It's a few weeks before Barry Diller almost lost everything, and he is in his element, at the Four Seasons restaurant in midtown Manhattan. Movie producer Harvey Weinstein is here, as is activist investor Carl Icahn. Diller, uncharacteristically, is sharing the spotlight with CBS chief Les Moonves in a panel discussion about the future of media.

Eventually, the subject turns to Diller himself, whose future at this moment looks precarious. For once, a man who has made a career of micromanaging his own myth is scriptless. The following week, a state court judge in Delaware will hear a lawsuit between Diller and John Malone, the media executive and erstwhile Diller ally who is threatening to strip Diller of everything: his control of IAC/InterActiveCorp, the internet company the two have been bickering over; Diller’s perch inside the Frank Gehry-designed IAC building, on Manhattan’s West Side; his reputation as one of the last of the badass brawlers in the media world; and perhaps most important, his peerless—and until now nearly flawless—ability to craft and maintain his own legend, even if IAC’s performance of late hasn’t exactly seemed to warrant it. (View slideshow.)

“It’s very odd that two people who don’t want to give up control of anything are giving control to a judge in Delaware," Diller says. “It’s unfortunate.”

Within a few weeks, Diller was vindicated. In late March, the judge ruled in his favor, Malone was forced to give up his fight, and an embarrassing public showdown ended. But Malone and his colleagues at Liberty Media had managed to use the trial to get to the heart of the Diller myth. With testimony and evidence that seemed relevant only in its capacity to embarrass the mogul, Diller’s adversaries made an issue of his huge paycheck and lavish lifestyle, as contrasted with the subpar performance of IAC, which has recently been an unqualified disappointment. (View an interactive feature explaining the ups and downs of Diller’s career.)

A few weeks after the court’s ruling, in a conference room just outside his spacious office in the IAC building, Diller still has the air of someone who has just survived a car crash. Instead of dismissing every third or fourth question with his trademark disdain, he is displaying an un-Dillerlike mellowness. “It was absolutely not something we sought,” he says somewhat quietly when I ask about the trial. “The only thing that remains is that it’s over.”

Diller then proceeds to make an astonishing admission: After all this time spent selling the world on his idea of an internet conglomerate, he now realizes that he was wrong from the start. Diller says he’s utterly committed to the idea of an anticonglomerate, blowing up IAC and leaving the company’s dispar­ate parts to operate on their own. “We decided, ‘Enough of this integrated-conglomerate pretension.’ We were kidding ourselves if we thought we could pull off an integrated conglomerate that acts like G.E. or P&G in anything less than 10, 20, or 30 years. It took them 100 years to get there.” (Read Lloyd Grove's interview with Diller, here.)

If Diller were running for president, his rivals would label him a flip-flopper, and they would be right. But Diller is no politician, despite a personal magnetism that is reminiscent of Bill Clinton’s. Nor is he a typical businessman. Rather, he is a bundle of contradictions. He is a onetime internet visionary now accused of being a has-been. He is a Hollywood showman out of context in the nerd’s world of the internet. He is a dealmaker masquerading as a day-to-day executive. And more recently, he has become a man whose outsize legend has seemed increasingly at odds with his ability to deliver the goods.

But now, at the age of 66, he has a new plan—to dismantle his 13-year-old company and create five separate units. The part Diller himself will continue to run will be made up of a number of relatively small entities. With so few pieces to keep track of, this so-called new IAC will be a model of transparency compared with the old one.

Diller is forthright in saying that his strategy for IAC over the years has been guided as much by curiosity as by anything that might constitute an actual business plan. This is a novel approach for the leader of a publicly traded company. The only others who practice it so openly are Larry Page and Sergey Brin, at Google. But their curiosity has been justified by wealth creation to the tune of $170 billion, a far cry from Diller’s own. Yet as George Mair wrote in his 1997 book, The Barry Diller Story, “Diller is one of the few executives in the entertainment business who can raise billions of dollars with just his name and vision as collateral.”

