James Cameron is striding across a vast soundstage in Playa Vista, an oceanside district of Los Angeles. This enormous, near-windowless building used to be part of Hughes Aircraft, turning out parts for fighter planes during World War II. Next door is the hangar where Howard Hughes built his “Spruce Goose,” the gargantuan flying boat that took so long to construct that the war was over before the craft made its one and only flight. Now it’s March 2008, 10 years almost to the day since the Titanic director took the stage at the Oscars, shook a gold statuette over his head, and notoriously declared himself you-know-what. Like Hughes, Cameron has been toiling away for years on an epic project some feared would never reach completion: a $250 million spectacle called Avatar.

Even by Hollywood standards, Avatar is moviemaking on a colossal scale. A sci-fi fantasy about a paraplegic ex-Marine who goes on a virtual quest to another planet, it merges performance-capture (a souped-up version of motion-capture) with live action shot in 3-D using cameras invented by Cameron. If all goes according to plan, on December 18 Avatar will dissolve the boundary between audience and screen, reality and illusion — and change the way we watch movies forever. “Every film Jim has made has soared past the envelope into areas nobody even imagined,” says Jim Gianopulos, cochair of Fox, the studio behind both Titanic and Avatar. “It’s not enough for him to tell a story that has never been told. He has to show it in a way that has never been seen.”

Today, Cameron and his crew are prepping the soundstage to record performance-capture data for a scene with the film’s two stars, Sam Worthington (last seen in Terminator Salvation) and Zoe Saldana (Uhura in J.J. Abrams’ Star Trek). “Come on over here,” he calls out with a wave. “I’ll show you what this is.” Wearing worn jeans and a New Zealand Stunt Guild T-shirt, Cameron holds up a small flat-panel screen tricked out with multiple handles and knobs. This is his virtual camera, he explains, a custom-designed viewing system that enables him to see not what’s in front of him (a darkened soundstage) but the lush, computer-generated world that will appear in the film.

Several feet away, Worthington, who plays soldier-turned-humanoid-Avatar Jake Sully, and Saldana, his alien love interest Neytiri, are standing around in black bodysuits dotted with roughly 80 metallic spots. Infrared cameras are strung across the ceiling to track these reflective markers, capturing the movements of the actors’ bodies. These same cameras register markers on the frame of Cameron’s screen as the director moves it about.