(FORTUNE Magazine) – Moments before Anne Mulcahy's annual meeting began, one of her board members did something that rarely, if ever, happened during the endless business inferno at Xerox. Something that three years of debt downgrades, sunrise conference calls with the auditors, missed Junior High ball games, constant layoffs, and always, always, the threat of bankruptcy had not done: He made Mulcahy cry.

The director was John Pepper, former CEO of Procter & Gamble. "I never thought I would be proud to have my name associated with this company again," he told her. "I was wrong."

Mulcahy regained her composure to preside over an uneventful meeting. A few retirees threw her some softball questions. Nobody gave her a hard time. But the meeting was a milestone. The Mulcahy family was there, sitting proudly in the back: husband Joe on the edge of his seat, bracketed by two neatly combed boys in blue blazers. Every director made the trip to Boston, including Pepper; Vernon Jordan; former Johnson & Johnson CEO Ralph Larsen; and Nick Nicholas, former co-CEO of Time Warner. Xerox's death spiral had occurred on their watch, and they had made Mulcahy an 11th-hour, back-to-the-wall choice to resuscitate the company. "This story here is a minor miracle," said Nicholas.

He isn't exaggerating. Three years ago Xerox had $17.1 billion in debt and $154 million in cash. It was about to begin seven straight quarters of losses. The credit markets had slammed shut. An SEC investigation of the Mexico unit was about to spread to other parts of the company. Reorganizations of the salesforce and the billing centers had led to chaos. In 2000 the stock fell from $63.69 a share to $4.43, the company lost 90% of its market cap, and the best and brightest headed for the exits. The board had one last chance--and, boy, was she a long shot.

Mulcahy, 47, smart and energetic, had an excellent reputation but not the track record of a potential CEO. She had spent 16 of her 24 years at Xerox in sales. She had been head of HR and chief of staff for former CEO Paul Allaire. In her 16 months in a line job she had created a fledgling desktop business to go against Carly Fiorina's HP printers. Instead of an MBA, she had an English/journalism degree from Marymount College. She was not on the Xerox board. She had thought for years about quitting to spend more time with her boys; each time she bought a new briefcase, she promised her husband that this one would really, truly be the last. In May 2000, when the board replaced her predecessor and made her president and CEO-in-waiting (she became CEO in August 2001 and chairman in January 2002), nobody was more astonished than Mulcahy. "I never expected to be CEO of Xerox. I was never groomed to be CEO of Xerox. It was a total surprise to everyone, including myself," she says, with trademark honesty.

But Mulcahy has other qualities missing in so many CEOs. She is straightforward, hard-working, disciplined. She is fiercely loyal to Xerox--the company, the brand, the people. She has the integrity of the Catholic schoolgirl she was for 16 years. Her co-workers describe her as both compassionate and tough. She is not afraid of bad news. "Part of her DNA is to tell you the good, the bad, and the ugly," says a colleague. Her willingness to work shoulder to shoulder with subordinates gives her unusual credibility and the ability to galvanize her team. Who could bear to let Mulcahy down when she had so much skin in the game? Oh, and did I mention she was stubborn? Her outside advisors finally quit trying to get her to consider bankruptcy. "They learned they might as well just save their breath," says a Xerox financial analyst. Even during the darkest days Mulcahy wouldn't hear of it. "Sometimes you can will your way through things," she says. "As much as you need competence, luck, and hard work, I think will has a lot to do with it."

Indeed, Xerox's progress has been startling. It has had four straight quarters of operating profits. (Although its earnings looked bad last quarter because of a litigation charge, its 13-cent-a-share operating profit beat expectations by five cents.) All of its business units have been profitable since last year. It slashed costs in part by cutting its workforce 30%, to 67,000--a decision so tough that few people thought an insider-CEO could stomach it. By March 31, Xerox had $3 billion in cash, and debt had fallen by 21%, to $14.3 billion. Amid the turmoil, a steady rate of R&D spending--6% of revenues--enabled the company to introduce dozens of new products in the past year. Xerox is off the ropes and back in the ring.

