UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934 for the fiscal year ended May 27, 200425, 2006

THE MARCUS CORPORATION

100 East Wisconsin Avenue – Suite 1900
Milwaukee, Wisconsin 53202-4125
(414) 905-1000

A Wisconsin corporation
IRS Employer Identification No. 39-1139844
Commission File No. 1-12609

We have one class of securities registered pursuant to Section 12(b) of the Act: our Common Stock, $1 par value, which is registered on the New York Stock Exchange.

We do not have any securities registered pursuant to Section 12(g) of the Act.

We are not a well-known seasoned issuer (as defined in rule 405 of the Securities Act).

We are required to file reports pursuant to Section 13 or 15(d) of the Act. We have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and have been subject to such filing requirements for the past 90 days.

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K iscontained in our definitive proxy statement incorporated by reference in Part III of this Form 10-K.

We are an accelerated filer (as defined in Rule 12b-2 of the Act).

We are not a shell company (as defined in Rule 12b-2 of the Act).

The aggregate market value of the voting common equity held by non-affiliates as of November 27, 200324, 2005 and August 5, 20044, 2006 was $296,164,742$523,986,379.35 and $354,187,933,$437,225,176.96, respectively. This value includes all shares of our voting and non-voting Common Stock, except for shares beneficially owned by our directors and executive officers listed in Part I below.

As of November 27, 200324, 2005 and August 5, 2004,4, 2006, there were 20,303,91621,352,968 and 20,611,92021,425,341 shares of our Common Stock, $1 par value, and 9,350,1859,090,471 and 9,323,6608,953,691 shares of our Class B, Common Stock, $1 par value, outstanding, respectively.

Portions of our definitive Proxy Statement for our 20042006 annual meeting of shareholders, which will be filed with the Commission under Regulation 14A within 120 days after the end of our fiscal year and, upon such filing, will be incorporated by reference into Part III to the extent indicated therein.

PART I

Special Note Regarding Forward-Looking Statements

        Certain matters discussed in this Annual Report on Form 10-K and the accompanying annual report to shareholders, particularly in the Shareholders’ Letter and Management’s Discussion and Analysis, are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may generally be identified as such because the context of such statements will include words such as we “believe,” “anticipate,” “expect” or words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause results to differ materially from those expected, including, but not limited to, the following: (i) our ability to successfully complete the proposed transaction to sell our limited-service lodging division; (ii)(1) the availability, in terms of both quantity and audience appeal, of motion pictures for our theatre division; (iii)division, as well as other industry dynamics such as the maintenance of a suitable window between the date such motion pictures are released in theatres and the date they are released to other distribution channels; (2) the effects of increasing depreciation expenses and preopening and start-up costs due to the capital intensive nature of our businesses; (iv)(3) the effects of adverse economic conditions in our markets, particularly with respect to our limited-service lodging and hotels and resorts divisions; (v)division; (4) the effects of adverse weather conditions, particularly during the winter in the Midwest and in our other markets; (vi)(5) the effects on our occupancy and room rates from the relative industry supply of available rooms at comparable lodging facilities in our markets; (vii)(6) the effects of competitive conditions in the markets served by us; (viii)our markets; (7) our ability to identify properties to acquire, develop and/or manage and continuing availability of funds for such development; and (ix)(8) the adverse impact on business and consumer spending on travel, leisure and entertainment resulting from terrorist attacks in the United States, the United States’ responses thereto and subsequent hostilities.hostilities. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this Form 10-K and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Item 1.    Business.

General

        We are engaged primarily in threetwo business segments: movie theatres; limited-service lodging;theatres and hotels and resorts.

        As of May 27, 2004,25, 2006, our theatre operations included 4645 movie theatres with 492504 screens throughout Wisconsin, Ohio, Illinois and Minnesota, including fourmoviefour movie theatres with 40 screens in Illinois and Wisconsin owned by third parties but managed by us. We also operate a family entertainment center,Funset Boulevard, that is adjacent to one of our theatres in Appleton, Wisconsin.

        As of May 27, 2004, our limited-service lodging operations included a chain of 178 Baymont Inns & Suites limited-service facilities in 32 states, seven Woodfield Suites all-suite hotels in five states and one Budgetel Inn in Wisconsin. A total of 84 of our Baymont Inns & Suites were owned and operated by us, tenwere operated under joint venture agreements or management contracts and 84 were franchised. On July 14, 2004, we entered into an agreement to sell our limited-service lodging operations to La Quinta Corporation, a leading limited-service lodging company based in Dallas, Texas, for approximately $395 million, excluding certain joint ventures and subject to certain adjustments. La Quinta Corporation will purchase the real estate and related assets and assume the operation of our Company-owned and operated properties and the Baymont franchise system. This transaction is expected to close in late summer or early fall, subject to customary closing conditions, consents and approvals.

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        As of May 27, 2004,25, 2006, our hotels and resorts operations included sixeight owned and operated hotels and resorts in Wisconsin, CaliforniaMissouri, Illinois and Missouri.Ohio. We also manage five hotels for third parties in Wisconsin, Minnesota, Texas and California and a vacation ownership developmentclub in Wisconsin.

        EachBoth of these business segments isare discussed in detail below.

Strategic Plans

        Our current strategic plans include the following goals and strategies:

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        The actual number, mix

Theatre Operations

        At the end of fiscal 2004,2006, we owned or operated 4645 movie theatre locations with a total of 492504 screens in Wisconsin, Illinois, Minnesota and Ohio for an average of 10.711.2 screens per location, compared to an average of 10.611.2 screens per location at the end of fiscal 20032005 and 10.410.7 at the end of fiscal 2002.2004. Included in the fiscal 2006, 2005 and 2004 totals arewere four theatres with 40 screens that we managemanaged for other owners. Our 41 company-owned facilities include 1920 megaplex theatres (12 or more screens), representing 62%68% of our total screens, 2519 multiplex theatres (two to 11 screens) and two single-screen theatres. Our long-term growth strategy for the theatre division is to focus on megaplex theatres having between 12 and 20 screens, which typically vary in seating capacity from 150 to 450 seats per screen. Multi-screen theatres allow us to offer a more diversified selection of films to attract additional customers, exhibit movies in larger or smaller auditoriums within the same theatre depending on the popularity of the movie and benefit from having common box office, concession, projection and lobby facilities.

        During fiscal 2004,2006, we opened sixbegan construction on our new screens, including12-screen theatre in Green Bay, Wisconsin and on our fourthUltraScreen™, atnew 13-screen theatre in Sturtevant/Racine, Wisconsin. The new theatres in Green Bay and Sturtevant/Racine, Wisconsin will replace older existing facilities to offer moviegoers the latest technology and amenities. In early fiscal 2007, we broke ground on our new flagship theatre, to be called “The Majestic,” in Brookfield, Wisconsin. The Majestic will replace two smaller existing theatres with 17 screens in the same market and closed and sold one theatre with six screens. We also opened one new theatre with six screens that we manage for another owner and we eliminatedis expected to feature 16 stadium-style auditoriums, including two screens at two existing theatres in conjunction with a project to convert two small auditoriums into one larger-capacity auditorium at each theatre. We anticipate adding at least 20 additional screens, including one new 12-screen complex in Wisconsin and eight screens at existing theatres, during fiscal 2005. We also plan to convert one of our two IMAX^® theatres to an72-feet-wideUltraScreen™Screens®, a multi-use auditorium and begin showing only non- IMAX^® films on the other. In connection with these changes, both of these theatres will stop using the IMAX^® name. We have also soldinclude two cafés and a four-screen theatre during the first quarter of fiscal 2005 and identified approximately five other theatres with up to 16 screens that we may close over the next three years with minimal impact on operating results.lounge. At fiscal year-end, we operated 477484 first-run screens, 40 of which are operated under management contracts, and 1520 budget-oriented screens.