IAC’s roots trace back to 1995, when Diller, recently fired from home-shopping network QVC, hooked up with Malone at a broadcasting company called Silver King, which the two later merged with the Home Shopping Network, QVC’s main rival. From there, HSN embarked on a dizzying series of acquisitions, shifting its focus from shopping to entertainment and eventually to the internet. A number of Diller’s moves were particularly well-timed. In 1997, he bought the USA Network and a passel of other entertainment properties from Seagram, sold them at a profit to Vivendi, and secured himself a $275 million gig as a part-time executive in the process. In doing so, he also extracted a concession from Malone about his future autonomy that proved to be his ace in the hole in March.

His early Web moves were prescient. Deals of note include nabbing 50 percent of Ticketmaster from Microsoft co-founder Paul Allen in 1997 in exchange for 17 percent of HSN, snatching up Hotels.com and Match.com in 1999, and paying $1.5 billion for 51 percent of travel website Expedia in 2002. In mid-2003, investors were cheering him on from the sidelines, and the market valued IAC at about $60 billion.

But since then, Diller has seemed less a visionary and more a spastic dealmaker. He has missed some big acquisition opportunities, including ­MySpace, which was snapped up by News Corp. for a fraction of what it’s worth today, and ticket broker StubHub, which would have folded in nicely with Ticketmaster. Instead, Diller went in for questionable deals, such as the 2005 purchase of the old-media catalog company Cornerstone Brands, an acquisition he has described as a mistake, and the 2006 purchase of ShoeBuy.com, a distant also-ran behind market leader Zappos.com.

His once-vaunted theme of interactivity, which had a sexy sheen 10 years ago, now seems stodgy, akin to making “We sell things” your corporate mantra.

His costliest misstep has been holding onto mortgage middleman LendingTree, which he purchased for $726 million in 2003. Diller could have made a fortune for IAC if he had sold LendingTree at the height of the housing boom in 2005, which is the kind of move you’d expect a master dealmaker to pull off. Instead, he held on, and he now admits that the unit is worth “vastly less” than what he paid for it. IAC wrote down the value of LendingTree by $475.7 million in 2007. Expect more where that came from.

While Diller may be perceived as a titan, Cowen & Co. analyst Jim Friedland says the value he’s created in the recent past has been puny. “Give or take, the return on invested capital has roughly been between 4 and 5 percent over the past several years,” Friedland says, “which is about the same return you could have received if you’d bought a Treasury bond.” If IAC’s cost of capital is 10 percent, which is Friedland’s estimate, Diller and his curiosity have been destroying value to the tune of about 5 percent a year since 2004.

Of course, the most relevant measure of the value of a publicly traded company is the price of its stock. From December 31, 2004, through April 25 of this year, IAC stock was down 63.3 percent, while the Nasdaq composite index had gained 11.4 percent. The company has pretty much been going through one wrenching transition after another for the past several years, and the stock has performed poorly over much of that time. The synergy that Diller so desperately sought among the more than 60 individual brands IAC owns has failed to materialize in any meaningful fashion. Diller nevertheless points out that IAC stock is up 237 percent since the company’s creation in 1995, even as the S&P 500 has risen only 138 percent.

"The best asset they have is Diller, who is running an internet company the same way you'd run a media conglomerate," says senior analyst Jeffrey Lindsay of Sanford Bernstein. “He had a good run for a few years, when the assets were firing on all cylinders. The mark of a very good business, though, is how well it can ride out a downturn. At this minute, it doesn’t seem to be doing it that well.”

The Gehry-designed IAC building is a monument to Diller himself. It’s a flashy, shape-shifting wonder at the edge of New York’s hottest neighborhood. Getting to Diller starts with walking through a lobby that seems designed for a catered cocktail party. A massive video screen showing the traffic on various IAC websites sits behind the reception desk.

