharply curtailed computer production and shipments to dealers, clearing out the sales channel to make way for the fruits of an aggressive plan to revamp virtually the entire product line in 2001. Jobs followed that up with the January release of the Titanium PowerBook laptop, or TiBook, Apple's biggest hit since the iMac. Even though TiBook prices are rather high--$2,500 to $3,500--Apple shipped upwards of 115,000 in just two months, making it right now the fastest-selling laptop on the planet. And the TiBook is just one of the many products that Apple has rolled out since January, in defiance of what is shaping up to be the PC industry's nastiest slump in years. Apple has launched turbocharged versions of its top-of-the-line Power Macintosh tower computers, two off-beat psychedelic iMacs, and rewritable CD drives as standard equipment in most of its models; to top it all off, the company shipped the new OS X operating system--long-awaited industrial-strength software that should undergird Apple's computers well into the next decade. Apple has more hardware and software launches on the way, and rumors abound that it is ready to open its own retail stores later this year. Many competitors, in contrast, have put off new products and slashed prices, laid off thousands of workers, and otherwise pulled back.

Wall Street investment pros, who led the stampede away from Apple last fall, seem to approve of Jobs' innovate-or-die strategy. "As bad as the December numbers looked, and despite the mistakes of last year, the March quarter's results demonstrate that they are as well managed as any PC maker, if not the best," says Charles Wolf of Needham & Co., the dean of securities analysts following Apple. "That's good, because in order to grow again, they'll have to do just about everything right."

At age 46, after 25 years in the business, Jobs is quite naturally a more seasoned executive than the imperious wunderkind who co-founded Apple. He's more laid back too, not to mention the fact that his stubbly beard has turned mostly white. Other things never change. Most days he still wears his uniform of a black mock turtleneck and Levi's sans belt. And the guy who got his start in electronics as a "phone phreak" making "blue boxes" that enabled people to steal long-distance phone calls still has a little rebel in him: He has yet to install license plates on his two-year-old silver Mercedes, apparently as a way to dodge parking tickets. "It's a little game I play," he explains.

This older-and-mostly-wiser Jobs, who privately complains he doesn't get enough credit as a recruiter and manager of talent, has in fact assembled the best executive team Apple has ever had: CFO Anderson is a balance-sheet whiz; headhunters think Tim Cook, an IBM and Compaq alum who runs manufacturing, sales, and customer support, has all the earmarks of a big-time CEO; and hardware and software design chiefs Jon Rubinstein and Avie Tevanian have turned the black art of product development into a well-oiled process. Apple's board, once the laughingstock of Silicon Valley, is now probably its strongest, counting among its members Oracle CEO Larry Ellison, Gap CEO Mickey Drexler, Intuit Chairman Bill Campbell, Genentech CEO Art Levinson, and former IBM and Chrysler CFO Jerry York.

Even with all that help, Jobs still wields inordinate influence over minute details of product development, advertising, marketing, and occasionally supply-chain issues and manufacturing. He applies his highbrow production values to just about everything an Apple customer sees and touches, from print and TV ads to Macintosh software and hardware. He waxes rhapsodic when describing the "fit and finish" of the new TiBook, pointing out not just the titanium shell but also how Apple built in tiny magnets to hold the keyboard in place.

Jobs' obsession with style can cut both ways, however. He himself concedes--to a point--that much of Apple's trouble last fall can be traced directly to his misjudgments. Take the G4 Cube. For Jobs it represented the dream machine he had been trying to build ever since he was squeezed out of Apple in 1985. It resurrected several idiosyncratic Jobsian design features: Inside it was a marvel of engineering--as powerful as Apple's hottest tower computers yet one-sixth the size and absolutely silent, because, as with the original Mac, Steve insisted on throwing out the whirring cooling fan. On the outside it looked somewhat like a shrunken, acrylic version of the old Next Cube computer that flopped in the early 1990s. When paired with one of Apple's slick matching flat-panel displays, the G4 Cube looked more like a sculpture sitting on your desk than a PC. Even though the setup cost more than $3,000, Jobs was sure Apple could sell 200,000 of them per quarter. In reality, Apple managed to sell only about 100,000 in the September quarter, a pathetic 29,000 in the December quarter, and a moribund 12,000 in the March quarter.

Says Jobs: "We were hoping that there was a space between the consumer products we sell like the iMac and the professional products we sell. It turns out there isn't." The loaded word there is "hoping." Jobs is so intent on making spectacles of product introductions that he keeps new devices heavily cloaked--which means Apple marketers can't do much conventional research to test consumer response. Jobs' instincts for the market are pretty keen but not infallible. "In his eyes all his geese are swans," quips an associate.