        Revenues for the theatre business, and the motion picture industry in general, are heavily dependent on many factors over which we have no control, including the general audience appeal of available films, andtogether with studio marketing, advertising and support campaigns. Movie production has been stimulated by additional demand from ancillary markets such as home video, pay-per-view and cable television, as well as increased demand from foreign film markets. Fiscal 2004 featured suchcampaigns, factors over which we have no control. Two fiscal 2006 films produced box office hits asreceipts in excess of $3 million for our circuit, compared to five films that reached that amount during fiscal 2005. The following five fiscal 2006 films produced the most box office receipts for our circuit:LordHarry Potter and the Goblet of Fire,Chronicles of Narnia: The Lion, The Witch and The Wardrobe,War of the Rings: The ReturnWorlds,Star Wars: Episode III – Revenge of the King, Finding Nemo, The Passion of the Christ, Pirates of the CaribbeanSith andElfWedding Crashers.

        We obtain our films from several national motion picture production and distribution companies and are not dependent on any single motion picture supplier. Our booking, advertising, concession purchases and promotional activities are handled centrally by our administrative staff.

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        We strive to provide our movie patrons with high-quality picture and sound presentation in clean, comfortable, attractive and contemporary theatre environments. Substantially all of our movie theatre complexes feature either digital sound, Dolby or other stereo sound systems; acoustical ceilings; side wall insulation; engineered drapery folds to eliminate sound imbalance, reverberation and distortion; tiled floors; loge seats; cup-holder chair-arms; and computer-controlled heating, air conditioning and ventilation. We offer stadium seating, a tiered seating system that permits unobstructed viewing, at over 88%approximately 90% of our first-run screens. Computerized box offices permit all of our movie theatres to sell tickets in advance. Our theatres are accessible to persons with disabilities and provide wireless headphones for hearing-impaired moviegoers. Other amenities at certain theatres include THX auditoriums, which allow customers to hear the softest and loudest sounds, and touch-screen, computerized, self-service ticket kiosks, which simplify advance ticket purchases. We also operate the Marcus Movie Hitline, which is a satellite-based automated telephone ticketing system that allows moviegoers to buy tickets to movies at any of 12 Marcus first-run theatres in the metropolitan Milwaukee area and our two theatres in Columbus, Ohio using a credit card. We own a minority interest in MovieTickets.com, a joint venture of movie and entertainment companies that was created to sell movie tickets over the internet and represents nearly 70%a large majority of the top 50 market theatre screens throughout the United States and Canada. As a result of our association with MovieTickets.com, moviegoers can buy tickets to movies at any of our first-run theatres via the internet and print them at home.

        We are currently testing digital cinema hardware and software in our theatres. Digital cinema may be able to deliver an improved film presentation to our customers, but the reliability of the hardware and software and the potential costs associated with this new technology are yet to be determined. Upon completion of successful testing and the determination of a suitable financing methodology (all film studios have preliminarily indicated that they will participate in the financing of the new technology implementation), we would anticipate a broader roll-out of digital cinema to our theatres in the future.

        We sell food and beverage concessions in all of our movie theatres. We believe that a wide variety of food and beverage items, properly merchandised, increases concession revenue per patron. Although popcorn and soda remain the traditional favorites with moviegoers, we continue to upgrade our available concessions by offering varied choices. For example, some of our theatres offer hot dogs, pizza, ice cream, pretzel bites, frozen yogurt, coffee, mineral water and juices. We have recently added self-serve soft drinks to many of our theatres.

        We have a variety of ancillary revenue sources in our theatres, with the largest related to the sale of pre-show advertising. During fiscal 2004, our theatre division purchasedWe have held a minority interest since fiscal 2004 in Cinema Screen Media, a cinema advertising company that provides pre-show entertainment on our screens and on over 3,000 screens nationwide.

        We also own a family entertainment center,Funset Boulevard, adjacent to our 14-screen movie theatre in Appleton, WisconsinWisconsin.. Funset Boulevard features a 40,000 square foot Hollywood-themed indoor amusement facility that includes a restaurant, party room, laser tag center, virtual reality games, arcade, outdoor miniature golf course and batting cages.

Limited-Service Lodging Operations

        As discussed above, we entered into an agreement on July 14, 2004 to sell our limited-service lodging business. As of the end of our fiscal 2004, we owned, operated or franchised a total of 178 limited-service facilities, with nearly 17,000 available guest rooms, under the name “Baymont Inns & Suites” in 32 states. A total of 84 of these Baymont Inns & Suites are owned and operated by franchisees, 84 are owned and operated by us and ten are operated by us under joint venture agreements or management contracts. As of the end of our fiscal 2004, we also operated seven mid-priced, all-suite hotels under the name “Woodfield Suites” in five states and one Budgetel Inn.

Hotels and Resorts Operations

The Pfister Hotel

        We own and operate the Pfister Hotel, which is located in downtown Milwaukee, Wisconsin. The Pfister Hotel is a full service luxury hotel and has 307 guest rooms (including 82 luxury suites and 176 tower rooms), three restaurants, two cocktail lounges and a 275-car parking ramp. The Pfister also has 24,000 square feet of banquet and convention facilities. The Pfister’s banquet and meeting rooms accommodate up to 3,000 people and the hotel features two large ballrooms, including one of the largest ballrooms in the Milwaukee metropolitan area, with banquet seating for 1,200 people. A portion of the Pfister’s first-floor space is leased for use by retail tenants. In fiscal 2004,2006, the Pfister Hotel earned its 2830^th consecutive four-diamond award from the American Automobile Association and was named one of the “World’s Best Places to Stay” byCondé Nast Travelermagazine.Association. The Pfister is also a member of Preferred Hotels and Resorts Worldwide Association, an organization of independent luxury hotels and resorts, and the Association of Historic Hotels of America. We are currently adding a new signature restaurant to this hotel (replacing an existing restaurant) and we are adding a new spa and salon. Renovations to guest rooms and meeting spaces are also planned at this hotel.

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The Hilton Milwaukee City Center

        We own and operate the 729-room Hilton Milwaukee City Center. Several aspects of Hilton’s franchise program have benefited this hotel, including Hilton’s international centralized reservation and marketing system, advertising cooperatives and frequent stay programs. The Hilton Milwaukee City Center also features Paradise Landing, an indoor water park and family fun center that features water slides, swimming pools, a sand beach, lounge and restaurant. The hotel also has two cocktail lounges, two restaurants and an 870-car parking ramp.

