In October 2003, as the computer world buzzed about what cool new gadget he would introduce next, Apple CEO Steve Jobs—then presiding over the most dramatic corporate turnaround in the history of Silicon Valley—found himself confronting a life-and-death decision.

During a routine abdominal scan, doctors had discovered a tumor growing in his pancreas. While a diagnosis of pancreatic cancer is often tantamount to a swiftly executed death sentence, a biopsy revealed that Jobs had a rare—and treatable—form of the disease. If the tumor were surgically removed, Jobs’ prognosis would be promising: The vast majority of those who underwent the operation survived at least ten years.

 

Yet to the horror of the tiny circle of intimates in whom he’d confided, Jobs was considering not having the surgery at all. A Buddhist and vegetarian, the Apple CEO was skeptical of mainstream medicine. Jobs decided to employ alternative methods to treat his pancreatic cancer, hoping to avoid the operation through a special diet—a course of action that hasn’t been disclosed until now.

For nine months Jobs pursued this approach, as Apple’s AAPL board of directors and executive team secretly agonized over the situation—and whether the company needed to disclose anything about its CEO’s health to investors. Jobs, after all, was widely viewed as Apple’s irreplaceable leader, personally responsible for everything from the creation of the iPod to the selection of the chef in the company cafeteria. News of his illness, especially with an uncertain outcome, would surely send the company’s stock reeling. The board decided to say nothing, after seeking advice on its obligations from two outside lawyers, who agreed it could remain silent.

In the end, Jobs had the surgery, on Saturday, July 31, 2004, at Stanford University Medical Center in Palo Alto, near his home. The revelation of his brush with death remained—like everything involving Jobs and Apple—a tightly controlled affair. In fact, nary a word got out until Jobs’ tumor had been removed. The next day, in an upbeat e-mail to employees later released to the press, he announced that he had faced a life-threatening illness and was “cured.” Jobs assured everyone that he’d be back on the job in September. When trading resumed a day after the announcement, Apple shares fell just 2.4%.

Apple entertained no further questions about Jobs’ health, citing the CEO’s need for privacy. No one learned just how long Jobs had been sick—or that he had contemplated not having the surgery at all. “It was very traumatic for all of us,” recalls one of those in whom Jobs confided, speaking on condition of anonymity because of the topic’s sensitivity. “We all really care about Steve, and it was a serious risk for the company as well. It was a very emotional and very difficult time. This was one page in the adventure.”

At this year's MacWorld Expo, Jobs' keynote speech drew the usual packed house (left). Jobs introduced the Macbook Air and then mingled with the faithful. At this year’s MacWorld Expo, Jobs’ keynote speech drew the usual packed house (left). Jobs introduced the Macbook Air and then mingled with the faithful.Photographs by Robert Yager

The Steve Jobs adventure: By now it’s one of the most remarkable stories in business. When Jobs returned in 1997 to Apple—then facing its own near-death experience—he arrived with a tarnished legend. He was, of course, the charismatic boy wonder who at age 21 had co-founded Apple with Steve Wozniak in his parents’ garage back in 1976. He was worth $200 million by 25, made the cover of Time magazine at 26, and was thrown out of the company at age 30, in 1985.

What he’s accomplished in the past decade has not just restored Jobs to the Silicon Valley pantheon but elevated him to the status of superstar. On the brink of bankruptcy when he returned, Apple now has a market value of $108 billion—more than Merck MRK , McDonald’s MCD , or Goldman Sachs GS ; $1,000 invested in Apple shares on the day Jobs took over is worth about $36,000 today. And it isn’t just Apple and its investors that have benefited from Jobs’ executive skill. Pixar, where he served simultaneously as CEO, has come to dominate the animation business, churning out megahits like Finding Nemo and The Incredibles that prompted Disney DIS to buy the company in 2006 for $7.5 billion. (Jobs now owns 7.3% of Disney, worth $4.6 billion, in addition to Apple stock worth $682 million.)

No less an authority than Jack Welch has called Jobs “the most successful CEO today.” Jobs, at age 53, has even become a global cultural guru, shaping what entertainment we watch, how we listen to music, and what sort of objects we use to work and play. He has changed the game for entire industries.

Jobs is also among the most controversial figures in business. He oozes smug superiority, lacing his public comments with ridicule of Apple’s rivals, which he casts as mediocre, evil, and—worst of all—lacking taste. No CEO is more willful, or more brazen, at making his own rules, in ways both good and bad. And no CEO is more personally identified with—and controlling of—the day-to-day affairs of his business. Even now, Jobs views himself less as a mogul than as an artist, Apple’s creator-in-chief. He has listed himself as “co-inventor” on 103 separate Apple patents, everything from the user interface for the iPod to the support system for the glass staircase used in Apple’s dazzling retail stores.

Jobs’ product introductions are semiannual events, complete with packed houses, breathless blog dispatches, and celebrity appearances—two hours of marketing performance art. Who else could have the nation panting in anticipation of a cellphone? After watching Jobs unveil the iPhone, Alan Kay, a personal computer pioneer who has worked with him, put it this way: “Steve understands desire.”