The inner sanctum is dead quiet. The offices of just five executives—each with its own balcony—take up the entire sixth floor. It’s hard not to be intimidated. Indeed, many people who have crossed paths with Diller in recent years warned me not to take it personally if he came across as belittling. In fact, he is disarmingly polite, almost soft-spoken. He is smaller than you would expect but gives off an air of bottled intensity.

The Diller legend has been laboriously constructed, put together piece by piece. There were the nights at Studio 54 in New York 30 years ago, when he hung out with Warren Beatty, Calvin Klein, and Mike Nichols. He was named ABC’s programming chief at the age of 26. At 32, he was offered the chairmanship of Paramount. From there he went on to launch the Fox network. The lasting impression is that for a while, Diller was the ultimate Hollywood mogul. “In the flesh, he was power incarnate,” producer Dawn Steel wrote in her book They Can Kill You but They Can’t Eat You. “He was the sexiest man I’d ever met. He handled power differently from anyone I’d ever known, in this very complex, sexual way.... You couldn’t not look at him.” (VIDEO: Watch Diller explain how he broke into the entertainment industry with no college degree.)

Diller was always a hybrid, equal parts business guy and showman. Like his old friend David Geffen, with whom he worked in the mailroom at the William Morris Agency, he is addicted to the deal. At Paramount, he cooked up tax-advantaged deals structured in ways that other moguls couldn’t understand. He’s bought and sold more companies than Rupert Murdoch himself.

More than that, he was making the connections and building the reputation that would last him throughout his career. Some of the most powerful executives in Hollywood in the past 20 years—Michael Eisner, Jeffrey Katzenberg, Dawn Steel, and producer Don Simpson—worked for him at Paramount, where they became known as the Killer Dillers. At Fox, he teamed up with Murdoch, who remains a close friend. When Murdoch sealed the deal to buy the parent company of the Wall Street Journal in August, Diller hosted a party for him on a yacht anchored off Manhattan.

“Sure, he’s a bundle of contradictions. But most people—most people I like, anyhow—are,” says Kurt Andersen, a media veteran who has done business with Diller over the years—including, most recently, the launch of the website VeryShortList.com. “If you’re famous, your public persona can often be reduced to a noncontradictory cartoon. But with Barry, his contradictions are just more vividly apparent than most.”

Diller has also consistently cultivated strong relationships with the media, providing financial support for The Charlie Rose Show, for example. As a result, he’s been a repeat guest on the program. He’s also bankrolling a news-aggregation website headed by former New Yorker and Vanity Fair editor Tina Brown. “He expresses himself better than anyone I know in business,” Brown says.

“Take him on at your peril,” warns Howard Stringer, the chairman of Sony. “People in the press are afraid to ask him a stupid question because the entire world will know in 30 seconds how stupid it is.”

Diller has used his formidable social and media networks to help wall off his public persona from his business one, an invaluable trick in tough times. Social chronicler Dominick Dunne—who sat at the same table as Diller at an awards ceremony only weeks before Diller’s trial was set to begin—makes that clear. “You never would have had a clue from his conversation or his speech that he was dealing with big problems in his life,” Dunne says, referring to the fight with Malone. “I admire him for that.”

Diller crafts his private persona as carefully as his public image. The social life on display is that of a bon vivant who swans around New York and Hollywood with his wife of seven years, fashion designer Diane von Furstenberg. Diller owns one of the world’s largest private yachts, the 305-foot-long Eos, and hosts a lavish pre-Oscars party at his home in Beverly Hills’ Coldwater Canyon. But in fact, Diller is a fiercely private man who spends much of his time while in New York at the Carlyle Hotel. Few know, for instance, that his brother was murdered in California in 1975 after a number of run-ins with the law. And though speculation about Diller’s sexuality has swirled for years, he has never addressed the topic.