Hilton Madison at Monona Terrace

        We own and operate the 240-room Hilton Madison at Monona Terrace.Terrace in Madison, Wisconsin. The Hilton Madison, which also benefits from the aspects of Hilton’s franchise program noted above, is connected by skywalk to the new Monona Terrace Community and Convention Center, has four meeting rooms totaling 2,400 square feet, an indoor swimming pool, a fitness center, a lounge and a restaurant.

The Grand Geneva Resort & Spa

        We own and operate the Grand Geneva Resort & Spa in Lake Geneva, Wisconsin, which is the largest convention resort in Wisconsin. This full-facility destination resort is located on 1,300 acres and includes 355 guest rooms, 50,000 square feet of banquet, meeting and exhibit space, 6,600 square feet of ballroom space, three specialty restaurants, two cocktail lounges, two championship golf courses, several ski-hills, two indoor and five outdoor tennis courts, three swimming pools, a spa and fitness complex, horse stables and an on-site airport. In fiscal 2006, the Grand Geneva Resort & Spa earned its 8^th consecutive four-diamond award from the American Automobile Association. A major conference center expansion, which will add approximately 12,000 square feet of meeting space to the resort, is currently under development and we are reviewing plans for a major renovation of the outdoor pool complex.

        We manageThrough fiscal 2006, we managed and sellsold units of a vacation ownership development, the Marcus Vacation Club, that is adjacent to the Grand Geneva Resort & Spa. The development includes 62 timeshare units and a timeshare sales center. Our timeshare owners can participateIn early fiscal 2007, we sold the remaining inventory in exchange programs throughthis development to Orange Lake Resort Condominiums International.& Country Club of Orlando, Florida, but will continue to provide hospitality management services for the property, including check-in, housekeeping and maintenance.

Miramonte Resort

        We own and operate the Miramonte Resort in Indian Wells, California, a boutique luxury resort located on 11 landscaped acres. The resort includes 14 two-story Tuscan style buildings with a total of 222 guest rooms, one restaurant, one lounge and 9,500 square feet of banquet, meeting and exhibit space, including a 5,000 square foot grand ballroom, a fully equipped fitness center, two outdoor swimming pools, each with an adjacent jacuzzi spa and sauna, outdoor meeting facilities and a golf concierge. A luxury destination spa,The Well^TM, was opened at the end of fiscal 2004 to further enhance this property. During fiscal 2004, the Miramonte Resort earned its^6thconsecutive four-diamond award from the American Automobile Association.

Hotel Phillips

        We own and operate the Hotel Phillips, a 217-room hotel in Kansas City, Missouri. After purchasing and completely restoring this landmark hotel, we reopened it in September 2001. The Hotel Phillips has conference rooms totaling 5,600 square feet of meeting space, a 2,300 square foot ballroom, a restaurant and a lounge.

-5-Four Points by Sheraton Chicago Downtown/Magnificent Mile

        We own and operate the Four Points by Sheraton Chicago Downtown/Magnificent Mile, a 226-room (including 130 suites) hotel in Chicago, Illinois. The Four Points by Sheraton Chicago Downtown/Magnificent Mile has affordable, well-appointed guestrooms and suites, 3,000 square feet of high-tech meeting rooms, an indoor swimming pool and fitness room and an on-site parking facility. The hotel will also lease space to several area restaurants, with one restaurant currently under development.

Wyndham Milwaukee Center

        We own and operate the Wyndham Milwaukee Center in Milwaukee, Wisconsin. The Wyndham Milwaukee Center has 220 rooms, 12,000 square feet of flexible banquet and meeting space, on-site parking, a restaurant and two lounges and is located in the heart of Milwaukee’s theatre and financial district. A major renovation of this hotel is expected to begin during our fiscal 2007 second quarter.

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Westin Columbus

        During the last month of fiscal 2006, we acquired the Westin Columbus in Columbus, Ohio. The Westin Columbus is a AAA four-diamond full-service historic hotel that currently includes 186 rooms and suites and offers more than 12,000 square feet of meeting, banquet and ballroom space, a restaurant and a cocktail lounge. The hotel is located in the heart of the downtown business district and is connected to the Southern Theatre, a historically restored performing arts theater. We anticipate a substantial renovation of this property during our fiscal 2007 and we will consider adding a majority equity partner to this hotel in the future.

Operated and Managed Hotels

        We operate the Crowne Plaza-Northstar Hotel in Minneapolis, Minnesota. The Crowne Plaza-Northstar Hotel is located in downtown Minneapolis and has 226 guest rooms, 13 meeting rooms, 6,370 square feet of ballroom and convention space, a restaurant, a cocktail lounge and an exercise facility.

        We manage the Hotel Mead in Wisconsin Rapids, Wisconsin. The Hotel Mead has 157 guest rooms, ten meeting rooms totaling 14,000 square feet of meeting space, two cocktail lounges, two restaurants and an indoor pool with a sauna and whirlpool.

        We operate Beverly Garland’s Holiday Inn in North Hollywood, California. The Beverly Garland has 257 guest rooms, including 12 suites, meeting space for up to 600, including an amphitheater and ballroom, an outdoor swimming pool and lighted tennis courts. The mission-style hotel is located on seven acres near Universal Studios.

        We manage the Timber Ridge Lodge, an indoor/outdoor waterpark and condominium complex in Lake Geneva, Wisconsin. The Timber Ridge Lodge is a 225-unit condominium hotel on the same campus as our Grand Geneva Resort & Spa. The Timber Ridge Lodge has meeting rooms totaling 3,640 square feet, a general store, a restaurant-cafe, a snack bar and lounge, a state-of-the-art fitness center and an entertainment arcade.

        Finally, we operate the Hilton Garden Inn Houston NW/Chateau in Houston, Texas, which opened in May 2002.Texas. The Hilton Garden Inn has 171 guest rooms, a ballroom, a restaurant, a fitness center, a convenience mart and a swimming pool. The hotel is a part of Chateau Court, a 13-acre, European-style mixed-use development that also includes retail space and an office village.

        During fiscal 2004, we announced twoTwo new hotels are currently under construction that we will manage upon completion of the respective projects. The Platinum Suite Hotel & Spa will be a luxury condominium hotel just off the Las Vegas Strip that will feature 255 condo units, a luxury spa, indoor and outdoor swimming pools, 8,440 square feet of meeting space, restaurants, lounge and an upscale bar. We own 50% of the joint venture developing this hotel, which is expected to open during our fiscal 2006.in September 2007. We are also announced our participationparticipating, as the principal equity partner, in a joint venture to restore and then manage the Skirvin Hotel in Oklahoma City, the oldest hotel in Oklahoma. Renovation of this historic hotel began in fiscal 2006 and is also expected to be completed during fiscal 2006.in February 2007. When completed, this hotel is expected to have 235225 rooms and 25,000 square feet of meeting space and is expected to be operated as a Hilton.space.

Competition

        EachBoth of our businesses experience intense competition from national, regional and local chain and franchise operations, some of which have substantially greater financial and marketing resources than we have. Most of our facilities are located in close proximity to competing facilities.

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        Our movie theatres compete with large national movie theatre operators, such as AMC Entertainment, Cinemark, Regal Cinemas Loews Cineplex and Carmike Cinemas, as well as with a wide array of smaller first-run and discount exhibitors. Although movieMovie exhibitors also generally compete with the home video, pay-per-view and cable television markets, wemarkets. We believe that such ancillary markets have assisted the growth of the movie theatre industry by encouraging the production of first-run movies released for initial movie theatre exhibition, which establisheshas historically established the demand for such movies in these ancillary markets.

