(MONEY Magazine) – Xerox looked like a lost cause when Anne Mulcahy took the helm back in July 2001. The copy-machine giant was eyeball-deep in debt and red ink--and then came an accounting scandal. Soon Xerox was being lumped with the likes of Enron and WorldCom.

Yet here we are nearly three years later, and the company many had left for dead is fast becoming the great turnaround story of the post-crash era--an IBM for the 2000s, with Mulcahy in the role of ex-Big Blue chief Lou Gerstner. A low-key insider before being thrust into the top job, Mulcahy quickly replaced the accounting team and set to work slashing costs. She shuttered the underperforming desktop division (which she had once run) and cut or outsourced 30,000 jobs--nearly a third of the company's work force. Meanwhile, Mulcahy focused R&D efforts on digital copiers and high-volume color printers.

Her strategy is now paying off big. Xerox earned $197 million in the fourth quarter of 2003, up from $9 million a year earlier. Some two-thirds of Xerox's equipment sales came from product lines introduced within the past two years. "There's a will to ensure that our company not only survives but has an opportunity to become great again," Mulcahy says of the turnaround.

The new product mix should help those aspirations. Printers and copiers are like razors in that every $1 in Xerox equipment sales begets $3 in "post-sale" purchases of toner, paper and accessories. But with color, Xerox's post-sale profit margins are five times wider than with black and white. Mulcahy is particularly bullish on Xerox's new DocuColor iGen3, a high-tech printer that sells for $500,000. Xerox has sold about 125 of the machines, and Mulcahy expects that number to reach 400 to 500 by the end of 2005.

For anyone who's read management Guru Jim Collins' bestseller Good to Great, the Xerox story may sound familiar. It's no coincidence. Collins studied a dozen well-known companies that made the leap from mediocrity to greatness and discovered a common narrative: A humble but driven insider takes over a struggling company, streamlines the business, uses technology opportunistically and keeps costs down after sales take off. "Not only have I read the book, I know it backward and forward," says Mulcahy. "I found it incredibly comforting that the characteristics that Jim talks about were ones I felt Xerox could deliver."

Mulcahy's optimism seems to be rubbing off on investors. Xerox's stock has rebounded from its $4 low in 2001 to $14 today, and early converts David King of Putnam New Value and Jim Benson of Oakmark Funds are betting it's got further to run. "Thirty-six months from now, I expect the stock to have doubled," says King. Benson adds that Xerox is paying down debt--once $17 billion--so rapidly that it could be largely debt-free by 2005. Meanwhile, Kevin Lane, chief market strategist for Redwood Technimentals, says that Xerox's recent history of posting gains on days when its trading volume is high is a sign that there's still pent-up demand for Xerox shares.

Xerox is not without risk for investors. Mulcahy admits that corporate demand has been softer than she expected this far into the recovery. But this cuts both ways. At 19 times earnings, Xerox should look even more attractive once corporate purse strings loosen. --JON BIRGER