It started with a sketch: an old man with hunched shoulders and a green face fixed in angry scowl. His beady eyes squinted sideways, and his left hand gripped an enormous bunch of coloured balloons covered in slogans like "love" and "joy". Look closely and you could see that he was holding them tight, the way people hold onto their dreams.

Today, five years after he was first scrawled on a scrap of paper by the film director Pete Docter, that old man has acquired both a name (Carl Fredrickson) and a pair of square spectacles. From humble beginnings, in felt-tip and coloured crayon, he's also emerged as one of the most lucrative men in Hollywood: star of a $400m cinematic phenomenon called Up.

Heard of it? You should have: Up is this year's smash hit from Pixar, a computer animation studio doing to 21st century animation what Disney did to 20th. It is the firm's 10th feature film, and its 10th straight box office sensation. It follows in the footsteps of such instant classics as Toy Story, A Bug's Life, Monsters Inc, Finding Nemo, and The Incredibles.

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Pixar makes cartoons children devour and adults adore. To critics, it can do no wrong. Between them, its films have grossed more than $5bn. Not one has made less than $300m. Hardly anyone, in the history of film-making, has enjoyed such a stupendous run of form. In 15 years, it has racked up 30 Oscar nominations and six wins.

Let's set this in context. "You have to go back to Disney in the Thirties and Forties, when they lifted audiences out of the Great Depression with Snow White, Bambi, Pinocchio and Dumbo, in quick succession, to get anything close," noted the esteemed film critic Tom Shone earlier this year. "This is living history, right under our noses. Your grandkids will ask about this."

Pixar never sits still. When the firm takes risks, they pay off in spades. The studio's last offering was 2008's Wall-E, a quirky love story about a garbage-eating robot. The film's protagonist communicated in bleeps and clicks. Its script contained barely a word of dialogue. On paper, it should never have worked. Instead, it made $521m, and won an Oscar for Best Animation.

So now we have Up. You'll have read plenty about this film because, in plain English, it's been around the block. Up was chosen to open the Cannes Film Festival in May, and has since wowed 53 different countries, grossing $415m. This makes it the third-most lucrative movie released this year, after Transformers and Harry Potter – both of which were sequels. It is, in other words, 2009's most successful original film.

On 9 October, this all-conquering animation finally touches down in Britain (we get things last thanks to a bizarre piece of scheduling by distributors). At last, the nation will be introduced to Carl Fredrickson. He is an elderly widower with a square head and a round nose described as "ripe for honking" who one day decides to bid farewell to attaching several thousand helium balloons to his house, and float off to South America.

The film is part swashbuckling action adventure, part poignant meditation on the meaning of happiness, love and loss. Critics, needless to say, adore it. They have guffawed at its subplots and raved about its supporting characters: an overweight boy scout, a pack of talking dogs, and a villainous adventurer voiced by Christopher Plummer. They have called it tender, thrilling, and very, very funny.

"Rarely has any film, let alone an animated one powered by the logic of dream and fantasy, been able to move so successfully and so effortlessly through so many different kinds of cinematic territory," said Kenneth Turan of the Los Angeles Times. "Up flies high, borne aloft by a sense of creative flight and a flawlessly-realised love story," agreed The New York Times.

Rotten Tomatoes, the aggregation website that ranks films according to their reviews, gave the film 97 per cent, an unthinkably high score which, in the list of all-time movie greats, ranks it alongside Casablanca and Gone with the Wind. The USA Today review was still more effusive, claiming: "The film's exquisite emotional depth puts it in a category of its own."

Last month, with the cheers of the popular media still ringing in their ears, Pixar was given the Lifetime Achievement Award at the Venice Film Festival, an honour previously bestowed on 40 decades' worth of screen legends, both in front and behind camera, ranging from Tim Burton and David Lynch, to Charlie Chaplin, Woody Allen and Clint Eastwood.

It was the first time the award has been given to an institution rather than an individual, and elevated Pixar firmly into the establishment. In 15 short years, since they arrived on the scene with Toy Story, the quirky animators have become the toast of world cinema. Next year, they will unveil Toy Story 3, which advance tracking puts on course to be the first billion-dollar animation in history.

Want to know the secret of their success? You'll have to go to San Francisco to find out.

***

A large Anglepoise lamp sits outside the front door of Pixar Studios. It is 12ft tall and is called Luxo. It, or rather he, is the company's mascot. A bouncy, animated version jollifies the logo that appears at the start of each of the studio's films. He signifies a cheeky mixture of playfulness and enlightenment.

