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The 280,000-square-foot studio in Playa Vista, Calif., has a curious history as a launching pad for big, risky ideas. In the 1940s, Howard Hughes used the huge wooden airplane hangar to construct the massive plywood H-4 Hercules seaplane—famously known as the Spruce Goose.

Two years ago, movie director James Cameron was in the Playa Vista studio at a crucial stage in his own big, risky project. He was viewing early footage from Avatar, the sci-fi epic he had been dreaming about since his early 20s. Cameron's studio partner, Twentieth Century Fox, had already committed to a budget of $200 million (the final cost is reportedly closer to $300 million) on what promised to be the most technologically advanced work of cinema ever undertaken. But as Cameron looked into his computer monitor, he knew something had gone terribly wrong.

The film—although "film" seems to be an anachronistic term for such a digitally intense production—takes place on a moon called Pandora, which circles a distant planet. Jake Sully, a former Marine paralyzed from the waist down during battle on Earth, has traveled to this lush, green world teeming with exotic, bioluminescent life to take part in the military's Avatar program. The human settlers are interested in mining Pandora's resources but can't breathe its toxic atmosphere, so to help explore the moon and meet with the native Na'vi who live there, Sully has his consciousness linked with a genetically engineered 9-foot-tall human–alien hybrid.

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Cameron wrote his first treatment for the movie in 1995 with the intention of pushing the boundaries of what was possible with cinematic digital effects. In his view, making Avatar would require blending live-action sequences and digitally captured performances in a three-dimensional, computer-generated world. Part action–adventure, part interstellar love story, the project was so ambitious that it took 10 more years before Cameron felt cinema technology had advanced to the point where Avatar was even possible.

The scene on Cameron's screen at Playa Vista—an important turning point in the movie's plot—showed Na'vi princess Neytiri, played by Zoë Saldana, as she first encounters Sully's Avatar in the jungles of Pandora. Everything in the forest is luminous. Glowing sprites float through Pandora's atmosphere, landing on Sully as Neytiri determines if he can be trusted. Playing Sully is Sam Worthington, an Australian actor whom Cameron had plucked from obscurity to play the movie's hero. Cameron was staring directly into Worthington's face—or, rather, he was looking into the face of a digitally rendered Worthington as a creature with blue skin and large yellow eyes—but he might as well have been staring into a Kabuki mask.

Digital Sleight of Hand

The onscreen rendering of Worthington was supposed to be a sort of digital sleight of hand—a human character inhabiting an alien body so that he could blend into an alien world, played by a human actor inhabiting a digital body in a digital world. To make the whole thing work, Worthington's performance, those subtle expressions that sell a character to the audience, had to come through the face of his Avatar. But after millions of dollars of research and development, the Avatar's face was not only lifeless, it was downright creepy. It "scared the crap out of me," Cameron recalls. "Horrible! It was dead, it was awful, it wasn't Sam. God, I thought. We've done everything right and this is what it looks like?

The reaction Cameron was feeling has a name. It's called the uncanny valley, and it's a problem for roboticists and animators alike. Audiences are especially sensitive to renderings of the human face, and the closer a digital creation gets to a photorealistic human, the higher expectations get. If you map human movements and expression to cute furry creatures that dance and sing like people, then audiences willingly suspend disbelief and go along with it. (Think of the penguins in Happy Feet.) But if you try to give a digital character a humanoid face, anything short of perfection can be uncanny—thus the term. Sometimes audience unease is to a character's advantage; in The Lord of the Rings the creature Gollum was supposed to be unsettling. But Cameron was looking for empathy, and in the first footage, that's not what he got.

Gonzo Effects

Why is the computer-generated face of a blue, cat-eyed human–alien hybrid so important? Well, for one thing, lots of money is riding on it. But so, to an extent, is James Cameron's stature as an unstoppable force in Hollywood. Cameron has built up enormous fame and power based on his reputation as a technical innovator—pushing the science and technology of modelmaking, digital animation and camera engineering.

But Cameron is perhaps even more famous as the industry's biggest risk-taker, which might have made him a lot of enemies if his risks hadn't been so spectacularly rewarded in the past. In 1997, the film Titanic taught Hollywood a powerful lesson in Cameronomics: The director's unquenchable thirst for authenticity and technological perfection required deep-sea exploratory filming, expensive scale models and pioneering computer graphics that ballooned the film's budget to $200 million. This upped the ante for everyone involved and frightened the heck out of the studio bean counters, but the bet paid off—Titanic went on to make $1.8 billion and win 11 Academy Awards.