Jobs’ personal abuses are also legend: He parks his Mercedes in handicapped spaces, periodically reduces subordinates to tears, and fires employees in angry tantrums. Yet many of his top deputies at Apple have worked with him for years, and even some of those who have departed say that although it’s often brutal and Jobs hogs the credit, they’ve never done better work.

How Jobs pulls all this off—how this bundle of conflicting behaviors can coexist, to spectacular effect, in a single human being—remains a puzzle, even though more than a dozen books have been written about him. Jobs is notoriously secretive and controlling when it comes to his relationship with the press, and he tries to stifle stories that haven’t received his blessing with threats and cajolery.

This story is one of them. While Jobs agreed to be interviewed by my colleague Betsy Morris on the subject of Apple’s selection as America’s Most Admired Company, he refused to comment for this story, which had been in the works for months. Dozens of people who work or have worked with Jobs did agree to extensive interviews, most insisting on not being named (even if praising him) for fear of incurring his anger.

History, of course, is littered with tales of combustible geniuses. What’s astounding is how well Jobs has performed atop a large public company—by its nature a collaborative enterprise. Pondering this issue, Stanford management science professor Robert Sutton discussed Jobs in his bestselling 2007 book, The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn’t. “As soon as people heard I was writing a book on assholes, they would come up to me and start telling a Steve Jobs story,” says Sutton. “The degree to which people in Silicon Valley are afraid of Jobs is unbelievable. He made people feel terrible; he made people cry. But he was almost always right, and even when he was wrong, it was so creative it was still amazing.” Says Palo Alto venture capitalist Jean-Louis Gasse, a former Apple executive who once worked with Jobs: “Democracies don’t make great products. You need a competent tyrant.”

Fair enough. But it is also important to understand the ways in which Jobs’ attempts to manipulate his world pose risks for Apple—and thus its investors. They are evident in his difficult partnerships with music and television companies, which chafe at his insistence on setting uniform prices for their songs and videos on iTunes; in the real story of his battle with cancer; and in his deployment of stock options at Apple and Pixar, which exposed both companies to backdating scandals.

Jobs himself judges the world in binary terms. Products, in his view, are “insanely great” or “shit.” One is facing death from cancer or “cured.” Subordinates are geniuses or “bozos,” indispensable or no longer relevant. People in his orbit regularly flip, at a second’s notice, from one category to another, in what early Apple colleagues came to call his “hero-shithead roller coaster.”

Jobs’ own story is far more complex. And in the 26 years that Fortune has been ranking America’s Most Admired Companies, never has the corporation at the head of the list so closely resembled a one-man show. Last year Piper Jaffray analyst Gene Munster opined that if Jobs were forced out as a result of the backdating scandal, Apple’s shares would drop 20% overnight. At the company’s current market cap, that would make him Apple’s $22 billion man. “Steve Jobs running the company from jail would be better for the stock price than Steve Jobs not being CEO,” muses Sutton.

Jobs is hardly likely to be forced out, as we shall see. On the contrary, he’s likely to continue taking Apple—and its customers, competitors, and investors—on a wild ride to places they couldn’t have imagined.

It may be instructive, then, to consider what drives the Steve Jobs adventure.

Jobs’confidential phone list from the mid-1980s at Apple Computer, included in more than 500 boxes of company documents archived at Stanford, reveals the rarefied air in which he operated while still in his 20s. There are private listings for Joan Baez and Diane Keaton (both onetime romantic interests), the home phone for California Governor Jerry Brown, and the White House line for Richard Darman, one of President Reagan’s top aides. By then, Jobs was already one of the first true business celebrities.

Jobs’ phone list also reflected the complex crosscurrents of his personal life. There was Kobun Chino, the Zen Buddhist monk who was his spiritual guru and would later preside at his wedding; Clara and Paul Jobs, the working-class California couple who had adopted and raised him; Joanne Simpson, his biological mother, whom he’d tracked down as an adult with the help of a private detective; and his first serious girlfriend, Chrisann Brennan, the mother of Lisa, his out-of-wedlock daughter.

Jobs conceives of himself as the company's creator-in-chief. His artistic sensibility extends to everything Apple does, including its memorable advertising campaigns. Jobs conceives of himself as the company’s creator-in-chief. His artistic sensibility extends to everything Apple does, including its memorable advertising campaigns.Courtesy of Gaslight Ad Archives

There was no listing, however, for Abdulfattah “John” Jandali, his Syrian biological father—a man Jobs has never discussed publicly. Jobs had been born to Jandali and Simpson, a pair of 23-year-old unwed University of Wisconsin graduate students, in 1955. Just months after giving their baby up for adoption, the two married, then had another child, whom they kept: Mona Simpson, who grew up to become a critically acclaimed novelist and never knew her famous brother existed until she was an adult.

A charming, promising academic, Jandali later abandoned his wife and 4-year-old daughter, moving from job to job as a political science professor before leaving academe. Now 76, he works as food and beverage director at the Boomtown Hotel & Casino near Reno. Mona Simpson’s novel, The Lost Father, is based on her quest to find him.