Which does not mean it will win the fight. Xerox is only part way through a technological transition it put off for years: moving from analog to digital copying, and from black and white to color. Big, cumbersome Xerox must now get nimble to regain lost share from Japanese competitors Canon and Ricoh. It must execute an IBM-style makeover to become more like a document consulting company and less like a copy-box maker. It must reverse more than three years of declining revenues to achieve Mulcahy's goal of at least 5% annual growth by 2005. And it must continue to pare debt--Mulcahy's goal is $12 billion by year-end--to earn investment-grade status. These are the very problems that bedeviled Mulcahy's predecessors. Now she must solve them, three years behind the curve and loaded with debt in a lousy economy.

No matter what you make of Xerox's long-term prospects, though, it is difficult not to pause and savor the story of the accidental CEO: the working mother who gets a job she never dreamed of and now has the fate of a company in her hands. A story of the unlikely woman who sacrificed her personal life to take charge of a corporate turnaround far more daunting and difficult than the one at IBM. (Lou Gerstner had neither a liquidity crisis nor an SEC scandal to contend with.) A story of how she embarked on a desperate mission to clean up one of the biggest messes caused by the mismanagement, misguided beliefs, and missed opportunities emblematic of business in the 1990s. It would have been a whole lot easier to file for Chapter 11.

Xerox is one of those storied tech companies--think IBM, Motorola, Hewlett-Packard--that rested on its laurels and resisted change. The Xerox machine was a technological marvel that enabled the company to grow at a ten-year compounded annual rate of 34% back in the 1960s, when such growth was remarkable. Although its top executives saw the digital age coming decades ago, they dodged it, diversifying into financial services in the 1980s and shying away from personal computers even though its own scientists at the famed Xerox PARC all but invented the PC. Worse, they let the Japanese devour their copier business.

By the time Paul Allaire, who had spent 33 years at Xerox, was ready to retire as CEO in April 1999, he had refocused the company on copiers and belatedly taken it into the desktop business to fend off HP. On paper, the choice of Rick Thoman, CFO of IBM, to succeed Allaire as CEO made sense. Thoman had run IBM's PC unit. Wall Street loved him. Who better than an outsider to take on the dirty work at Xerox? But Thoman's 13 months as CEO were disastrous. (A spokesman for Thoman said he regrets that he didn't get the opportunity to finish the job he'd started, and that he wasn't able to bring in his own team.) In May 2000, Allaire, who declined to be interviewed for this article, came into Mulcahy's office as she prepared for a business trip to Japan. Allaire told her the Xerox board had a different odyssey in mind. He was replacing Thoman as CEO. Would she become his president, COO, and successor?

To appreciate the magnitude of this course change, you need to know a few things about Anne Marie Dolan Mulcahy. She was not a standout growing up on New York's Long Island. She says her mother told friends that nothing indicated Anne would one day be a CEO. Mulcahy had four brothers with whom she played stickball on summer nights, a mother determined to see her daughter get equal billing, and a father who encouraged vigorous dinner debates. Mulcahy is driven but confesses she is motivated more by fear of failure than by ambition. She so obsessively splits her time between her job and her boys that she cringes when people ask about hobbies. "Sometimes I just make some up," she says, sighing.

While not particularly religious, Mulcahy is imbued with Catholic virtues--for better and for worse. Why would she fight what looked to be a losing battle? "Nothing spooked me as much as waking up in the middle of the night and thinking about 96,000 people and retirees and what would happen if this thing went south," she says. "Entire families work for Xerox"--including her own: her husband, who retired in 1998 after a 35-year career in sales; and her brother Tom Dolan, a senior vice president who joined Xerox six years before she did. When Mulcahy got her big offer, duty and loyalty compelled her to take it, despite zero preparation. She now believes her lack of training was a good thing. She had no preconceived notions, no time to develop bad habits. "There was no time for development classes," she says. "There really was no shade from day one."

Xerox was in shambles--losing market share and tangled in '90s-style matrix-management. In a visit to a New York City sales office Mulcahy found hundreds of people, but no one in charge. Nobody could answer the basics: How many do we sell? Who's responsible for North America? "The best way to get nothing done is for people to sit on the fence," says Mulcahy. "We were 90,000 people sitting on the fence."