There's no denying that Diller is an extremely smart man. He speaks in well-constructed paragraphs. It's received wisdom in media circles that you don’t tangle with him. There’s the story about the time he threw a videocassette at someone’s head and the one about his making a senior executive cry. While his supporters go to great lengths to cast his prickliness in a positive light, the truth is that the guy can be ruthless. “He’s got elephant balls,” David Geffen once told a reporter.

John Malone surely knew this, which is probably why he hired technology executive Greg Maffei as C.E.O. of Liberty Media in 2002. If, as has been speculated, Malone was about to set Liberty on a collision course with IAC—and by extension, Diller—he might as well have a fall guy in the event the strategy failed. While Maffei had an impressive résumé, with senior-executive stints at Microsoft and Oracle, what he also had was a contentious history with Diller. Maffei had been chairman of Expedia when it was acquired by IAC in 2002, and according to his own testimony, somewhere in the confusion, he lost track of some $28 million in options that subsequently expired and became worthless. Maffei appealed to Expedia C.E.O. Dara Khosrowshahi to reinstate the options, but Khosrowshahi refused. Diller testified at the trial that when Maffei asked Khosrowshahi to change the option dates of his agreement, Khosrowshahi told him, “I’m not going to jail for you.”

While to billionaires like Malone and Diller, the loss of $28 million might not mean much, it rankled Maffei. In Delaware, when Malone was asked whether Maffei had a grudge against Diller, Malone understatedly responded, “We knew that there had been a history.” Maffei would proceed to build on that history, spending the next few years slowly ratcheting up the pressure on Diller, who contends that Maffei openly criticized him with growing frequency.

Maffei’s public remarks led Diller to confront him during one of media banker Herb Allen’s Sun Valley, Idaho, retreats, accusing Maffei of acting a little “high school” and asking that they find a way to change the tone. He says that Maffei agreed. But Maffei only redoubled his efforts, inviting a Wall Street Journal reporter to accompany him in the fall of 2007 on the company jet from New York to Colorado, where the reporter met with Malone. That flight eventually led to a front-page hit job that Malone himself participated in but later disavowed.

It’s hard to believe that Malone didn’t see what was coming, especially considering the numerous zingers he offered up to the reporter. On ownership of IAC: “The hook is set. It is our company. Barry ain’t going to be able to spit the hook.” On Wall Street’s view of Diller: “There was a time when there was, I think, a 20 percent Barry premium. Today you could argue there is a Barry discount.” Last, Malone said, “It is a little uncomfortable for Barry. Right now we are the shadow that walks around behind him.”

When I tell Diller that I don’t quite believe his testimony that he was “hurt” by the Journal article, he doesn’t pause for a second. “You’re wrong,” he says. “I was. But I wasn’t hurt by Greg Maffei. Greg Maffei can’t hurt me. But John Malone, with whom I have had a very long relationship? What he did absolutely hurt me.” Diller nevertheless hopes to patch things up with Malone. “Malone was the only credible witness they had,” he says.

While the trial itself was mind-numbing at times, the subtext was riveting: John Malone, slayer of moguls, was looking to destroy the reputation of a man whose myth he had helped create. News coverage of the trial failed to adequately convey this aspect, given the dailies’ need to cover the incremental developments.

The gist of the dispute is this: Diller decided that in the process of splitting IAC into five pieces, he would also strip Liberty of its supervoting rights in four of IAC’s five companies. Liberty owns some 30 percent of IAC’s stock but 62 percent of the votes through its ownership of supervoting shares.

In 1995, Diller made it clear that his motives in joining forces with Malone were to be his own boss and to have a serious piece of the action. The two men agreed that Diller would vote Liberty’s stake in the company through a proxy agreement. But Diller soon found himself in the very situation he’d hoped to avoid. Major shareholders blocked his efforts to buy NBC and then nearly derailed his purchase of Expedia.

As a result, Diller told Malone that unless he could shake off the restrictions, he was out. Malone acquiesced. The question in Delaware was whether Diller had the right to split his own company if he desired. Judge Stephen Lamb decided that he did.