When Jobs had his own illegitimate child, also at the age of 23, he too struggled with his responsibilities. For two years, though already wealthy, he denied paternity while Lisa’s mother went on welfare. At one point Jobs even swore in a signed court document that he couldn’t be Lisa’s father because he was “sterile and infertile, and as a result thereof, did not have the physical capacity to procreate a child.” He later acknowledged paternity of Lisa, married Laurene Powell, a Stanford MBA, and fathered three more children. Lisa Brennan-Jobs, now 29, graduated from Harvard and is a writer.

At Apple during his 20s, Jobs served as board chairman and head of the Macintosh division. But he was never given the CEO job. Adult supervision—in the form of professional managers—was recruited to run the fast-growing business, notably Pepsi president John Sculley. “Back then he was uncontrollable,” venture capitalist Arthur Rock, an early Apple board member, told Institutional Investor last year. “He got ideas in his head, and the hell with what anybody else wanted to do. Being a founder of the company, he went off and did them regardless of whether it ended up being good for the company.”

To be sure, many of the gifts that would drive Apple’s resurrection over the past decade were already evident in the 1980s: the marketing showmanship, the inspirational summons to “put a dent in the universe,” the siren call to talent. Engineer Bob Belleville recalls Jobs recruiting him from Xerox in 1982 with the words: “I hear you’re great, but everything you’ve done so far is crap. Come work for me.” Jobs famously seduced Sculley to Apple by challenging him: “Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?”

But after two years of working closely with Jobs, Sculley came to liken him to Russian revolutionary Leon Trotsky. In Odyssey, his memoir of this period, he called Jobs “a zealot, his vision so pure that he couldn’t accommodate that vision to the imperfections of the world.” In 1985, Sculley orchestrated Jobs’ firing after a power struggle. And in his memoir, Sculley dismissed Jobs’ vision for the company. “Apple was supposed to become a wonderful consumer products company,” Sculley wrote. “This was a lunatic plan. High tech could not be designed and sold as a consumer product.” Of course, Sculley was dead wrong.

During the ensuing 12 “wilderness years,” as they have come to be known, Jobs started Next Computing and bought what became Pixar from George Lucas. Next was a business failure, burning through hundreds of millions in investors’ money. But by the time Apple bought Next in 1997, setting in motion Jobs’ return, he obviously had developed the capacity to become a CEO for the ages.

Apple was on the ropes. Right away, Jobs dug into the mucky details of the business, creating a sense of urgency, radically reducing Apple’s product line, and accelerating a wholesale cost cutting that would shrink the company back to profitability. Jobs had become a far better leader, less of a go-to-hell aesthete who cared only about making beautiful objects. Now he was a go-to-hell aesthete who cared about making beautiful objects that made money. No engineering spec, no design flourish was too small for his scrutiny. “It wasn’t like he was some mythical creative genius and leaving the rest of the company to itself,” says retired DuPont chairman Ed Woolard, a former director who was instrumental in bringing Jobs back. “It may have been true in the past. It was not true when he came back. He clearly was deeply involved in all the practical operations of Apple.”

That’s not to suggest that he ever became easy to work for. Jobs is even known to yell at company directors. Asked how she dealt with her boss, former Apple PR chief Laurence Clavere once told a colleague that before heading into a meeting with Jobs, she embraced the mindset of a bullfighter entering the ring: “I pretend I’m already dead.” (Clavere says today that she doesn’t recall making the comparison but notes that “working with Steve is incredibly challenging, incredibly interesting. It was also sometimes incredibly difficult.”) Jobs’ break-the-rules attitude extends to refusing to put a license plate on his Mercedes. “It’s a little game I play,” he explained to Fortune in 2001.

Often Jobs would suddenly “flip,” taking an idea that he’d mocked (maybe your idea) and embracing it passionately—and as his own—without ever acknowledging that his view had changed. “He has this ability to change his mind and completely forget his old opinion about something,” says a former close colleague who asked not to be named. “It’s weird. He can say, ‘I love white; white is the best.’ And then three months later say, ‘Black is the best; white is not the best.’ He doesn’t live with his mistake. It evaporates.” Jobs would rationalize it all by simply explaining, “We’re doing what’s right today.”

Despite all that, Jobs was able to put together a world-class team when he got back to Apple. He assembled an inner circle dominated by his brain trust from Next, which included his two top product guys: Avie Tevanian, who ran software, and Jon Rubinstein, who presided over the hardware team. Phil Schiller, already at Apple, was promoted to head of product marketing, while operations chief Tim Cook was recruited from Compaq. Jobs hired Ron Johnson from Target TGT to launch Apple’s retail stores.

The group also included two executives who would later bear the brunt of Apple’s backdating scandal. The first was general counsel Nancy Heinen, who had also come over from Next. Dominique Trempont, Next’s former CFO, recalls that when Jobs was first considering whether to hire Heinen there, he asked to see some of the contracts she had written so that he could evaluate the “aesthetics” of her work. The second executive was the lone holdover from the previous regime—Fred Anderson, chief financial officer and the company’s de facto No. 2. Anderson was widely credited with keeping Apple alive long enough to give Jobs time to work his magic. A calm, square-faced, retired Air Force officer, Anderson dealt with liquidity crises, restructurings, Wall Street—and the always volatile CEO. One former board member described Anderson’s role as “tantrum controller.”