She knew she had to get to the bottom of Xerox's problems quickly. She cast about for someone, anyone, who could teach her Balance Sheet 101. The guy she found, Joe Mancini Jr., director of corporate financial analysis, says Mulcahy gave him such a hard time when she ran the desktop division that after her promotion, "I wasn't sure I'd have a job." He became her tour guide in deciphering the company's $30 billion balance sheet. He taught her about debt structure, inventory trends, and the impact of taxes and currency moves so that she could understand what would generate cash and how each of her decisions would affect the balance sheet. She took home binders and crammed over the weekend as if studying for finals. "It was an unusual situation for him--tutoring the CEO," Mulcahy says. "But there wasn't a lot of time for false pride."

She needed a team, but her timing couldn't have been worse. Xerox stock had begun its free fall, descending through the 20s on its way to a low of $4.30 on Oct. 9 of last year. Mulcahy met personally with more than 100 top executives to determine whether they would stick it out, instill confidence, and be "totally about Xerox." In other words she was assessing their character. "When there are no logical reasons to stay, it's good to have some illogical ones," she says. "Reasons like 'I can't abandon the ship' or 'If I left now, what would my team think?'"

Ursula Burns, a senior vice president of corporate strategic services, had already accepted a job at a place she declined to name. (If she'd taken it, she'd be a lot richer.) Burns, 44, who is African American, began as an intern at Xerox in 1980 and quickly became a star; eventually she was named head of manufacturing. She, too, had strong roots and a parochial-school education. She grew up in a Manhattan tenement, one of three children raised by a single mother. Her family was so poor that her mother, Olga, a child-care worker, made $4,400 in her best year. Somehow Burns's mother managed to scrape together the $650 annual tuition she needed to send her daughter to Most Holy Redeemer School. Burns says that her mother "had a minimum set of expectations that were very high. It was all about 'Let's focus on the stuff we can control.'"

Burns studied engineering--she has an MS from Columbia University--with the hope that she could one day support her mother. When Mulcahy asked her to help with the rescue effort, she could not say no: "I have been to almost every country in the world. I have a wonderful life and great friends. I have more than I ever imagined, and it all came from a partnership between me and this company," Burns says. "So what do you say when times are tough? 'Thank you very much, I'll see you later.' That's not what my mother taught me."

Mulcahy and Burns tackled their jobs like women possessed. Constantly on the move, Mulcahy met with bankers, reassured customers, galvanized employees. She sometimes visited three cities a day. "She'd call me on a Saturday, and I'd say 'Where are you?'" recalls Burns. "She'd say, 'Texas.' And I'd say, 'What the hell are you doing? You've got to go home.' Her mission in life was, 'If this place is going to fail, it's not going to be because Anne Mulcahy slept.'" In a moment of desperation Mulcahy cold-called Warren Buffett. "I knew he didn't invest in tech companies, but I just somehow believed I could change his mind about Xerox," she said when asked about it recently. Buffett invited her to Omaha for dinner. He didn't invest, but he was supportive. "You didn't get promoted," he told her. "You went to war."

Burns, meanwhile, focused on the guts of the company: How do we buy parts? How do we assemble things? How do we whack $1 billion out of production costs but still increase productivity? She was comical but merciless in operations reviews; she would call only on people who had missed their goals. "She'd say, 'Jim, you blew it; tell us what happened,'" laughs Mulcahy. Pretty soon people got the message: If they met their goals, they got to sit back and watch the others squirm.

It fell to Burns as head of manufacturing to execute one of the most delicate and difficult parts of the restructuring: selling some of Xerox's manufacturing operations to Flextronics and closing the rest--while simultaneously renegotiating a contract with the union representing those very workers. As Burns spent six weeks recuperating from a hysterectomy, she held talks first from her hospital bed and then from her living room. "Anne would say, 'Look me in the eye. Can we do this?'" recalls Burns. "And I would say, 'Yeah, yeah, we can do this.' And then I'd go away and ask myself, 'Can we really do this?'"