Luxo welcomes visitors to a large brick and glass building that is roughly a 20-minute limousine ride across the bay from San Francisco airport. He shares the cobblestones with a large model of a yellow ball with a blue stripe and a red star on it. This ball is another of the company's quirky trademarks; it makes cameo appearances in most of their films.

Step inside company HQ and you're in a large foyer, full of life-size sculptures of characters from the films Monsters Inc and The Incredibles. The building was once a Del Monte cannery. Today, it contains a cappuccino bar, restaurants, and a shop selling the noisy Hawaiian shirts that Pixar's young, frighteningly-happy staff wear to work.

Strictly speaking, Pixar Studios are in Oakland. Spiritually, their home is more Silicon Valley. Dotted around the office are pool, ping-pong and air hockey tables. Most of them are in use, throughout the working day. Grown men whizz down corridors on skateboards and scooters. Ask a guide why, and he'll shrug his shoulders and simply say: "Because they're creative."

What they mean is that Pixar is a professional playground for happy, inventive people. The firm's PR people boast that the senior production staff on Up have been on the payroll for over a decade. They are the best in the world at what they do, and deserve the perks that go with it – from ping-pong and company yoga days to subsidised fettuccine.

"It's weirdly, un-intuitively unusual to have a studio that's run by artists," says Up director Pete Docter, when I ask how this rubs off on Pixar films. "Most Hollywood studios are run by businessmen. The problem with that is that if you start out on any film with the goal of simply making money, the chances are that you're not going to make a great movie."

Pixar approaches film-making from the opposite direction. They take talented people, allow them to enjoy themselves, and let that childish abandon rub off on films. Their work environment out-Googles even Google. As a result it nurtures bold ideas that might, in a normal studio environment, end up on the cutting room floor.

"A lot of time people look at our movies and think, 'What the heck, that doesn't work out on my numbers chart.' With Up they might say, 'It won't appeal to kids, they hate old people.' Or, 'You can't have an action adventure film that stars a 78-year-old man.' But from the top, Pixar is different," adds Docter, who himself has the appearance of a child who has never quite grown up.

The company's top man – Toy Story creator John Lasseter – judges the worth of potential projects by a simple yardstick. "He'll just ask 'do I feel anything about this story? Do I care enough?' says Docter. "He always tells us that our primary concern should be to make something we'd be proud to show to our family. Beyond that, he gives us total freedom."

This creative freedom is blisteringly evident in Up's unlikely protagonist. Carl Frederickson is a grump in the slapstick tradition of Punch and Judy, or Laurel and Hardy. He pokes things with a walking stick, grunts, grimaces and stews over irritations. His life story, rendered through an almost-silent (and technically flawless) 10-minute sequence at the start of the film, perfectly captures the human condition. If you are so inclined, it may move you to tears.

Carl was created when Docter, formerly the director of Monsters Inc, was told to sit in a room at Pixar HQ with co-director Bob Petersen, and come up with an entire film. They sat, and sketched, and talked and sketched, until one day, Docter produced his original sketch of balloon-wielding old man. Something about him fascinated them. It was, if you like, a "Eureka" moment.

From that image, the kernel of a plot was formed. After months of brainstorming, it became a multi-faceted script. Without giving too much away, Up's plot premise runs as follows: one day, upset by the imminent loss of his home to rapacious property developers, Carl decides to attach 15,000 helium balloons to his house, and float off to Peru.

Things are complicated by the emergence of Russell, a portly young boy scout who stows away on his bizarre journey. The old man and the young boy's relationship provides the film's dramatic fulcrum. Through the child, Carl rediscovers how to love, learns to cope with loss and comes to the eventual conclusion that life's a journey, and perhaps we should be sunny and optimistic about it.

This, then, is a film of contrast: an action movie that is multilayered, and sensitive. A comedy with jokes that are both highbrow and lowbrow. Like the playful lamp that is Pixar's mascot, it enlightens and entertains. In keeping with the studio's remit, it has soul. Or, as Up's scooter-borne creators like to say amid the ping-pong tables and cappuccino bars where they work, it is a film that manages to make people care.

***

For all the talk of artistic freedom, that old saying about success being 1 per cent inspiration and 99 per cent perspiration still runs true at Pixar, where there is a steely professionalism behind their creativity. It took four years, hundreds of people and a vast budget to complete the process of turning Docter's hand-drawn sketch into a slick, 96-minute animated film.