        Our Baymont Inns & Suites compete with national limited-service lodging chains such as Hampton Inn (which is owned by Hilton Hotels Corporation), Fairfield Inn (which is owned by Marriott Corporation), Holiday Inn Express and Comfort Inn, as well as a large number of regional and local chains. Our Woodfield Suites compete with national chains such as Embassy Suites, Comfort Suites, AmeriSuites and Courtyard by Marriott, as well as other regional and local all-suite facilities.

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        Our hotels and resorts compete with the hotels and resorts operated by Hyatt Corporation, Marriott Corporation, Ramada Inns, Holiday Inns Wyndham Hotels and others, along with other regional and local hotels and resorts.

        We believe that the principal factors of competition in eachboth of our businesses, in varying degrees, are the price and quality of the product, quality and location of our facilities and customer service. We believe that we are well positioned to compete on the basis of these factors.

Seasonality

        Historically, our first fiscal quarter has produced the strongest operating results because this period coincides with the typical summer seasonality of the movie theatre industry and the summer strength of our lodging businesses.business. Our third fiscal quarter has historically produced the weakest operating results in our hotels and resorts division primarily due to the effects of reduced travel during the winter months onmonths. Our third fiscal quarter for our lodging businesses.theatre division has historically been our second strongest quarter but is heavily dependent upon the quantity and quality of films released during the Thanksgiving to Christmas holiday period.

Environmental Regulation

        We do not expect federal, state or local environmental legislation to have a material effect on our capital expenditures, earnings or competitive position. However, our activities in acquiring and selling real estate for business development purposes have been complicated by the continued emphasis that our personnel must place on properly analyzing real estate sites for potential environmental problems. This circumstance has resulted in, and is expected to continue to result in, greater time and increased costs involved in acquiring and selling properties associated with our various businesses.

Employees

        As of the end of fiscal 2004,2006, we had approximately 7,5005,300 employees, a majorityover one-half of whom were employed on a part-time basis. A number of our (i)(1) hotel employees in Minneapolis, Minnesota are covered by a collective bargaining agreementsagreement that expire inexpires on April 2005; (ii)30, 2010; (2) operating engineers in the Hilton Milwaukee City Center and Pfister Hotel are covered by collective bargaining agreements that expire on December 31, 2006 and April 30, 2007, respectively; (iii)(3) hotel employees in the Hilton Milwaukee City Center and the Pfister Hotel are covered by a collective bargaining agreement that expires on JuneAugust 15, 2006; (iv)(4) painters in the Hilton Milwaukee City Center and the Pfister Hotel are covered by a collective bargaining agreement that expires on May 31, 2008; (v)(5) projectionists at the Chicago, Illinois theatres that we manage for a third party are covered by a collective bargaining agreement that expiredexpires on June 6, 2004, an extension to which is currently being negotiated; (vi)October 14, 2006; (6) projectionists at other Chicago locations are covered bycurrently actively negotiating a new collective bargaining agreement that expires on April 30, 2006; (vii)and the current agreement has been extended for the duration of these negotiations; (7) projectionists in Madison, Wisconsin are covered by a collective bargaining agreement that expires on April 2, 2008; and (viii)(8) projectionists in Milwaukee, Wisconsin are covered by a collective bargaining agreement that expires on May 30, 2007.

Web Site Information and Other Access to Corporate Documents

        Our corporate web site is www.marcuscorp.com. All of our Form 10-Ks, Form 10-Qs and Form 8-Ks, and amendments thereto, are available on this web site as soon as practicable after they have been filed with the SEC. In addition, our corporate governance guidelines and the charters for our Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee are available on our web site. If you would like us to mail you a copy of our corporate governance guidelines or a committee charter, please contact Thomas F. Kissinger, Vice President, General Counsel and Secretary, The Marcus Corporation, 100 East Wisconsin Avenue, Suite 1900, Milwaukee, Wisconsin 53202-4125.

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        The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.

The Lack of Both the Quantity and Audience Appeal of Motion Pictures May Adversely Affect Our Financial Results.

        The financial results of our movie theatre business and the motion picture industry in general are heavily dependent on the general audience appeal of available films, together with studio marketing, advertising and support campaigns, factors over which we have no control. The relative success of our movie theatre business will continue to be largely dependent upon the quantity and audience appeal of films made available by the movie studios and other producers. Also, our quarterly results of operations are significantly dependent on the quantity and audience appeal of films that we exhibit during each quarter. As a result, our quarterly results may be unpredictable and somewhat volatile.

Our Financial Results May be Adversely Impacted by Unique Factors Affecting the Theatre Exhibition Industry, Such as the Shrinking Video Release Window, the Increasing Piracy of Feature Films and the Increasing Use of Alternative Film Distribution Channels and Other Competing Forms of Entertainment.

        Over the last decade, the average video release window, which represents the time that elapses from the date of a film’s theatrical release to the date a film is available on video or DVD, has decreased from approximately six months to less than four and one-half months. We cannot assure you that this release window, which is determined by the film studios, will not shrink further, which could have an adverse impact on our movie theatre business and results of operations.

        Piracy of motion pictures is prevalent in many parts of the world. Technological advances allowing the unauthorized dissemination of motion pictures increase the threat of piracy by making it easier to create, transmit and distribute high quality unauthorized copies of such motion pictures. The proliferation of unauthorized copies and piracy of motion pictures may have an adverse effect on our movie theatre business and results of operations.

        We face competition for movie theatre patrons from a number of alternative motion picture distribution channels, such as DVD, network, cable and satellite television, video on-demand, pay-per-view television and downloading utilizing the internet. We also compete with other forms of entertainment competing for our patrons’ leisure time and disposable income such as concerts, amusement parks, sporting events, home entertainment systems, video games and portable entertainment devices such as the iPod®. An increase in popularity of these alternative film distribution channels and competing forms of entertainment may have an adverse effect on our movie theatre business and results of operations.

The Relative Industry Supply of Available Rooms at Comparable Lodging Facilities May Adversely Affect Our Financial Results.

        Historically, a material increase in the supply of new hotel rooms in a market can destabilize that market and cause existing hotels to experience decreasing occupancy, room rates and profitability. If such over-supply occurs in one or more of our major markets, we may experience an adverse effect on our hotels and resorts business and results of operations.

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Our Businesses are Heavily Capital Intensive and Preopening and Start-Up Costs and Increasing Depreciation Expenses May Adversely Affect Our Financial Results.

        Both our movie theatre and hotels and resorts businesses are heavily capital intensive. Purchasing properties and buildings, constructing buildings, renovating and remodeling buildings and investing in joint venture projects all require substantial upfront cash investments before these properties, facilities and joint ventures can generate sufficient revenues to pay for the upfront costs and positively contribute to our profitability. In addition, many growth opportunities, particularly for our hotels and resorts division, require lengthy development periods during which significant capital is committed and preopening costs and early start-up losses are incurred. We expense these preopening and start-up costs currently. As a result, our results of operations may be adversely affected by our significant levels of capital investments. Additionally, to the extent we capitalize our capital expenditures, our depreciation expenses may increase, thereby adversely affecting our results of operations.