Diller says he had no choice but to bring things to a head. “Because of that article, I thought, one, that we would never be able to make a deal with them, and, two, that I didn’t want to negotiate with them anyway. That was personal. They were really out for the throat of the company.”

During the trial, Maffei seemed to enjoy his moment in the spotlight, smiling and laughing with Liberty’s lawyers during breaks. It helped that he was paid $19.2 million for his efforts in 2007—more than triple his 2006 pay of $5.7 million. Malone, whose natural expression seems almost a scowl, showed practically no emotion, while his neatly combed hair suggested a boy on his way to Sunday school. Diller was confidence incarnate in a blue pinstripe suit. It’s an amazing thing to see charisma on display: Malone, who has almost none, barely attracted a sidelong glance from the gallery. But when Diller walked into the room, it seemed for an instant that no one could look away.

Almost from the start, Maffei and Malone sought to make the trial a referendum on the performance of IAC’s stock and Diller’s pay, even though neither issue was legally relevant. When I asked Maffei about the motivation for Liberty’s lawsuit, he stuck to the company line: “First and foremost, this isn’t about the performance of IAC, or stock performance, or vanity buildings, or anything else like that. This is about the fact that Barry Diller sued us and made a proposal where he would steal our votes.”

Since taking the helm of IAC in 1995, Diller has pulled down $1.1 billion for his efforts. Virtually all of that money came from a few early option grants approved by Malone himself.

Diller is tired of answering questions about his pay but insists that he is not defensive about it. “Look, when you’re dealing with amounts of money this large, none of it is justifiable,” he says. “There is no moral right to any of this. But I earned this money over 10-plus years, not in one single year. And while it’s a genuine waste of time for me to try and explain this yet again, I want you to imagine that you’re a shareholder and you could go back 14 years, when you’re talking about a company that was technically bankrupt, a company that had lost $70 million the previous year. Would you have any problem granting me those options if you knew that 14 years later, even in a depressed market, that company would be worth $13 billion? What would your vote be?”

When I ask Diller how he feels about being called a relic of Web 1.0, he laughs. “I don’t pay too much attention to moments in time. I’ve had too many of them.” He goes on to say that if being labeled Web 1.0 means he owns a handful of internet properties that actually generate revenue and profit, then he’s guilty.

“That’s true of some of our businesses,” he says. “But thank God for that, because they produce the revenue that lets us innovate and create brand-new businesses.” He points to his firm’s initiatives in the online gaming space as an example. GarageGames.com is a site for developers of online games, and InstantAction.com is where those games will live. “That’s $50 million we’ve laid on the table on an idea,” Diller says.

Yet with only a handful of companies to work with, it is unlikely that his greatest skill—using highly complex deals to shift money around—will be of much use. Consider one of his new properties: FiLife.com, a financial site that’s a joint venture with Dow Jones. FiLife—which hired Dave Kansas, a former editor for TheStreet.com and the Wall Street Journal, to great fanfare—seems like it may be a dead man walking. Staffers are bailing, and word is that the site may never enjoy an official launch.

Of course, Diller will continue to experiment with public shareholders’ money, critics be damned. IAC president of programming Michael Jackson, who has worked with Diller on and off for the better part of a decade, says this of the company’s media strategy: “Barry says, ‘We all know there’s something going on here. We don’t quite know what we’re going to do, but we will start, put one foot in front of the other, and find our way. Not everything is going to succeed. Unless you’re out punting, though, you can’t really know what the audience will engage in.’ ”

Diller’s ultimate challenge is to guide IAC to a place where it’s once more earning the respect of the stock market, bringing the reputation of the company and the man in sync. For a minute there, during the panel discussion at the Four Seasons, the world was privy to that rarest of moments: Barry Diller gave us a glimpse of vulnerability. Don’t expect to see that again anytime soon.