At almost every turn, Mulcahy had to ignore conventional wisdom. Xerox is an old-fashioned company, the sort of place where workers still have retirement parties and retirees still have reunions. The average tenure of a Xerox employee is 14 years, double the overall corporate average. When the CEO of one of Mulcahy's biggest lenders said she would have to kill the culture to succeed, Mulcahy shot back, "I am the culture. If I can't figure out how to bring the culture with me, I'm the wrong person for the job." She appealed to employees with missionary zeal, in videos and in person--what Burns called a "laying on of hands." She implored them to "save each dollar as if it were your own." She ended every appearance with a nudge: "Remember, by my calculations, there are [she fills in the number] selling days left in the quarter." She rewarded those who stuck it out not only by refusing to abolish raises but with symbolic gestures as well; last year she gave all employees their birthdays off.

The gentle pressure was vintage Mulcahy. Work hard. Measure the results. Tell the truth. Be brutally honest. (One of Mulcahy's first brutally honest remarks--that the Xerox business model was not sustainable--sent the stock down 26% in one day.) She knew she couldn't gild the lily. "Anne told us everything, stuff we really didn't want to know," says Burns. Like how close they were to running out of cash. Burns, the mother of two children ages 10 and 14, remembers going home one night and telling her husband, Lloyd Bean, a Xerox scientist, that "we could lose our house. We could lose everything." Bean replied: "Xerox isn't going anywhere, sweetheart. It's up to you to make sure that doesn't happen."

If Mulcahy ever thought bankruptcy was an option, she never let on. She dug in her heels every time the workout advisors brought it up. "A lot of people will try to convince you that there are advantages to Chapter 11," she says. "I was like, 'Don't even go there.' Whatever you think the advantages are from a financial standpoint, I think they are dismal and demoralizing for a company that wants desperately to turn around and regain its reputation." Joe Mancini says some of the early meetings got so tense that he thought the workout experts might "go away and not be our advisors." Basically, he recalls, they didn't think Mulcahy had the balls to take the draconian actions needed to keep Xerox afloat.

But she did. In June 2001 she shut down the desktop division; these were people she had hired and a business she had created. "There was no good script," she says. "The company was in a lot of trouble. They weren't the ones accountable for the problem. You couldn't follow a string of logic for them." The only thing she could do, she says, "was to take the hit personally. I hung out, walked the halls, and told them I was sorry."

In the fall Mulcahy made a presentation to Xerox's 56 bankers, assuring them that the company would pay back its $7 billion revolving credit. She had never faced a crowd so hostile. When she concluded her address she was met with deadly silence. "Man, what does it take to get a smile out of these guys?" she asked, taking her seat. Between clenched teeth the banker next to her replied: "Seven billion dollars."

She also resolved Xerox's accounting scandal. Soon after becoming CEO, she replaced her auditors and cleaned house in the finance department. In April 2002, Xerox agreed to a record $10 million fine to settle charges that it defrauded investors by improperly accelerating revenues, overstated earnings by using "cookie-jar" reserves, and disguised loans as asset sales, among other things. The SEC also rebuked the company for being uncooperative. Xerox did not admit or deny wrongdoing, but the settlement pained Mulcahy. She says she was never questioned, subpoenaed, or deposed by the SEC, but has been named as a defendant in several shareholder lawsuits. (In early June former CEOs Allaire and Thoman and four other former Xerox executives settled individual SEC charges that between 1997 and 2000 they used improper accounting to defraud investors. Although they neither admitted nor denied wrongdoing, they agreed to pay more than $22 million in penalties and fines.)

After the settlement Xerox had 90 days to restate four years of results. The company had brand-new auditors and no CFO. In two years Mulcahy had not taken off a single weekend. Even if she made it through the re-audit, Xerox faced another difficult deadline: It had to renegotiate its revolving credit agreement by Oct. 22, the day after Mulcahy's 50th birthday. In June the ratings agencies had downgraded Xerox debt deeper into junk. One day last summer Mulcahy saw a picture of herself in a Time article that grouped her with Tyco's Dennis Kozlowski and WorldCom's Bernie Ebbers. "I just remember staring at it and saying, 'How did this happen?'" she says.