Item 2.    Properties.Adverse Economic Conditions in Our Markets May Adversely Affect Our Financial Results.

        Downturns or adverse economic conditions affecting the United States economy generally, and particularly downturns or adverse economic conditions in the Midwest and in our other markets, adversely affect our results of operations, particularly with respect to our hotels and resorts division. Poor economic conditions can significantly adversely affect the business and group travel customers, which are the largest customer segments for our hotels and resorts division. Additionally, although our theatre business has historically performed well during economic downturns as consumers seek less expensive forms of out-of-home entertainment, a significant reduction in consumer confidence or disposable income in general may temporarily affect the demand for motion pictures or severely impact the motion picture production industry, which, in turn, may adversely affect our results of operations.

Adverse Weather Conditions, Particularly During the Winter in the Midwest and in Our Other Markets, May Adversely Affect Our Financial Results.

        Poor weather conditions adversely affect business and leisure travel plans, which directly impacts our hotels and resorts division. In addition, theatre attendance on any given day may be negatively impacted by adverse weather conditions. In particular, adverse weather during peak movie-going weekends or holiday time periods may negatively affect our results of operations. Adverse winter weather conditions may also increase our snow removal and other maintenance costs in both of our divisions.

Each of Our Business Segments and Properties Experience Ongoing Intense Competition.

        In each of our businesses we experience intense competition from national, regional and local chain and franchise operations, some of which have substantially greater financial and marketing resources than we have. Most of our facilities are located in close proximity to other facilities which compete directly with ours. The motion picture exhibition industry is fragmented and highly competitive with no significant barriers to entry. Theatres operated by national and regional circuits and by small independent exhibitors compete with our theatres, particularly with respect to film licensing, attracting patrons and developing new theatre sites. Moviegoers are generally not brand conscious and usually choose a theatre based on its location, the films showing there and its amenities. With respect to our hotels and resorts division, our ability to remain competitive and to attract and retain business and leisure travelers depends on our success in distinguishing the quality, value and efficiency of our lodging products and services from those offered by others. If we are unable to compete successfully in either of our divisions, this could adversely affect our results of operations.

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Our Ability to Identify Suitable Properties to Acquire, Develop and Manage Will Directly Impact Our Ability to Achieve Certain of Our Growth Objectives.

        A portion of our ability to successfully achieve our growth objectives in both our theatre and hotels and resorts divisions is dependent upon our ability to successfully identify suitable properties to acquire, develop and manage. Failure to successfully identify, acquire and develop suitable and successful locations for new lodging properties and theatres will substantially limit our ability to achieve these important growth objectives.

Our Properties are Subject to Risks Relating to Acts of God, Terrorist Activity and War and Any Such Event May Adversely Affect our Financial Results.

        Acts of God, natural disasters, war (including the potential for war), terrorist activity (including threats of terrorist activity), epidemics (such as SARs and bird flu), travel-related accidents, as well as political unrest and other forms of civil strife and geopolitical uncertainty may adversely affect the lodging and movie exhibition industries and our results of operation. Terrorism incidents, such as the events of September 11, 2001, and wars, such as the Iraq war in 2003, significantly impact business and leisure travel and consequently demand for hotel rooms. In addition, inadequate preparedness, contingency planning, insurance coverage or recovery capability in relation to a major incident or crisis may prevent operational continuity and consequently impact the reputation of our businesses.

Our Results May be Seasonal, Resulting in Unpredictable and Non-Representative Quarterly Results.

        Historically, our first fiscal quarter has produced our strongest operating results because this period coincides with the typically strong summer performance of the movie theatre industry and the summer strength of our lodging business. Our third fiscal quarter has historically produced our weakest operating results in our hotels and resorts division, primarily due to the affects of reduced travel during the winter months. Our third fiscal quarter for our theatre division has historically been our second strongest quarter but is heavily dependent upon the quantity and quality of films released during the Thanksgiving to Christmas holiday period.

        None.

        We own the real estate of a substantial portion of our facilities, including, as of May 27, 2004,25, 2006, the Pfister Hotel, the Hilton Milwaukee City Center, the Hilton Madison at Monona Terrace, the Grand Geneva Resort & Spa, the Miramonte Resort and the Hotel Phillips, all of our Company-owned Baymont Inns & Suites, all of the Woodfield SuitesWyndham Milwaukee Center, the Westin Columbus and the majority of our theatres. We lease the remainder of our facilities. As of May 27, 2004,25, 2006, we also managed five hotel properties and four theatres that are owned by third parties. Additionally, we own properties acquired for the future construction and operation of new facilities. All of our properties are suitably maintained and adequately utilized to cover the respective business segment served.

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        Our owned, leased and franchisedmanaged properties are summarized, as of May 27, 2004,25, 2006, in the following table:

        Certain of the above individual properties or facilities are subject to purchase money or construction mortgages or commercial lease financing arrangements, but we do not consider these encumbrances, individually or in the aggregate, to be material.

        Over 90% of our operating property leases expire on various dates after the end of fiscal 20052007 (assuming we exercise all of our renewal and extension options).

Item 3.    Legal Proceedings.

        We do not believe that any pending legal proceedings involving us are material to our business. No legal proceeding required to be disclosed under this item was terminated during the fourth quarter of fiscal 2004.2006.

Item 4.    Submission of Matters to a Vote of Security Holders.

        No matters were submitted to a vote of our shareholders during the fourth quarter of fiscal 2004.2006.

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EXECUTIVE OFFICERS OF COMPANY

        Each of our executive officers is identified below together with information about each officer’s age, position and employment history for at least the past five years:

        Stephen H. Marcus has been our Chairman of the Board since December 1991 and our President and Chief Executive Officer since December 1988. Mr. Marcus has worked at the Company for 4244 years.

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        Bruce J. Olson has been employedjoined the Company in his present position of Group Vice President since July 1991. He was elected to serve on our Board of Directors in April 1996.1974. Mr. Olson previously served as our Vice President-Administration and Planning from September 1987 until July 1991 and asthe Executive Vice President and Chief Operating Officer of Marcus Theatres Corporation from August 1978 until October 1988, whenat which time he was appointed President of that corporation. Mr. Olson joined the Company in 1974.

        H. Fred Delmenhorst has beenalso served as our Vice President-Human Resources sincePresident-Administration and Planning from September 1987 until July 1991. In July 1991, he joined the Companywas appointed as our Group Vice President and in December 1984.October 2004, he was promoted to Senior Vice President. He was elected to serve on our Board of Directors in April 1996.

        Thomas F. Kissinger joined the Company in August 1993 as Secretary and Director of Legal Affairs and inAffairs. In August 1995, he was promoted to General Counsel and Secretary and in October 2004, he was promoted to Vice President, General Counsel and Secretary. Prior thereto,to August 1993, Mr. Kissinger was associated with the law firm of Foley & Lardner LLP for five years.

        Douglas A. Neis joined the Company in February 1986 as Controller of the Marcus Theatres division and in November 1987, he was promoted to Controller of Marcus Restaurants. In July 1991, Mr. Neis was appointed Vice President of Planning and Administration for Marcus Restaurants. In September 1994, Mr. Neis was also named as our Director of Technology and in September 1995 he was elected as our Corporate Controller. In September 1996, Mr. Neis was promoted to our Chief Financial Officer and Treasurer.