To keep all this talent, Jobs took a typical Silicon Valley step: He eliminated most cash bonuses from executive compensation and started handing out lots more stock options instead. And here, as elsewhere, Jobs played by his own rules.

020128000052.JPGJobs with key members of his brain trust in 2002. From left, Design Chief Jonathan Ive, Software Guru Avie Tevanian, Hardware Chief Jon Rubinstein and Applications Czar Sina Tamaddon.Photograph by Michael O’Neill

Among the first things Jobs did in 1997 was to reprice underwater stock options for all Apple employees, twice in six months. Apple also made a big grant in a way that looked like “springloading,” issuing options one day before the announcement of a big deal with Microsoft sent Apple shares soaring 33%.

Repricing and springloading are controversial (they give insiders an edge that shareholders don’t enjoy), but they are not illegal. Neither is it illegal to grant “in-the-money” options with a below-market price as long as the action is disclosed and accounted for. What is illegal, though, is backdating—the picking of a date in the past, when a stock’s value was lower, to assign the exercise price of options—without those adjustments. Backdating invariably involves lying to investors, creating false documentation, and avoiding the earnings hit required for giving employees in-the-money grants.

In 2006, after the Wall Street Journal ran its Pulitzer Prize-winning series about backdated stock options, Apple (which hadn’t been named in the coverage) scrambled to assess whether it had a problem. The company appointed a special board committee to investigate, which concluded that it did. The company discovered “irregularities” with 6,428 grants between 1997 and 2001—roughly one in six that Apple issued during that period. (New disclosure requirements after that time caused backdating to dry up.) The company also found no instances of backdating before Jobs took over as CEO. Apple was forced to restate its earnings, taking a pretax charge for unreported compensation expenses of $105 million.

Disney, which bought Pixar in 2006, also investigated and found a backdating problem there during Jobs’ time as CEO. As the Wall Street Journal first reported, key Pixar executives received options grants priced at the stock’s yearly low in 1997, 1998, 2000, and 2003. A Merrill Lynch analyst put the odds of that happening by chance at one in 112 million. (Disney declined to comment on backdating.) But the events at the two companies don’t quite fit the classic backdating template, which has cost dozens of executives their jobs. For one thing, Jobs didn’t personally benefit from backdated options—at least not directly. For another, in a climate where many were rushing to judgment, Jobs enjoyed the benefit of the doubt from protective boards.

Was Jobs himself involved in backdating stock options? At Apple, the answer is yes: In an SEC filing, Apple acknowledged that Jobs “was aware [of] or recommended the selection of some favorable grant dates.” But Apple’s investigation concluded that Jobs’ involvement didn’t amount to misconduct because he “was unaware of the accounting implications.” As for Pixar, Disney issued a four-sentence summary of its own internal inquiry, concluding that “while options were backdated at Pixar” before its sale to Disney, “no one currently associated with the Company engaged in any intentional or deliberate acts of misconduct.”

The SEC and the Justice Department are still investigating backdating at both Apple and Pixar. The SEC last April announced that it would take no action against Apple, citing the company’s “swift, extensive, and extraordinary cooperation,” including its “prompt self-reporting, an independent internal investigation, the sharing of the results of that investigation with the government, and the implementation of new controls designed to prevent the recurrence of fraudulent conduct.”

Former Genreal Counsel Nancy Heinen, left and former CEO Fred Anderson, far right, have been charged in the options backdating scandal. Seated with Jobs and Anderson are Retail Chief Ron Johnson, left, and COO Tim CookPhotograph by Russ Curtis; Win McNamee—Reuters/Landov

At the same time, the SEC filed charges against two former members of Jobs’ inner circle—general counsel Heinen and CFO Anderson. Heinen, accused of orchestrating two backdated grants and falsifying documentation for them, has pleaded innocent to fraud claims and is preparing for trial. Anderson has settled a lesser claim of negligence involving one grant, paying $3.64 million in disgorgement and fines, while remaining free to serve as an officer or director of public companies (he chairs the audit committee at eBay).

Anderson, in an extraordinary public statement he issued after settling his case with the SEC, disputed Apple’s exoneration of Jobs. Through his lawyer, he said he alerted Jobs to the accounting implications even as the CEO was in the process of picking a retroactive date for the grant to his top lieutenants. He also said Jobs assured him that the award had been properly approved by Apple’s board.

The story of that grant opens in late 2000, a panicky time for Apple. Silicon Valley was reeling from the dot-com crash. Apple had missed its quarterly numbers, and after a big run-up in the company’s stock (multiplying the company’s market cap from $2 billion to $16 billion), Apple’s market value had melted back down to $5 billion. Jobs feared that his inner circle was ripe for poaching.

In October 2000, Jobs started talking to the directors about giving the executive team a big grant to place them in golden handcuffs. At the time—for 15 months, in fact—Apple’s board had no compensation committee providing oversight over the CEO’s grant practices, an extremely unusual situation. (Almost 99% of public companies at the time had compensation committees, according to a study by the research firm ISS, a unit of RiskMetrics.)