As much of a control freak as he is with products and marketing, there are other, nitty-gritty aspects of Apple's business in which Jobs probably could be a little more engaged--such as sales and distribution strategy and the glad-handing needed to cultivate large corporate and education customers. A case in point was Apple's flubbed effort last summer to revamp its sales to schools.

Apple's education distribution needed attention; 2000 was the second consecutive year that Dell Computer outsold Apple in a segment Apple had dominated for two decades, a crucial market that accounts for nearly 40% of its sales. For years the company had relied on a loose affiliation of third-party resellers to move the hardware. Apple's then head of sales, Mitch Mandich, wanted to address the problem by bringing the sales force in-house. He had told Jobs back in January 2000 that he wanted to retire sometime during the year, but he hoped to see through the sales-force transition before he left. Despite protests from CFO Anderson and a couple of directors that the timing was all wrong, Jobs told Mandich to go ahead.

Recalls Jobs: "The problem was, we were very straightforward and told these third-party salespeople ahead of time that, 'Hey, in four months we're going to switch and you're going to be out of a job.' Obviously these folks did everything they could to sell as much as they could by June 30, when we let them go, and did absolutely nothing to build for sales in the July quarter. So when our new sales folks got there, they found there was no pipeline work at all; they had to start from scratch. And, duh, this was during the peak buying time for schools. It was just stupid on our part to do this then, and that was my decision. It was a train wreck, and it was totally my fault."

Mandich retired in December, with operations chief Tim Cook taking over his duties. Jobs strenuously denies Mandich was pushed aside. "Look, Mitch is a friend of mine, and he did great things for Apple. It was in the plan all along that he would retire. As for the education sales force, the concept he proposed was right, and we're doing a lot to fix it now."

In other ways, the domineering Jobs has been able to jolt the company awake. That's what happened last September, when it became apparent that a slowdown in the worldwide economy would compound Apple's problems. Jobs claims he saw signs of a potential recession last summer: "When Mickey Drexler joined the Apple board a couple of years ago, he invited me to join the Gap's board too. I said yes, because I wanted to learn more about retailing and consumer behavior. Well, the whole apparel industry started seeing a slowdown in spring 2000. That's a good barometer of consumer spending, and it started to concern me."

So when Apple's September numbers began to look shaky, recalls Apple director Bill Campbell, "Steve was the one who said we had to grab the situation by the throat and make an announcement. Some of us thought we should wait and see. But he insisted that things were going to get worse before they got better. He was right." That meant doing two things: Make sure Apple proceeded apace with its new-product plans in hopes of reinvigorating demand in 2001, and reconfigure the company so that even if business didn't pick up markedly, Apple could still be profitable. Says Anderson: "We knew right then that we had to bring the company down to one that is still moderately profitable at $6 billion in annual revenues rather than $8 billion."

There were two things Jobs didn't want to do to accomplish all that: Lay people off or deplete the company's hard-won cash reserves. It helped that Apple under Jobs had farmed out most of its manufacturing to subcontractors, so it could dial back production without putting its own people out of work. But it had to pay huge penalty fees for cancellation of key components that it had preordered when it forecast much higher production levels. Also, Apple had to pay rebates and otherwise help its distributors and retailers clear out what had become an 11-week inventory glut to make way for the new products. All that cost big bucks.

A look at the numbers shows what happened. Says Tim Cook: "We cut production by about a third, shipping only 650,000 units in the December quarter, which took down sales-channel inventory to 300,000, or about five weeks' worth. That means Apple itself only registered about $1 billion in sales when the actual retail sell-through was $1.6 billion." And Apple absorbed $260 million in one-time charges, about half in rebates and pricing actions to clear inventory and the other half in cancellation charges for unique parts, such as shells for the Cube and slot-load DVD drives. To offset those outlays, Anderson sold some of Apple's holdings in several Internet companies before the bottom really fell out of the market.

If the surprise about Steve Jobs, middle-aged manager, is that he can engineer that kind of disciplined belt-tightening, the wonder is that he hasn't lost the ability he had as an enfant terrible to inspire just that--wonder. With the December quarter behind him, Jobs turned to what he does best, which is to tantalize consumers with visions of just how magical a computer can still be. His chosen venues to introduce a fusillade of new products were Macworld trade shows--one in San Francisco and one in Japan, Apple's largest overseas market.

Jobs kicked off each show with a keynote that was an amalgam of standup routine, magic show, striptease, and pep rally. For all his showmanship, the message he wanted to deliver was subtle. On the one hand, he had to demonstrate that in a world of networks based on industrywide standards, Apple computers are powerful enough and, in effect, compatible enough to do everything Windows PCs can. On the other hand, he had to distinguish Macs to warrant their premium prices. As a subtext, he wanted to keep wooing loyal Apple users by stoking their snobbery, reminding them that they weren't mere worker bees twiddling spreadsheets, but intelligent people who like to have fun and be creative with their computers.