        William J. Otto joined the Company in 1993 as the Senior Vice President of Operations of Marcus Hotels, Inc. In 1996, Mr. Otto was promoted to Senior Vice President and Chief Operating Officer of Marcus Hotels, Inc. and in April 2001 he was further promoted to President and Chief Operating Officer of Marcus Hotels, Inc.

        James R. AbrahamsonGregory S. Marcus joined the Company in April 2000March 1992 as President and Chief Operating OfficerDirector of Baymont Inns, Inc. Mr. Abrahamson previously served as ExecutiveProperty Management/Corporate Development. He was promoted in 1999 to Senior Vice President – Corporate Development and became an executive officer of the Franchise Hotel GroupCompany in July 2005. He was elected to serve on our Board of Hilton Hotels Corporation from January 1995 until April 2000.Directors in October 2005.

        Our executive officers are generally elected annually by the Board of Directors after the annual meeting of shareholders. Each executive officer holds office until his successor has been duly qualified and elected or until his earlier death, resignation or removal.

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PART II

Item 5.    Market for the Company’s Common Equity, Related Shareholder Matters and Issuer Repurchases of Equity Securities.

        Our Common Stock, $1 par value, is listed and traded on the New York Stock Exchange under the ticker symbol “MCS.” Our Class B Common Stock, $1 par value, is neither listed nor traded on any exchange. During each quarter of fiscal 20032005 and 2004,the first and second quarters of fiscal 2006, we paid a dividend of $0.055 per share of our Common Stock and $0.05 per share of our Class B Common Stock. On August 5, 2004, there were 2,385 shareholdersDuring the third and fourth quarters of recordfiscal 2006, we paid a dividend of $0.075 per share of our Common Stock and 44 shareholders of record$0.06818 per share of our Class B Common Stock. Additionally, on January 17, 2006, the Company announced the declaration of a special cash distribution of $7.00 per share on the Company’s Common Stock and Class B Common Stock, which was paid on February 24, 2006. On February 27, 2006, during the Company’s fourth quarter, the Company’s stock began trading ex-dividend, reflecting the special distribution. The following table lists the high and low sale prices of our Common Stock for the periods indicated:indicated, which have been retroactively reduced for all periods prior to February 27, 2006 by $7.00 per share to adjust for the special cash distribution.

        On August 4, 2006, there were 2,236 shareholders of record of our Common Stock and 56 shareholders of record of our Class B Common Stock.

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        ThroughAs of May 27, 2004,25, 2006, our boardBoard of directors has approvedDirectors had authorized the repurchase of up to 4.7 million shares of our outstanding Common Stock. Under these authorizations,Pursuant to this board authorization, we may repurchase shares of our Common Stock from time to time in the open market, pursuant to privately negotiated transactions or otherwise. The repurchased shares are held in our treasury pending potential future issuance in connection with employee benefit, option or stock ownership plans or other general corporate purposes. Under these authorizations,Pursuant to this board authorization, we have repurchased approximately 2.83.1 million shares of Common Stock. These authorizations doStock as of May 25, 2006. This board authorization does not have an expiration date. We did not repurchase any shares

        The following table sets forth information with respect to purchases made by us or on our behalf of our Common Stock during the fourth quarter.periods indicated. All of these repurchases were made in the open market and pursuant to the publicly announced repurchase authorization described above.

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Item 6.    Selected Financial Data.

Eleven-YearFive-Year Financial Summary

GRAPH OMITTED.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

General

        We report our consolidated and individual segment results of operations on a 52-or-53-week fiscal year ending on the last Thursday in May. Fiscal 2004, 20032006, 2005 and 20022004 were 52-week years. Our upcoming fiscal 20052007 will also be a 52-week year.53-week year and we anticipate that our reported results for fiscal 2007 will benefit from the additional week of reported operations.

        We divide our fiscal year into three 13-week quarters and a final quarter consisting of 13 or 14 weeks. Our primary operations are reported in threetwo business segments: theatres limited-service lodging and hotels and resorts. As a result of the sale of substantially all of the assets of our KFC restaurantslimited-service lodging division during fiscal 2001,2005, we have presented the restaurantlimited-service lodging business segment has been presented as discontinued operations in the accompanying financial statements and in this discussion. As a result of our recent signingsale of a definitive agreementthe remaining inventory of real estate and development costs associated with our vacation ownership development adjacent to sellthe Grand Geneva Resort and our limited-service lodging division, thissale of the Miramonte Resort during fiscal 2005, we have also presented these assets and related results of operations, previously included in our hotels and resorts segment, will be presented as part of our discontinued operations in futurethe accompanying financial statements and in this discussion. Prior year results have been restated to conform to the current year presentation.

        Historically, our first fiscal quarter has produced the strongest operating results because this period coincides with the typical summer seasonality of the movie theatre industry and the summer strength of ourthe lodging businesses.business. Our third fiscal quarter has historically produced the weakest operating results in our hotels and resorts division primarily due to the effects of reduced travel during the winter months on our lodging businesses.

        Revenue and operating income increases in all three of our business segments contributed to an overall increase in earnings duringmonths. Our third fiscal 2004. Total revenues reached an all-time high and our net earnings were at the highest level in the last six years. Another record yearquarter for our movie theatres, an improved operating environment fortheatre division has historically been our two lodging segments, increased investment income and reduced interest expense all contributed to the overall improved results compared to the prior year.

Pending Sale of Limited-Service Lodging Division

        On July 14, 2004, we signed a definitive agreement to sell our limited-service lodging division to La Quinta Corporation of Dallas, Texas, for approximately $395 million in cash, excluding certain joint ventures and subject to certain adjustments. La Quinta will purchase our Baymont Inns & Suites, Woodfield Suites and Budgetel Inns brands, real estate and related assets and assume the operation of the Company-owned and operated properties and the Baymont franchise system. Eight joint venture Baymont Inns & Suites were excluded from the original transaction. One or more of these joint ventures could be added to the transaction at a later date and total proceeds would increase accordingly. The transactionsecond strongest quarter but is expected to close later this summer or early fall, subject to customary closing conditions, consents and approvals.

        The assets to be sold consist primarily of land, buildings and equipment with a net book value of approximately $261 million as of May 27, 2004. As a result, upon consummation of the sale, we would expect to report a significant gain on sale of discontinued operations during fiscal 2005, after applicable income taxes. Our fiscal 2005 operating results will likely include approximately three months of results from our limited-service lodging division and those results will be classified as income or loss on discontinued operations. The impact of the sale on our full year fiscal 2005 operating results and financial condition will be largelyheavily dependent upon how we decidethe quantity and quality of films released during the Thanksgiving to use the expected proceeds.Christmas holiday period.

        Over the past five years, we successfully established the Baymont Inns & Suites brand in the mid-price segment of the lodging industry, building the brand and the related infrastructure. We came to the conclusion that in order to continue Baymont’s growth, the brand would benefit by being part of a larger system. La Quinta Corporation owns, operates or franchises more than 370 La Quinta Inns and La Quinta Inn & Suites in 33 states. As a result, we believe that the sale of this division to LaQuinta is in the best long-term interests of our associates, franchisees, guests and shareholders.