In late 2000, Jobs told at least one of his top lieutenants to expect the options to be priced on Jan. 2, 2001. But at the end of January, Jobs was still consulting with Heinen about the grant. The stock had been climbing that month, which meant that options would have a higher exercise price than if they had been granted on Jan. 2.

“Steve Jobs running the company from jail would be better for the stock price than Steve Jobs not being CEO,” says Stanford professor Robert Sutton.

Apple’s board has drawn criticism for years. For 15 months during the period when options were backdated, it didn’t even have a compensation committee.

On Jan. 30, 2001, according to the SEC’s suit, Heinen e-mailed Jobs with a list of possible retroactive dates for the grant; Anderson got the list too. The goal was to get the executive team a price almost as low as the close on Jan. 2. (Heinen thought that using the original date might draw public criticism for springloading because Apple stock had jumped just a few days later on product announcements by Jobs at Macworld.)

Jobs picked Jan. 17 for the executive team grant, a date when Apple shares still had a nice low closing price. According to the SEC suit, Heinen instructed a staff attorney, Wendy Howell, to prepare a “unanimous written consent” (UWC) for the signature of Apple board members, retroactively approving the options with “an effective date of Jan. 17, 2001, priced at [$8.41].” (All share prices and numbers of options in this story are adjusted for subsequent splits in Apple stock.)

The board members didn’t fax back the signed papers for the executive-team stock-options grant until Feb. 7—which, in the SEC’s view, made that the proper grant date. By then, Apple stock was up 23% over the Jan. 17 grant price. This meant each of the six executives receiving options got a paper windfall of either $1.6 million or $3.9 million, depending on the size of their grant. According to the SEC, it also meant Apple had engaged in illegal backdating, awarding in-the-money options without disclosing it and inflating company earnings by failing to record the $18.9 million expense on its financial statements.

Apple directors, like the company, refused to make any public comment for this story. But in response to shareholder lawsuits, Apple’s lawyers argued that the directors routinely signed UWCs giving perfunctory approval to option grants they’d effectively delegated to management. Similarly, the lawyers argued, Jobs had no reason to think there was a problem, because his CFO and general counsel had signed off on the grant.

As a condition of taking over in 1997, Jobs had fired most of Apple’s board, installing a new one with just six members. Only two directors were holdovers: Edgar Woolard, the retired DuPont chairman, and Gareth Chang, senior vice president of Hughes Electronics. The others were Oracle CEO Larry Ellison, a close friend of Jobs; Intuit CEO Bill Campbell, who had worked at Apple back in the 1980s and was Jobs’ neighbor; Jerry York, a former CFO of IBM and Chrysler, who later became CEO of Micro Warehouse, a computer reseller that did extensive business with Apple; and Jobs himself.

Apple’s board has drawn criticism from governance experts for years. In his 2002 book, Take On the Street, former SEC chairman Arthur Levitt complained that Apple’s governing body simply failed to meet “good governance litmus tests.” Levitt wrote, “It’s plain to me that Apple’s board is not designed to act independently of the CEO.” A self-described “Apple junkie,” Levitt had actually been invited by Jobs to become an Apple director in February 2001—only to be “disinvited” after returning from a visit to Silicon Valley. “Arthur, I don’t think you’d be happy on our board and I think it best if we not invite you,” Levitt recounts Jobs telling him in a phone call. Levitt says Jobs explained that he had come to this conclusion after reading a Levitt speech on corporate governance. “Frankly, I think some of the issues you raised, while appropriate for some companies, really don’t apply to Apple’s culture,” Jobs told him. Levitt says he was “floored.”

No question, Apple’s culture at this level was out of the ordinary. Jobs accepted a salary of $1 a year. In January 2000, after the stock had soared and the company’s survival seemed assured, Apple announced that it was buying Jobs a jet—not a corporate jet for him to use, mind you, but his own Gulfstream V. Total cost to the company, including Jobs’ taxes on the gift: $88 million. While the plane has long been cast as a board’s creative gesture of gratitude, Woolard says Jobs is the one who thought of it. “He brought up the idea: ‘What I really need is a plane where I can take my family to Hawaii on vacation, go to the East Coast.’ I said, ‘All right.'” Larry Ellison declared, “With what he’s done, we ought to give him five airplanes!” Jobs also got a mega-grant of 40 million options—almost 6% of the company, priced at $21.80 a share. Half would vest immediately, the rest within 18 months. That was unusual, but the board reasoned that it should make up for the 30 months when Jobs had worked for a buck a year.

Jobs’ own options would lead to the second SEC problem for Apple, though only Heinen would face charges for it. The issue arose after the dot-com crash sent Apple’s stock price back below $10, and the Apple board, eager to keep Jobs happy, voted on Aug. 29, 2001, to give him a fresh batch of 15 million options at $8.92. But Jobs—sensitive to press criticism he’d been receiving for his 2000 mega-grant, which was underwater—refused to accept the new award unless the board canceled bis previous one. Accounting complications that made it impractical to do this—as well as wrangling over the vesting schedule—dragged the matter out until December.