The resulting show-and-tell covered much more than the sexy TiBook and the kaleidoscopically colored iMacs. Jobs made much of technological breakthroughs by Apple's component suppliers that will help it keep pace in terms of performance with Windows PCs. Motorola, which makes the PowerPC microprocessor for the Mac, finally managed to goose the performance of its chips to come closer to matching the processing speed and power of Intel's Pentiums. And Japan's Pioneer gave Apple first crack at selling its SuperDrive recordable DVD drives, which enable users to edit and record professional-quality videos onto disks that can be played on a TV plugged into a standard DVD player.

Jobs also touted the Macintosh OS X operating system, which, released in March, beat a similar effort by Microsoft with its Windows XP, an overhauled version of its flagship product that it hopes to ship this fall. A descendant of both Unix and the system software that powered Jobs' old Next computers, OS X will be the foundation of many new Apple machines in the future.

But it's another kind of software that Jobs is relying on to make the Mac really stand out, namely multimedia applications software. One such product is iTunes, a snazzy program for managing digital music files and burning them onto CDs. To distinguish it from other music applications, iTunes is loaded with features: It quickly compresses songs from a conventional CD into MP3 files, lets amateur deejays easily organize playlists of tunes for burning back onto a CD, and taps into online streaming radio stations. (In a touch that may give aging baby-boomers flashbacks, it includes a trippy "visualize" feature that turns a Mac screen into a 3-D light show.) The other new application Jobs demonstrated, called iDVD, uses the SuperDrive to help you organize digital photos, music, and homemade movies for burning onto a recordable DVD disk.

Indeed, media applications like iTunes, iDVD, and iMovie video-editing software are the linchpins of Jobs' strategy--not the Internet or faster processors or even OS X. His ultimate goal is to make Macs a unique, vital hub in a networked world exploding with smart digital devices. That goal is not startlingly original--Microsoft's Bill Gates and Sony's Nobuyuki Idei espouse similar "visions." There are a couple of differences, however. For one, Jobs' vision is crisper: "All these new digital and networked consumer devices--digital camcorders, still cameras, MP3 music players, smart cell phones, and PDAs like the Palm--are creating what I would call a new digital lifestyle," he says. "But most of those devices in and of themselves don't make a whole solution. They aren't powerful enough and their user interfaces are too rudimentary to let you run elaborate applications or edit content; their screens aren't big enough; they don't have sufficient data storage. But a PC with the right software can complete the solution and make your digital toys much more useful and valuable. The digital lifestyle is as important to creative people as the Internet has been." There's one other difference: Unlike Sony or Microsoft's products, Apple's deliver much of what Jobs promises right out of the box.

At Macworld, and even to the Apple faithful who already use iTunes, iMovie, and the like, the digital lifestyle is a persuasive vision. But for years now, being cool and new and easy to use hasn't helped Apple lure any significant number of Windows PCs users. Doing a better job of reaching out may help explain Jobs' rumored next gambit--opening dozens of Apple retail stores around the U.S. Jobs won't talk about retailing plans, but something is afoot. The Internet is buzzing with reports that Apple has leased retail space in several cities, including a 6,500-square-foot site for a flagship in leafy, upscale Palo Alto.

Could Apple do any better with brand-specific computer stores than PC maker Gateway, which recently announced it was closing dozens of its 300-plus Gateway Country Stores? Analyst Charles Wolf, for one, thinks stores can help: "First, the retail-buying experience for Apple products hasn't been all that good. They just pulled out of Sears and have been disappointed by the efforts of the big electronics chain stores. Secondly, digital-lifestyle software like iMovie and iDVD is not bought but sold. You have to touch the customer to get across the proposition that it makes a difference to own a Mac rather than a Windows PC."

Besides, like so much else at Apple, the retailing strategy would creatively engage the boss. Given Jobs' enthusiasm for his reciprocal role as a Gap director, it's not hard to imagine him trying to revolutionize computer retailing; after all, he has played a huge role in transforming PC hardware and software design, not to mention computer advertising (remember "1984"?).

And when you pair the retailing concept with another Jobs vision, you get to something truly ambitious. It's no secret that Jobs has toyed with putting the Apple logo on other kinds of digital hardware. One of the first things he did upon returning to Apple three years ago was to offer to buy Palm from its then-parent, 3Com. (Palm instead went public.) "I still wish we had been able to buy it," he says. Okay, then, how about making a run at Handspring, a maker of Palm-compatible handheld computers? Or co-branding with a maker of portable MP3 players or digital cameras or camcorders? After all, wouldn't Jobs like to have Apple profit more broadly and directly from this new digital lifestyle? And wouldn't that strategy work best if Apple's own stores were stocked with a wide array of Apple-branded digital gadgets? "I don't know what you're talking about," Jobs replies, looking at the ceiling. Then he smiles and changes the subject.

