Free of the taint of fraud,



took flight Tuesday as investors bet on a brighter tomorrow.

The Bermuda-based conglomerate ended a scandal-clad year on a high note Tuesday. Tyco's stock, pounded to single digits at its low point this summer, soared 13% Tuesday, following the

release of a $50 million forensic audit of the company's accounting.

But even after closing the books on that audit -- which accused only past management, led by former CEO Dennis Kozlowski, of outright fraud -- Tyco's new leaders still shoulder a heavy burden in turning the company around. The audit, conducted by high-profile attorney David Boies and a slew of assistants, exposed a company that relied heavily on aggressive accounting tricks to bolster its phenomenal growth.

Tyco CEO Ed Breen has already sworn off the nonstop acquisitions tied to those artificial boosts. But some investors say that in choosing to correct only $380 million in accounting "errors" -- and keeping past accounting tricks in place -- the company has left Wall Street staring forward into a somewhat cloudy future. And as some observers have been

pointing out, if the company can't keep growing steadily, Tyco stock will become far less palatable.


During a Tuesday morning conference call, analysts struggled for a clearer picture of Tyco's true earnings power -- both past and future.

Jeff Sprague, an analyst at Salomon Smith Barney, expressed some concern about this year's "dramatic erosion in margins." And Leon Cooperman of Omega Advisors -- where Tyco is a major holding -- bluntly asked whether Tyco has "significant earnings power beyond the current level." Profits have plunged during the company's celebrated shift from aggressive to conservative practices.

Tyco responded by reiterating its 2003 earnings guidance of $1.50 to $1.75 a share -- a possible drop from 2002's $1.75 -- and promising to retool Tyco into a more efficient company.

"This company's going to move forward now, and it's going to grow this business," Breen assured.

But Tyco faces some daunting challenges. Most pressing is the need to bridge a $3.6 billion funding gap that has recently doubled from earlier projections this year. The company hopes to end months of negotiations with its lenders by renewing -- at most -- half of a $3.86 billion revolver that matures in February. Tyco is also exploring a combination of capital market transactions and minor divestures to meet its obligations.

A Thousand Cuts

Breen said he remains confident that Tyco will secure all the funding it needs. Still, next year's earnings could take a hit in the process. Tyco has allowed for no stock dilution in its 2003 projections. And the company could divest itself of assets currently yielding about 10% of its sales.

Tyco is also depending on cuts in its $1.8 billion capital expenditure budget to meet next year's earnings goals.

Meanwhile, Tyco could see its favorable tax rate threatened if new legislation cracks down on companies incorporated in tax havens like Bermuda. Tyco also faces potential losses from 11,000 asbestos-related claims and multiple shareholder lawsuits, although the company carries some insurance protection against both.

And -- despite clearance by the Boies team -- fraud charges still remain a possibility. The

Securities and Exchange Commission

, which has reopened an investigation that was closed two years ago, is currently poring over fresh material related to Tyco's admittedly aggressive accounting for acquisitions.

At least one analyst raised concerns Tuesday that the SEC's enforcement arm -- the division now handling that probe -- might find some unpleasant surprises. Boies responded by saying that, in general, the SEC is already aware of the "substantive points" laid out in the documentation delivered to the agency 11 days ago.

Still, a noted short-seller marveled Tuesday at the market's "premature" celebration.

"The wording in the report is just amazing," he said. "It claims there was no systemic fraud even though there was a pattern of aggressive accounting.

"I'm astonished people think this is such terrific news."