Brian AchJobs with his wife, Laurene Powell, at New York’s Museum of Modern Art for a Pixar Exhibit.Photograph by Brian Ach — Wireimage

That created a fresh problem: How to price Jobs’ award? The stock had climbed since the original board vote back in August, and using that date wouldn’t have withstood scrutiny because Apple was now in a new fiscal year. After Heinen reviewed a spreadsheet showing closing prices for a three-month period with Arthur Levinson, a member of Apple’s reconstituted comp committee and the CEO of Genentech, the grant was dated on Oct. 19.

The grant’s strike price ($9.15) wouldn’t be as good as it was back in August, but it was better than the $10.51 the stock hit on Dec. 18—which, according to the SEC, was the proper price for the grant. Levinson informed the board about the arrangements in an e-mail, noting that he had instructed Heinen to make sure Apple was “conforming to all legal requirements/guidelines.”

It wasn’t. The SEC claims that Heinen ordered Howell to dummy up the necessary paperwork to make it look like the full board approved the grant at a special meeting on Oct. 19—a meeting that never took place. Heinen denies this, blaming her subordinate for creating the phony documents.

All this gave Jobs a paper backdating windfall of about $20 million, according to the SEC. But he never cashed in the options, and in March 2003, after Apple’s share price kept dropping, Jobs traded his entire stake of 55 million underwater options for the certainty often million restricted shares. In perfect hindsight, given Apple’s soaring stock price since that time, he lost a fortune on the deal. Jobs’ restricted shares would sell today for about $1.2 billion before taxes. His options, had he kept them, would yield about $5.8 billion (pretax).

Pixar’s board did have a compensation committee, but it never met. In fact, the entire Pixar board—also handpicked by Jobs—typically met only about three times a year. Jobs personally negotiated options awards with key executives.

The biggest such grant at issue—two million options—had gone to Toy Story director John Lasseter, Pixar’s star creative executive, as part of the ten-year contract he had negotiated with Jobs in 2001. Jobs never received Pixar options himself, but he owned more than half the company, and locking up Lasseter led Disney to buy Pixar in 2006, in an enormously lucrative deal for Jobs that made him Disney’s largest shareholder.

Joe Graziano, the former Apple CFO who served on the Pixar board from 1995 until the Disney sale, acknowledges that Lasseter was “the single biggest asset at Pixar.” He blames any backdating problems on “an administrative glitch,” delaying the completion of paperwork authorizing grants that Jobs had promised. “It was normal for him to come into the board and say, ‘This is what we want to do for compensation. We got these two guys. We want to give them these shares and lock them up.’ And the board said, ‘Go for it.’ But unfortunately the documents get signed months later.”

That, of course, means the grants were issued improperly. And “glitches” don’t explain how grants to the company’s most valuable players could be issued at the lowest annual stock price in four separate years.

Pixar, by the time of the backdating disclosures, was no longer a public company but a Disney subsidiary and had no board of its own. At Apple, however, shareholder activists have expressed dismay with the way the company has dealt with the matter. Jobs did issue a brief statement that promised remedial measures and said, “I apologize to Apple’s shareholders and employees for these problems, which happened on my watch.” But beyond its initial press release and a limited elaboration in a subsequent SEC filing, Apple explained nothing about how the backdating had occurred and demanded repayment from no one.

In a detailed report to Apple investors, ISS criticized the board’s lack of candor, stating, “Steve Jobs has been instrumental in creating significant shareholder value; however, a cult-like devotion to any CEO can be a huge downside risk to shareholders.” Glass Lewis, another shareholder advisory firm, described the special committee findings absolving Jobs as “an attempt to whitewash the backdating scandal.”

At Apple’s annual shareholder meeting last May in Cupertino, the two firms recommended that shareholders withhold their votes for reelecting most of the outside Apple directors. For three of the directors, more than 30% of shareholders did. By the rubber-stamp standards of such proceedings, a 30% vote against directors of a company on a tear—the iPhone was about to go on sale, the stock was headed to the moon—is noteworthy.

When the CEO of a publicly traded corporation is diagnosed with a serious illness, what is his obligation to inform shareholders? There is no clear answer.

The SEC requires that any public company disclose material information to investors so that they can include it in their calculation of whether to buy or sell a stock. But there are no specific guidelines governing health issues, and the SEC has never taken action against a company in this area. It is generally accepted that a company should disclose the diagnosis of a CEO’s fatal illness, while it need not say anything about a problem like a broken arm. Everything in between is problematic—and the tension between privacy and shareholder interests is even greater when the CEO is so powerfully identified with the company’s fortunes.

Different companies have handled the problem in different ways. When Intel CEO Andy Grove was diagnosed with prostate cancer in 1995, he made no formal disclosure—Grove chose to write about it instead in a 1996 article for Fortune. On the other hand, Berkshire Hathaway’s Warren Buffett—one of the few Fortune 500 CEOs considered as essential to his company as Jobs is to Apple—issued a press release in June 2000 days after he learned he would need surgery to remove benign polyps along with part of his colon, even though the procedure was considered routine.

The story of how Jobs managed his illness has not previously been disclosed. This account comes from several sources with personal knowledge of the situation; all insisted on not being identified.

Jobs’ tumor was discovered in October 2003. He had been getting abdominal scans periodically because of a history of intestinal problems. His doctors noticed a growth that turned out to be an islet cell neuroendocrine tumor—a rare and operable form of pancreatic cancer. With surgery, his long-term prognosis would be good.