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Consolidated Financial Comparisons

        The following table sets forth revenues, operating income, other income (expense), earnings from continuing operations, earnings from discontinued operations, net earnings and earnings per share for the past three fiscal years (in millions, except for per share and percentage change data):

Fiscal 20042006 versus Fiscal 20032005

        All three operating divisions contributed to ourAn increase in revenues and operating income from our hotels and resorts division during fiscal 2004. A third consecutive year of record2006 offset a decrease in revenues and operating performanceincome from our theatre division significant improvement in operating results from our limited-service lodging division and a second consecutive year of improved operatingcompared to the prior year. Operating results from our hotels and resorts division resulted in an increase in overallbenefited from the addition of two new hotels as well as improved performance from our existing properties, partially offset by combined start-up and preopening costs associated with ongoing development projects. Theatre division operating income (earnings before other income/expense and income taxes). Overall operating income wasresults were negatively impacted in fiscal 2004 by an increase in our loss from corporate items, due primarilya particularly weak first quarter slate of movies compared to a one-time charge of over $600,000 related tothe prior year, insurance claims. These claims,as the largestdivision’s operating results during the last three quarters of which relatesfiscal 2006 improved slightly compared to our former restaurant division, became our responsibility inthe last three quarters of fiscal 2004 when our former insurance company filed bankruptcy. A significant increase in2005. Increased investment income and decrease inreduced interest expense during fiscal 2004 contributed to our increasedan overall increase in earnings from continuing operations during fiscal 2006, offsetting reduced gains on disposition of property and equipment and increased equity losses from unconsolidated joint ventures. Our overall net earnings decreased significantly during fiscal 2004.2006 compared to the prior year due to last year’s significant gains on the disposition of the previously noted discontinued operations.

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        We recognized investment income of $1.7$7.9 million during fiscal 2004,2006, representing an increase of $1.7 million, or 27.1%, compared to a net investment lossincome of approximately $150,000$6.2 million during the prior year. Investment income has historically includedincludes interest earned on cash, cash equivalents, cash held by intermediaries and notes receivable, including notes related to the sale of timeshare units in our hotels and resorts division. InvestmentThe fiscal 2006 increase in investment income was the result of interest earned on these items was downproceeds received from the priorsale of our limited-service lodging division in September 2004. Our cash and cash equivalents totaled $34.5 million at the end of our fiscal year, due primarilybut was as high as $292.7 million as of the end of our fiscal 2006 third quarter. The majority of our cash was invested in federal tax-exempt short-term financial instruments.

        On January 17, 2006, our Board of Directors approved a special cash dividend of $7.00 per share, payable on February 24, 2006, the first day of our fiscal 2006 fourth quarter. The special dividend returned to an overall reductionour shareholders approximately $214.6 million of the proceeds received from the sale of the limited-service lodging division. As a result, our investment income was reduced in our notes receivable during fiscal 2004. Comparisons2006 fourth quarter and will be significantly reduced in fiscal 2007 compared to last year, however, were favorably impactedfiscal 2006.

        In evaluating the use of the proceeds from the sale of our limited-service lodging division, we believed it was appropriate to return a portion of the value we had created in that business to our shareholders and to provide them with added liquidity for their investment. In addition, in order to provide additional stability to our shareholder return and emphasize our commitment to increasing long-term shareholder value, we also increased our regular quarterly dividend by 36% to $.075 per share of common stock.

        In a $2.6 million investment loss reported during fiscal 2003 relatedprivate letter ruling, the Internal Revenue Service determined that the special dividend would be treated as a distribution in partial liquidation pursuant to loans toSections 302(b)(4) and investments302(e)(1) of the Internal Revenue Code. For shareholders that are not corporations, this means that the special distribution will generally be treated as payment in Baymont Inns & Suites joint ventures that experienced significant financial difficultiesexchange for stock in the months following September 11, 2001. We have a limited number of joint ventures and our exposure to additional losses related to these joint venturesCompany that is not significant. In addition, we also recognized a $494,000 pre-tax investmentconstructively redeemed. Non-corporate shareholders will generally recognize capital gain or loss on securities held during fiscal 2003, whose decline in fair value was deemedthis constructive exchange to the extent of the difference between the amount of the special distribution and their adjusted basis of the shares constructively surrendered. Corporate shareholders generally will not be other than temporary. During fiscal 2004 and in years prioreligible for capital gains treatment with respect to fiscal 2003, gains and losses on these available for sale investments were included in other comprehensive loss in shareholders’ equity, consistentthe special distribution. Shareholders should consult with current accounting pronouncements.their tax advisors with respect to the tax consequences of the special distribution.

        Our interest expense totaled $16.9$14.4 million for fiscal 2004,2006, representing a decrease of $2.8 million,$500,000, or 14.1%3.2%, compared to fiscal 20032005 interest expense of $19.6$14.9 million. The decrease in interest expense was primarily the result of a $39.1 million, or 14.2%, reduction inmaking scheduled payments on our total long-term debt including current maturities atduring the end ofyear. We do not expect our interest expense to change substantially in fiscal 2004 compared to the end2007, other than as a result of the prior year.payment of scheduled current principal maturities. Current maturities of long-term debt on our balance sheet as of May 25, 2006 included $25.0 million related to a mortgage note on our new Chicago hotel with a maturity date of September 2006. We currently anticipate extending the maturity date of this note, which would result in the majority of this amount being reclassified as long-term debt.

        WeOur continuing operations recognized net gains on disposition of property, equipment and investments in joint ventures of $2.2$1.7 million during fiscal 2004,2006, compared to gains from continuing operations of $2.1$2.2 million during fiscal 2003.2005. The fiscal 20042006 net gain was primarily the result of theour first quarter sales of six parcels of excess land, the sale of a former theatre outlot and real estate development in MinnesotaAppleton, Wisconsin and the sale ofa strip shopping center developed by a joint venture Baymont property.on land adjacent to our theatre in Delafield, Wisconsin. These gains were partially offset by fourth quarter losses related to the closing of a restaurant in our Pfister Hotel and the replacement of certain hotel assets. The timing of our periodic sales of property and equipment can resultresults in variations in the gains or losses that we report on disposition of property and equipment each year. We are actively attempting to sellanticipate periodic additional parcelssales of excess land and we believe that additional net gains on disposition ofnon-core property and equipment with the potential for additional disposition gains during fiscal 2007. It is possible that we may also report significant gains during fiscal 2007 from the intended sale of two valuable theatre parcels in conjunction with our building of a nearby replacement theatre in Brookfield, Wisconsin.