A unique hybrid of scientist, explorer, inventor and artist, Cameron has made testing the limits of what is possible part of his standard operating procedure. He dreams almost impossibly big, and then invents ways to bring those dreams into reality. The technology of moviemaking is a personal mission to him, inextricably linked with the art. Each new film is an opportunity to advance the science of cinema, and if Avatar succeeds, it will change the way movies are captured, edited and even acted.

Filmmakers, especially those with a technical bent, admire Cameron for "his willingness to incorporate new technologies in his films without waiting for them to be perfected," says Bruce Davis, the executive director of the Academy of Motion Picture Arts and Sciences. It adds to the risky nature of Cameron's projects, but his storytelling has reaped enormous benefits. There's a term in Hollywood for Cameron's style of directing, Davis says: "They call this ‘building the parachute on the way down.'"

But repeatedly pulling off these feats of derring-do requires both the drive of an ambitious egomaniac and an engineer's plodding patience. "You have to eat pressure for breakfast if you are going to do this job," Cameron says. "On the one hand, pressure is a good thing. It makes you think about what you're doing, your audience. You're not making a personal statement, like a novel. But you can't make a movie for everybody—that's the kiss of death. You have to make it for yourself."

Gonzo Effects

Cameron's dual-sided personality has roots in his upbringing—the brainy sci-fi geek from Chippewa, Ontario, was raised by a painter mother and an engineer father. "It was always a parallel push between art and technology," he says. "My approach to filmmaking was always very technical. I started off imagining not that I would be a director, but a special-effects practitioner."

Unable to afford to go to film school in Los Angeles, Cameron supported himself as a truck driver and studied visual effects on weekends at the University of Southern California library, photocopying dissertations on optical printing and the sensitometry of film stocks. "This is not bull," he says. "I gave myself a great course on film FX for the cost of the copying."

Cameron eventually landed a job on the effects crew of Roger Corman's low-budget 1980 film Battle Beyond the Stars, but he didn't tell anyone that he was an autodidact with no practical experience. When he was exposed to the reality of film production, it was very different from what he had imagined, he recalls: "It was totally gonzo problem solving. What do you do when Plans A, B and C have all crashed and burned by 9 am? That was my start. It wasn't as a creative filmmaker—it was as a tech dude."

Over the years, Cameron's budgets have increased to become the biggest in the business, and digital technology has changed the realm of the possible in Hollywood, but Cameron is still very much the gonzo engineer. He helped found the special-effects company Digital Domain in the early 1990s, and he surrounds himself with Hollywood inventors such as Vince Pace, who developed special underwater lighting for Cameron's 1989 undersea sci-fi thriller, The Abyss.

Pace also worked with Cameron on Ghosts of the Abyss, a 2003 undersea 3D documentary that explored the wreck of the Titanic. For that movie, Pace and Cameron designed a unique hi-def 3D camera system that fused two Sony HDC-F950 HD cameras 2½ inches apart to mimic the stereoscopic separation of human eyes. The Fusion Camera System has since been used for 3D movies such as Journey to the Center of the Earth and the upcoming Tron Legacy, and at sporting events such as the 2007 NBA finals.

The 3D experience is at the heart of Avatar. (In fact, some suspect that Cameron cannily delayed the movie's release to wait for more theaters to install 3D screens—there will be more than 3000 for the launch.) Stereoscopic moviemaking has historically been the novelty act of cinema. But Cameron sees 3D as a subtler experience.

To film the live-action sequences of Avatar, he used a modified version of the Fusion camera. The new 3D camera creates an augmented-reality view for Cameron as he shoots, sensing its position on a motion-capture stage, then integrating the live actors into CG environments on the viewfinder. "It's a unique way of shooting stereo movies," says visual-effects supervisor Stephen Rosenbaum. "Cameron uses it to look into the environment; it's not about beating people over the head with visual spectacle."

This immersive 3D brings a heightened believability to Avatar's live-action sequences—gradually bringing viewers deeper into the exotic world of Pandora. In an early scene, Sully looks out the window as he flies over the giant trees and waterfalls of the jungle moon, and the depth afforded by the 3D perspective gives the planet mass and scale, making it as dizzyingly real for viewers as it is for him.

For more Cameron and Avatar's neat techniques, read the full story in Popular Mechanics.