But there were some sweet moments too. Older son Michael, 20, had taken a summer job at a bank and was keeping his eye on the news wires. Whenever a Xerox headline crossed, he'd call Mulcahy to give her a heads-up. On another occasion, Mulcahy got home late to hear a voicemail from Jim Firestone, a senior vice president and her top strategist. Firestone is a buttoned-down former IBMer--all business, no chitchat--the last person she would have expected to call. "At the end of the day, you just have to ask yourself, Is there anything more I could have done today that would have made a difference for Xerox?" the message said. "If the answer is no, then you've got to stop and go home and get some sleep. Because if it survives, it survives. And if it doesn't, you have to be able to live with yourself and say maybe it wasn't there to be had." She says the call meant the world to her: "I was just torturing myself with this stuff."

About then Mulcahy's luck began to turn. With the SEC matter settled, she was able to recruit a new CFO, Larry Zimmerman, a former finance vice president from IBM who joined Xerox last June. The company had considered many ways to improve its balance sheet, but Zimmerman and Mulcahy made a pact: They would not do anything that they did not understand. They decided against moving debt off the balance sheet. "It's more financial engineering than it is business fundamentals," says Mulcahy. By October the company had struck a deal with GE's lending arm to provide $5 billion in financing.

The good news began to come in bunches. Margins improved, and costs came down. The company had some profitable quarters. The culture that critics told Mulcahy she had to break rallied round her instead. In Texas sales teams had abandoned expensive incentives and awarded car washes (by colleagues) to top producers. "People were holding prayer groups," she says incredulously. "They were saying the rosary for me." Says Timothy R. Coleman, a senior managing director at Blackstone: "She was leading by example. Everybody at Xerox knew she was working hard, and that she was working hard for them."

Coleman became a convert: "Anne met her plan, she beat her plan, she had taken the costs out, and she did it in spades." Some of Xerox's biggest lenders, which had been so angry when she drew down her entire credit line by the end of 2000, began to soften. J.P. Morgan Chase assigned a couple of bankers to help renegotiate the credit agreement, and Citibank and BankOne signed on. Mulcahy spent hours jawboning bank executives. She got down to the last couple of holdouts and was beside herself. "I had done everything. I had talked to their CEOs and chairmen. I begged. I harassed them. I said, 'We have 54 [out of 56] banks signed up, and you can't get there? I don't get it!'" In desperation she called Citi's Sandy Weill. "I need your help," she said.

"But I've already signed up."

"I need you to pick up the phone and call a couple of people for me." She had her deal by the end of June, four whole months before her birthday.

The debt deal doesn't allow much room for error. Xerox's annual interest expenses rose by $140 million this year, and it has less borrowing power. Litigation resulting from the accounting scandals is still pending. The economy continues to be soft, while competition is stiffer than ever. "The cycles will just speed up," says Matthew Espe, CEO of Ikon Office Solutions, a document-services distributor of brands like Canon and Ricoh. "If you're a one-trick pony [like Xerox], you're swimming against the tide."

Mulcahy knows her battle isn't over. She worries about "sustaining the energy and intensity of the place." With CEO credibility tenuous, she takes nothing for granted. She doesn't feel entitled, not even on the corporate jet. "This is a bag-carrying environment," says Mulcahy, who not only carries her own but becomes a flight attendant the minute the seatbelt sign goes off (Xerox laid off the real one). "Beer? Wine? Soft drinks?" she asks, handing out napkins. "I cook more here than I do at home," she adds.

All companies go through cycles, but only great companies come out stronger. Mulcahy's goal, having brought Xerox back from the dead, is to make it great again. "There is something about resilience," she says. "The ability to address issues, to keep brands and heritages and jobs in place. I keep hoping that's the story that will emerge here. If this company becomes great again, that's a good story."

It would be more than that. It would be a major miracle.

FEEDBACK bmorris@fortunemail.com