But Jobs sought instead to treat his tumor with a special diet while launching a lengthy exploration of alternative approaches. “It’s safe to say he was hoping to find a solution that would avoid surgery,” says one person familiar with the situation. “I don’t know if he truly believed that was possible. The odd thing is, for us what seemed like an alternative type of thing, for him is normal. It’s not out of the ordinary for Steve.”

Apple director Levinson, who has a Ph.D. in biochemistry, monitored the situation for the board. He and another director, Bill Campbell, tried to persuade Jobs to have the surgery. “There was genuine concern on the part of several board members that he may not have been doing the best thing for his health,” says one insider. “But Steve is Steve. He can be pretty stubborn.”

By the standards of medical science, it was an open-and-shut case: There was no serious alternative to surgery. “Surgery is the only treatment modality that can result in cure,” Dr. Jeffrey Norton, chief of surgical oncology at Stanford, wrote in a 2006 medical journal article about this kind of pancreatic cancer. It was Norton, one of the foremost experts in the field, who eventually operated on the Apple CEO, Fortune is told. (He declined to comment.)

Jobs. One of the first true business celebrities, appeared on Fortune's cover no fewer than ten times before the current issue. He first made the cover of Time Magazine at the age of 26.Jobs. One of the first true business celebrities, appeared on Fortune’s cover no fewer than ten times before the current issue. He first made the cover of Time Magazine at the age of 26.Courtesy of Fortune

Dr. Roderich Schwarz, chairman of surgical oncology at the University of Texas Southwestern Medical Center in Dallas, who has performed the procedure more than 150 times (but who was not involved in Jobs’ case), says that waiting more than a few weeks with this diagnosis “makes no sense because you don’t know what the potential for growth or spread is.” Schwarz says he knows of no evidence that diet can be helpful. “But the patient decides. If they believe an herbal diet can do miracles, they have to make the decision. Every once in a while you have somebody who decides something you wish they wouldn’t.”

The surgery Jobs faced, known as the “Whipple procedure,” is brutal and complex. It lasts six hours or more and involves removing parts of the pancreas, bile duct, and intestines, then reconstructing the digestive tract. But it’s relatively safe: Mortality from the surgery is less than 5% at specialized medical centers with surgeons who have performed it many times.

Jobs put the procedure off for more than nine months, raising the thorny issue of disclosure. He told the board, and the board decided to say nothing. Palo Alto attorney Larry Sonsini, the company’s longtime outside counsel, advised the directors that the CEO’s right to privacy trumped any disclosure requirement as long as he could continue to perform his duties. A second outside lawyer agreed.

So Apple conducted business as usual, disclosing nothing and letting the tiny circle of insiders who knew about the situation continue to trade Apple shares.

The board of Pixar, the other public company where Jobs served as CEO, remained in the dark until his announcement, according to director Graziano. “All I know is I didn’t [know],” Graziano told Fortune.

In the end Jobs had the surgery, at the end of July in 2004. Sources tell Fortune that he decided to proceed with the operation earlier that month, after a scan revealed growth in the tumor. By all accounts, the surgery was a success.

It is impossible to know whether Jobs’ decision to delay the procedure has increased his risk of a cancer recurrence in any way. In a newspaper interview, Norton estimated that 80% to 90% of patients with Jobs’ condition survived at least ten years, while cautioning that predictions are difficult because the number of cases is so small.

Jobs himself has never volunteered much on the matter—except once. In a June 2005 commencement address he gave at Stanford University, which was published in Fortune, he described the sequence of events this way: “About a year ago, I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas…. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months…. Later that evening I had a biopsy where they stuck an endoscope down my throat, through my stomach into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope, the doctor started crying, because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery, and, thankfully, I am fine now.”

It was a great speech, simple and moving—though it clearly left the false impression that Jobs had learned of his illness in mid-2004 and immediately proceeded to surgery, when in fact he had learned of it in October 2003.

Ralph Whitworth, an activist institutional investor, served as chairman of Waste Management when its CEO was stricken with a fatal brain tumor. He says the issue is “a very tricky one,” but Apple should have disclosed Jobs’ illness promptly after assessing his situation—whether legally required to or not. “Good governance has nothing to do with following the minimum standards,” says Whitworth. “Executives should announce before they’re going into major surgery. Yes, your stock will go down. [But] how would the shareholders have felt if they said he died on the operating table? ”

Former SEC chairman Levitt agrees. “It’s a difficult personal decision,” says Levitt. “But clearly if a CEO is going in for major surgery, that’s a disclosable item.”

In the end, the combination of a happy outcome and remarkable secrecy about just how long Apple had known Jobs was sick minimized any public criticism—or impact on its shares. “Steve came through this okay, and Apple never suffered because of it,” says one insider. “Had it come out differently—thank God it didn’t—there could have been a lot of people second-guessing Apple had they known what happened.”

Last year the founder of the Stanford Social Innovation Review called Apple one of “America’s Least Philanthropic Companies.” Jobs had terminated all of Apple’s long-standing corporate philanthropy programs within weeks after returning to Apple in 1997, citing the need to cut costs until profitability rebounded. But the programs have never been restored.