So here's where Apple now stands: It is steward of the PC industry's flashiest computers and enjoys a fiercely loyal base of users. Management is topnotch, and Jobs has provided Apple's 8,500 employees with a clear strategy of marrying the Mac both with the Internet and with the digital multimedia gadgets that are all the rage. It has money in the bank that should sustain Apple's 2,000 hardware and software engineers with the resources they need to keep coming up with TiBooks and iApplications for the foreseeable future. Its OS X operating system software should make it easy and inviting for independent software developers to keep writing programs for the Mac. And Jobs is more than willing to try new ways of reaching potential customers. Sounds pretty good.

Yet Apple's market share is slight and growing slighter. The company will probably never be a major supplier of computers to business, other than in creative niches like graphic-design departments. And while Motorola seems to be doing better at making high-end microprocessors, there's still the perception of a significant performance gap between Macs and Windows PCs. Finally, there remains that specter of incompatibility with the rest of the PC world. The Internet, with its browser-oriented content and software, has kept Mac users in the loop with the rest of computerdom, but the latest Internet features often don't show up on Macs right away and sometimes never do.

Which raises the nagging question most people ask about Apple: Does a renegade PC maker with only a tiny sliver of the market have enough mass to flourish in any but the best of economic times? In his second reign, Jobs has been blessed: The economy grew, and so did Apple. But it didn't grow as fast as other computer makers, and last fall, when the economy softened and Apple made a few mistakes, the bottom literally fell out. That Apple found a way to be profitable again this past quarter is testimony to management, but it gives no inkling of how the company might grow again, or how it might regain market share.

Jobs won't address that issue directly. "Before we start writing Apple off as Liechtenstein, it's worth pointing out that the biggest company in our industry holds only a 16% market share," he says. "We're not talking Sony vs. Bang & Olufsen here. Besides, our competitors are selling completely fungible commodities, and we aren't." Jobs also loves to point out that Apple's market share is larger than that of either BMW or Mercedes-Benz in the auto marketplace, and those brands do just fine. Like BMW, he says, "Apple is big enough to afford to design and build what we want to build, and small enough to be nimble." Besides, he adds, "there's one really good thing about having only a 5% market share, and that is that we only have to convince five people out of the other 95 out there to try a Mac, and we'll double the size of our company. Believe me, we have plans to attempt that."

When Jobs talks that way, it's unclear whether he's just rationalizing or whether he knows something we don't. Apple may cast itself as personal computing's BMW, but the analogy breaks down if you stretch it out a few years. The PC industry shifts constantly, and its economics are even more brutal than those of carmaking. Companies that steadily lose market share can't lead the way--and that's a must for Apple, which can't simply go with the flow of Wintel technology. Eventually a BMW of the computer industry could slide into beautiful irrelevance.

And if Jobs really does have plans to jump-start growth, it's utterly unclear what they are. The retail stores, the increasing democratization of the Internet, the digital lifestyle--they're all factors that could work in Apple's favor, but the most they can do is temporarily stanch the market-share loss. Does he have a Handspring-like deal up his sleeve? Or how about another paradigm-shattering product that could open whole new markets for Apple, as the Apple II and Macintosh computers did? Eventually Apple will need something of that magnitude.

But no amount of wheedling can get Jobs to talk about what he might like Apple to bring to market, other than better and more beautiful PCs. In fact, as Jobs assesses the Apple he presides over today, he sounds downright conservative: "I'm actually just as proud of what Apple hasn't done as what it has done, because it hasn't squandered resources since I've been back. And that's really easy to do in our industry. Believe me, we take our share of risks, but you want to think things through carefully...The most important thing is to never get paralyzed by shooting for something totally original...Somebody once said, 'Best is the enemy of better.' I don't know if I really subscribe to that, but I would have to say that everything doesn't have to be like the Mac of 1984 to be really exciting and worth doing and wonderful..."

That sounds like the voice of maturity. Clearly, Jobs' brainchild has benefited from his more realistic brand of perfectionism since his return. He's not engaging in hyperbole when he says, "We're making the best personal computers that anyone has ever built." But now that the Internet boom has flamed out and now that the economy has stalled, it may be that a tidy sandbox is not enough; it may be time, in fact, for Jobs to start sculpting a new sandcastle.

FEEDBACK: bschlender@fortunemail.com

REPORTER ASSOCIATE Lenore Schiff