Touring the building, it's fascinating to see how a team of resident artists and sculptors sketched out every character in the film, first in pen and ink, then clay models, refining them at every turn. The standard of draughtsmanship is as good as you'd find at any gallery. Indeed, Pixar sketches recently graced New York's Museum of Modern Art.

When it comes to creating the moving, talking characters and background in the finished film, Pixar go to extraordinary lengths to achieve realism. Production staff spent days with dog behaviour experts to work out how a pack of talking dogs in the film ought to interact; how junior members of the group would move, communicate and carry themselves in front of an alpha male.

Another time, a live ostrich was brought into the office on the back of a trailer, so they could work out how to develop a 15ft-tall, multicoloured Peruvian bird called Kevin. Up's designers used the real-life animal to establish how Kevin should walk and how sunlight would reflect on his feathers.

No expense was spared. At one point, to get inspiration for Up's Amazonian landscapes, a group of staff spent a week in Colombia. In another move of which the studio is particularly proud, a team of computer programmers spent months making sure that the 15,000 balloons that carry Carl's house aloft – each with their own original string – behave and interact believably.

Like all Pixar films, which these days cost roughly $150m to make, Up was produced according to a rough timetable. The first two or three years were very low tech: designing characters, finalising a script, and working out how sets will look. Then can they began the painstaking process of actually realising the film. Typically, a four-second clip took a single animator a fortnight to produce.

All the while, Docter, Petersen and other production staff were refining their story. A one-page plot outline became a 20-page document and then a massive script. Subplots were added and removed. "We workshop from beginning to bitter end, and we throw a lot out," says Bob Petersen. "It's not easy to do. It can get expensive."

Every Pixar film director (seven have projects in development at any one time) is encouraged to screen a rough cut of his work for other staff – and sometimes outside audiences, such as employees' families – every couple of months. They tweak and revisit their film according to the reaction. They are tireless in pursuit of perfection.

It wasn't ever thus. Pixar was founded by George Lucas, the Star Wars creator, in the late 1970s. It began as a technology firm working in the relatively-new field of computerised animation by building computers and writing software that could enhance mainstream films. After a few years, Lucas – who is at heart a film-maker rather than a tech entrepreneur – sold the firm to Steve Jobs of Apple fame.

Though Pixar was responsible for many important products that were sold to Hollywood studios, the firm consistently lost money. Its turnaround came in the early 1990s, when it decided to start making feature films. At the first attempt, in 1995, it struck gold with Toy Story: a £350m smash hit that, as the first computer-generated animation to achieve mainstream success, changed the course of cinema history.

Today, though predominately into film-making, Pixar retains an interest in computer development. The firm's headquarters are divided in two, with one side dedicated to technology (it contains a computer the size of a tennis court called the "render farm" where films are printed) and the other left to the people who come up with ideas for films. "People go between them on rollerskates and scooters," says Jonas Rivera, Up's producer. "I like to say that it's where Silicon Valley meets Hollywood."

Computer-generated animation requires film-makers to design a virtual set, and virtual characters, who are then controlled by animators who manipulate their movement via intricate spreadsheets. Directors control what appears on screen by a process similar to "real" film-making: they use "virtual" cameras to sit, and shout "cut" to flick between them. Voices are not added until the very end.

In Up, the normal creative process was further complicated. The film is one of the first major new products to be widely released in 3D. Around 100 UK cinemas are now kitted out with suitable projecting equipment. To studios, 3D is a worthwhile investment. Tickets to 3D cinemas command a premium (you will also be able to see Up in traditional D) and their films are almost impossible to pirate. But Pixar, with typical creative flourish, used the technology to enhance Up's narrative, creating a "depth script" that varied the levels of contrast according to the storyline.

"Carl, our main character, goes on an emotional journey," says Bob Whitehill, the man responsible. "When he's a boy, his life is very rich and full, so 3D in that section is pretty deep and dimensional. When he loses his wife, and becomes confined, his life is claustrophobic, so we slam the depth down, and make everything very shallow. Then when he lifts off to go on the adventure, things deepen again." In the future, Whitehill says, every Pixar film will be made in three dimensions (indeed next year, they are re-releasing Toy Story one and two in the format). That pioneering mentality – and the effect it has on other major studios, who are scrambling to release their own 3D titles ensures that right now, the location where Silicon Valley meets Hollywood is an exciting place to be.

***

Three years ago, a thunderbolt struck Pixar's dream factory. The firm was purchased by Disney, for the considerable sum of $7.4bn – a deal that was jaw-dropping not just for its size but also for the compelling corporate narrative that lay behind it.