Unlike Bill Gates—the tech world’s other towering figure—Jobs has not shown much inclination to hand over the reins of his company to create a different kind of personal legacy. While his wife is deeply involved in an array of charitable projects, Jobs’ only serious foray into personal philanthropy was short-lived. In January 1987, after launching Next, he also, without fanfare or public notice, incorporated the Steven P. Jobs Foundation. “He was very interested in food and health issues and vegetarianism,” recalls Mark Vermilion, the community affairs executive Jobs hired to run it. Vermilion persuaded Jobs to focus on “social entrepreneurship” instead. But the Jobs foundation never did much of anything, besides hiring famed graphic designer Paul Rand to design its logo. (Explains Vermilion: “He wanted a logo worthy of his expectations.”) Jobs shut down the foundation after less than 15 months.

Jobs has never revealed any plans to leave Apple, though after news of his pancreatic cancer was disclosed, the board insisted it had privately discussed a succession plan. It is hard to imagine a tougher act to follow. Indeed, Jobs is a tough act for even Jobs to follow.

Already in 2008, Jobs has unveiled his usual array of sleek new products, highlighted by the MacBook Air, billed as “the world’s thinnest notebook.” The company’s most recent quarterly results were its best ever: Apple reported $1.58 billion in profit, $18 billion in the bank, and zero debt. Despite signs of a recession, the company projected second-quarter earnings growth of 29%.

But this time, all that just wasn’t amazing enough. Since the beginning of 2008, Apple shares have tumbled by 40% from their all-time high in late December (in a down market, to be sure). Disappointing the masses is a risk you take when your stock is priced for bedazzlement.

And even for Apple, conjuring the magic won’t get any easier. It’s hard for a big company to keep growing rapidly, especially if the economy heads into a downturn. Cellphone makers—and even Google—are cranking out new products to compete with the iPhone. The iPod market shows signs of being saturated. Amazon’s new digital-music store is gunning for iTunes, aided by record companies eager to escape Jobs’ insistence on dictating the price for their content. It’s the same reason NBC Universal took its shows off iTunes. Then there’s the possibility of additional fallout from the SEC and Justice Department investigations at Apple and Pixar.

As usual, Apple’s fortunes will rest not just on external factors, but on the shoulders of its CEO, who has pushed his company both to astounding heights and to the edge of significant risk. It is Steve Jobs himself who is the wonder—as well as the worry.

A version of this article appears in the March 2008 issue of Fortune magazine.

Jobs’ Journey

Apple: The Beginning

1976 Apple Computer is founded. Apple I is introduced.

1979 Jobs and a team of engineers visit Xerox PARC, where they see a demo of mouse and graphical user interface.

1980 Apple goes public in biggest IPO since Ford Motor in 1956. Jobs’ 15% stake is worth more than $200 million.

1983 The Apple Lisa is released, inspired by Xerox’s user interface.

1984 The Macintosh is introduced. The “1984” commercial airs during the Super Bowl.

Out of a Job. What’s Next?

1985 Jobs is ousted from Apple. Launches Next, pays Paul Rand $100,000 to design logo.

1986 Jobs buys Pixar from George Lucas for $10 million.

1988 The Next Cube is released. Price: $6,500.

1993 After years of sluggish sales, Jobs lays off half the employees of Next and repositions it as a software company.

1995 Pixar releases Toy Story, the first full-length computer-animated film, to rave reviews. + Pixar goes public one week later; Jobs’ 80% stake is worth $585 million.

1996 Apple announces acquisition of Next for $430 million, posts $816 million loss for the year.

1997 Jobs becomes interim CEO of Apple, replaces board, launches “Think Different” campaign.

Jobs Returns to Apple

1998 Apple returns to profitability. The iMac debuts, becomes the fastest-selling Macintosh ever. + Pixar releases A Bug’s Life.

iTunes and Beyond

2000 Jobs becomes permanent CEO of Apple. + Board gives Jobs a Gulf stream V jet and 40 million options.

2001 Big year for introductions: first Apple stores, the iPod, iTunes, and the OS X operating system.

Apple grants Jobs another 15 million options. + Pixar releases Monsters Inc.

2003 Jobs swaps underwater options for restricted shares. + Jobs is diagnosed with pancreatic cancer; board decides not to disclose it. + Pixar releases Finding Nemo to record box office.

2004 Jobs undergoes cancer surgery, discloses both cancer and “cure” the next day.

+ The Incredibles is released.

Apple Ascendant

2005 iPod Nano is released. Huge hit.

2006 Pixar is sold to Disney, making Jobs its largest shareholder, with a stake now worth $4.6 billion. + Cars is released. + Apple board announces backdating investigation, informs SEC. + Board confirms backdating, but clears Jobs and management. Company announces $105 million restatement. + Disney launches internal investigation of backdating at Pixar.

2007 iPhone is introduced. + Apple stock hits a record $199.83 a share. + SEC files suit against Fred Anderson and Nancy Heinen. SEC clears company. Anderson settles with SEC, issues statement challenging Jobs’ account. + Disney board acknowledges backdating but clears Pixar management.

2008 Apple stock drops 40% in two months in a down market.