updated 10/31/2006 2:03:30 PM ET 2006-10-31T19:03:30

Eastman Kodak Co., scrambling to spin larger profits from digital photography as its fabled film business erodes, said Tuesday its two straight years of quarterly losses narrowed in the July-September period as digital earnings surged above $100 million.

Excluding one-time items — chiefly $202 million in restructuring costs — the results beat Wall Street expectations and its stock rose more than 4 percent.

Kodak lost $37 million, or 13 cents a share, in the three months ended Sept. 30 — its eighth quarterly loss in a row. But that compared with a year-ago loss of $914 million, or $3.18 a share, when it took a $778 million tax charge linked to its massive, four-year overhaul.

A photographic film icon during much of the 20th century, Kodak has struggled to reap profits even while becoming a major player in recent years in digital photography and commercial printing.

“The key to our strategy this year will remain our focus on margin expansion,” Kodak’s chief executive, Antonio Perez, said in a conference call with analysts. “As I said in January, we have achieved scale. Now we must achieve the earnings and cash needed to pay to complete our transformation and invest aggressively.”

With special items removed, Kodak earned $130 million, or 44 cents a share, in the quarter. Analysts surveyed by Thomson Financial had forecast earnings of 19 cents a share on sales of $3.285 billion.

Sales fell 10 percent to $3.204 billion from $3.5 billion largely because of a slump in film sales.

In August, Kodak predicted an overall operating loss of $500 million to $850 million in 2006 despite earnings of $350 million to $450 million from digital operations. While Perez expects to meet that profit range, he said digital sales growth could fall “somewhat short” of a 10 percent target as the company invests more on high-margin digital cameras and other devices.

As it approaches the end of a third year in its historic makeover, Kodak is trimming its manufacturing operations and axing up to 27,000 jobs. Its global work force has dipped below 50,000 from a peak of 145,300 in 1988.

Kodak has accumulated $2 billion in net losses since it last posted a profit of $458 million in the third quarter of 2004. Since January 2004, it has racked up $2.6 billion in restructuring charges.

The transformation “is proceeding somewhat better than at least I expected,” said Ulysses Yannas, a broker with Buckman, Buckman & Reid in New York. “I think this quarter we’re starting to see glimmers of light at the end of the tunnel.”

Other analysts, however, had a hazier view.

“The analog-to-digital conversion is still incredibly challenging,” said Shannon Cross of Cross Research in Short Hills, N.J.. “Even after we get through this restructuring, they are still going to have 10,000 people in their analog business. So there will be more restructurings to come.”

In the quarter, digital sales eased 1 percent to $1.79 billion, while revenues from film, paper and other traditional, chemical-based businesses slid 19 percent to $1.4 billion. But while profits from traditional businesses plunged 39 percent to $109 million from $148 million a year ago, profits from digital businesses jumped to $105 million from $7 million.

Film and photofinishing sales slumped to $1.07 billion from $1.35 billion a year ago while operating profits dropped to $139 million from $174 million.

Health imaging sales fell 6 percent to $597 million, and operating earnings tumbled to $68 million from $96 million because of higher silver prices and costs associated with exploring a partnership, an outright sale or other options for the 110-year-old business.

Graphic communications sales eased by $6 million to $880 million but operating earnings reached $31 million, up from $7 million a year ago.

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