For most of the previous decade, Pixar's success had served to highlight the myriad failures of its rival organisation. Indeed, many of the firm's brightest stars, including its chief John Lasseter, had actually defected from Disney in the 1980s, partly in protest at the stiff-collared culture there.

Lasseter, and many of his peers, had been disillusioned by the Mouse House's reluctance to embrace computer animation. They had been deadened by creative interference from Disney executives, who (in the eyes of animators) would bastardise carefully-crafted creative projects with "mandatory notes," – notorious memos that insist scenes are cut, jokes rewritten, or edgy plotlines reimagined.

For Pixar to therefore suddenly join its longstanding bête noir was widely regarded as a sellout. While shareholders counted their pay-cheques, concern about the future reached the very highest level of the firm. Many pundits confidently predicted that the move would kill the magic.

"I'll be totally honest with you: when it happened we were all very concerned," recalls Rivera. "All the staff were called into the foyer of this very building. When the deal was announced, there was a collective groan. We were looking at each other, asking, 'What just happened? Is it over?'"

So far, their fears seem unfounded. Disney has so far acted like a benign parent. Rather than enforce its culture on its new division, it did the exact opposite: installing Lasseter as chief creative officer at the new mega-studio, with a remit to Pixar-ise the Disney establishment. His first move after taking office was to make all executive notes to film-makers "advisory" rather than mandatory.

"Today, we still have one rule: make the films you want to," adds Rivera. "You don't have to have a reason or permission from above. A movie like Up is a great example: no one ever questioned us. All they talked about, the only notes Disney gave us, were story notes they weren't clear on. Aside from that, their only job has been to handle marketing and distribution."

Since joining the bigger firm, Pixar have been able to increase their output, stepping up production to a film a year. In future, they intend to alternate new projects with sequels of old hits. 2010's offering will be Toy Story 3; 2011 will see Newt, a comedy about two reptiles who must mate in order to save their species, but can't stand each other.

But one nagging doubt remains. Pixar became the firm it is today because it was the polar opposite of Disney, spiritually as well as in corporate structure. Pixar's best films offer a leftish take on life. Toy Story taught kids not to be seduced by every new gimmick that comes along. Wall-E warned the world not to throw out so much crap.

Up offers its own critique of 21st century capitalism: Fredricksen's journey begins when he is evicted from his home by property developers who want to flatten it in favour of another block of yuppie flats. The developers have tiny eyes and mouths, and no noses. They are almost faceless.

But now Pixar is now part a vast corporate machine. Toys based on its characters are sold at Disney stores. Rides based on its films jollify Disneyland. Will this matter? Could it lose the liberal bearings that made it gear. The jury remains out. But so long as gems like Up continue to soar out of Pixar's polished HQ, we can probably give them the benefit of the doubt.

"UP" is released on 9 October

Pixar’s top ten: What the critics said

Toy Story (1995)

"The sweetest and savviest film of the year ... Children will enjoy a new take on the irresistible idea of toys coming to life. Adults will marvel at a witty script and utterly brilliant anthropomorphism." The New York Times

A Bug's Life (1998)

"It's impossible not to be utterly blown away by Pixar's animation." Salon

Toy Story 2 (1999)

"The kind of exhilarating cinema experience that leaves you gasping in admiration." Empire

Monsters Inc (2001)

"The Pixar animators keep grown-ups as riveted as the kids with visual marvels that dazzle and delight." Rolling Stone

Finding Nemo (2003)

"The madly inventive folks at Pixar may just be the most dependable storytellers now working in Hollywood ... A visual marvel, every frame packed to the gills with clever details." Newsweek

The Incredibles (2004)

"Pixar ... is the übermensch among studios. The sophistication of its digital know-how, the wit and invention of its scripts, such are the qualities that set it head and shoulders above the competition." The Independent

Cars (2006)

"Existing both in turbo-charged today and the gentler 1950s, straddling the realms of Pixar styling and old Disney heart, this new-model 'Cars', is an instant classic." Time

Ratatouille (2007)

"Some of Pixar's productions ... have reached heights of invention, speed and wit not seen in animation since the work done by Chuck Jones at Warner Bros. in the 1940s. In 'Ratatouille', the level of moment-by-moment craftsmanship is a wonder." The New Yorker

Wall E (2008)

"The new Pixar picture 'Wall-E' is one for the ages, a masterpiece to be savoured before or after the end of the world."

Up (2009)

"Depending on what you think of 'Cars', Pixar makes it either 9 out of 10 or 10 for 10 with 'Up', a captivating odd-couple adventure that becomes funnier and more exciting as it flies along." Variety