Eastman Kodak Co. (EK) on Wednesday said operating profit from digital products was lower than expected because of weakness in its business with the medical industry and slower U.S. economic growth.

Rochester, N.Y.-based Kodak, which is struggling to transform itself from a camera and film company to a provider of digital imaging systems (search), said the profit shortfall comes despite faster-than-expected sales growth in digital products such as commercial printing, cameras and special paper.

Kodak's health group sells sophisticated laser imagery gadgets, including radiography, mammography and dental imaging equipment used for diagnostics by doctors and hospitals. In its second-quarter report in July, Kodak said the group's digital revenue growth was less than anticipated.

Kodak, which will hold a meeting with investors in New York on Wednesday, said growth in digital earnings from operations this year will be "somewhat behind the ambitious target of $275 million to $325 million" it set for 2005.

What's more, the company, which launched the strategic overhaul in late 2003, said it may only meet the lower end of its 2005 forecast of $1 billion to $1.2 billion in net cash from operating activities plus asset sales.

In January 2004, the world's largest maker of photographic film laid out a plan to transform itself into a provider of digital products and services, such as cameras, docks and commercial printing systems. The complex plan calls for Kodak to grow from acquisitions, even as it cuts back on operations that serve its flagging film markets.

It has since said it plans to cut up to 25,000 jobs in all and reduce manufacturing assets sharply.

Kodak on Wednesday said the transformation was yielding results, and it expects to generate profitable digital revenue growth between now and the end of 2007. It sees gross profit margins of 30 percent and digital earnings from operations equal to 10 percent of revenue.

The company expects digital revenue growth to exceed its previous growth rate target of 36 percent this year. It had previously said 2005 would be the first year that revenue from digital products would outpace that from traditional products.

In yet another operational shift, Kodak plans in January 2006 to separately run its consumer digital and consumer film systems units, since they have different supply-chain needs and retail partners.

In a related matter, Bernard Masson, currently president, Digital & Film Imaging Systems at Kodak, will retire in January. In 2002, Masson was hired by Kodak away from Lexmark International Inc. (LXK)

Shares of Kodak were flat after closing on Tuesday at $25.01 on the New York Stock Exchange.