18

        We currently hold investments in several joint ventures that are accounted for under the equity method and have reported equity gains and losses from unconsolidated joint ventures as a separate line item on our consolidated statements of earnings. During fiscal 2006, we reported net equity losses from unconsolidated joint ventures of $1.9 million, compared to net equity losses of $1.1 million during the prior fiscal year. Losses during fiscal 2006 were primarily the result of preopening costs from our 50% ownership interest in Platinum Condominium Development, LLC, which is developing a luxury condominium hotel in Las Vegas, Nevada, and operating losses from our minority ownership interest in Cinema Screen Media, a cinema advertising company that provides pre-show entertainment on our screens and over 3,000 screens nationwide. Primarily as a result of our expectation that the Las Vegas Platinum Hotel will open around September 2006, we do not expect to incur the same level of equity losses during fiscal 2007. In fact, upon completion of construction and the expected closing of the condominium unit sales, our hotels and resorts division will share in any development profit on the project. We currently estimate that our 50% share of the development profit may be recognized during the coming year,first half of fiscal 2007 and may be up to approximately $5 to $7 million after all units have closed, net of some expected additional preopening expenses. The division will then manage the hotel for a fee and share in addition to the expected gainany joint venture earnings on the sale ofcommercial areas, such as the limited-service lodging division.restaurants, spa and bars.

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        We reported income tax expense on continuing operations for fiscal 20042006 of $15.9$10.4 million, an increasea decrease of $3.5$1.3 million, overor 11.3%, compared to fiscal 2003.2005. Our effective income tax rate for continuing operations during fiscal 20042006 was 39.2% compared31.7%, significantly lower than our fiscal 2005 effective rate of 37.5% and our historical 39-40% range. This was primarily due to 39.1%the previously described investments in federal tax-exempt short-term financial instruments. A majority of the cash and cash equivalent funds remaining after our special dividend will likely continue to be invested in federal tax-exempt short-term financial instruments until they are needed to meet our cash requirements. These types of investments will continue to favorably impact our effective income tax rate, but not to the same extent in fiscal 2003. We2007 as in fiscal 2006 because the invested amount will be much lower. In addition, our fiscal 2007 effective income tax rate is also likely to be favorably impacted by federal and state net historic tax credits of over $6.0 million related to our Oklahoma City Hilton Skirvin project. As a result, assuming that the Hilton Skirvin renovation is completed during fiscal 2007 as planned, we currently anticipate that our fiscal 2007 effective income tax rate during fiscal 2005 will likely remain in the 39-40% range.may be less than 30.0%.

        Net earnings during fiscal 20032006 included an after-tax gainloss from discontinued operations of $1.9 million, compared to after-tax income from discontinued operations of $1.3 million during the prior year. Net earnings for fiscal 2006 and 2005 also included after-tax gains on sale of discontinued operations of $1.3$7.7 million or $.04 per share (aand $78.3 million, respectively. A detailed discussion of this itemthese items is included in the Discontinued Operations section).section. Weighted average shares outstanding were 29.930.9 million during fiscal 20042006 and 29.530.5 million during fiscal 2003.2005. All per share data is presented on a diluted basis.

Fiscal 20032005 versus Fiscal 20022004

        All three operating divisions contributed to theAn increase in revenues and operating income from our hotels and resorts division was offset by reduced theatre division results, resulting in an overall decrease in total revenues and operating income from continuing operations during fiscal 2003. Record2005 compared to the prior year. Theatre division operating performance from our theatre division and significant improvement in operatingresults were negatively impacted by a weaker slate of movies compared to the prior year. Operating results from our hotels and resorts division resulted infor the same properties improved during fiscal 2005, partially offset by combined start-up and preopening costs associated with our new Chicago hotel. Significantly increased investment income and reduced interest expense contributed to an overall increase in overall operating income, despite decreases in operating income from our limited-service lodging division and a nearly $1.0 million, or 8.9%, increase in our total gas and electric costs for the year. A slight increase in interest expense, investment losses reported during fiscal 2003 and a significantly higher effective income tax rate contributed to our decreased earnings from continuing operations andduring fiscal 2005, offsetting the reduced operating income. Our overall net earnings increased significantly during fiscal 2003.

        We recognized a net investment loss of approximately $150,000 during fiscal 2003, compared to investment income of $2.4 million during the prior year. As previously noted, the significant decrease in investment income during fiscal 2003 was primarily the result of a $2.6 million investment loss related to loans to and investments in Baymont Inns & Suites joint ventures and a $494,000 pre-tax investment loss on securities held during fiscal 2003, whose decline in fair value was deemed to be other than temporary.

        Our interest expense totaled $19.6 million for fiscal 2003, representing an increase of $800,000, or 4.4%, over fiscal 2002 interest expense of $18.8 million. The increase in interest expense was the result of our issuance of fixed rate long-term senior notes during the fourth quarter of fiscal 2002 in lieu of lower cost variable interest rate borrowings in place during the majority of fiscal 2002. The resulting increase in interest expense was partially offset by an overall reduction in our long-term debt during fiscal 20032005 compared to the prior year due primarily to reduced capital expenditures during fiscal 2003.significant gains on the disposition of the previously noted discontinued operations.

19

        We recognized gains on dispositioninvestment income of property, equipment and investments in joint ventures from continuing operations of $2.1$6.2 million during fiscal 2003,2005, representing an increase of $4.5 million, or 257.6%, compared to investment income of $1.7 million during the prior year. The fiscal 2005 increase in investment income was the result of interest earned on proceeds received from the sale of our limited-service lodging division in September 2004 and Miramonte Resort in December 2004. The majority of our $259.1 million of cash and cash equivalents at the end of fiscal 2005 was invested in federal tax-exempt short-term financial instruments. A portion of these funds was held by intermediaries during the fiscal year to facilitate potential tax deferral opportunities and earned taxable interest. The majority of the cash held by intermediaries was released to us in early March 2005 and was subsequently reinvested in federal tax-exempt short-term financial instruments. The remaining $28.6 million of cash held by intermediaries for tax deferral purposes at the end of the fiscal year was used to acquire a new hotel in early fiscal 2006.

        Our interest expense totaled $14.9 million for fiscal 2005, representing a decrease of $1.7 million, or 10.0%, compared to fiscal 2004 interest expense of $16.5 million. The decrease in interest expense was primarily the result of paying off all of our outstanding short-term borrowings, consisting of commercial paper, with cash provided by operating and investing activities (including the sale of our limited-service lodging division). In addition, we capitalized interest related to the construction of our Chicago hotel totaling approximately $835,000 during fiscal 2005, compared to capitalized interest of $296,000 during fiscal 2004. We also continued to make scheduled payments on our long-term debt during the year, further reducing our interest expense.

        Our continuing operations recognized gains on disposition of property and equipment of $2.5$2.2 million during fiscal 2002.2005, compared to gains from continuing operations of $2.8 million during fiscal 2004. The fiscal 2003 gains2005 gain was primarily the result of our sale of two outlots on existing theatre land parcels, a four-screen theatre in Beaver Dam, Wisconsin and an excess land parcel.

        During fiscal 2005, we reported net equity losses from unconsolidated joint ventures of $1.1 million, compared to net equity losses of approximately $400,000 during the prior fiscal year. Losses during fiscal 2005 were primarily the result of the sales of a redeveloped former theatre location, two former restaurant locationspreopening costs from our 50% ownership interest in Platinum Condominium Development, LLC and several parcels of excess land.operating losses from our minority ownership interest in Cinema Screen Media.

        We reported income tax expense on continuing operations for fiscal 20032005 of $12.4$11.7 million, an increasea decrease of $1.3 million over$200,000, or 1.8%, compared to fiscal 2002 despite reduced earnings before income taxes.2004. Our effective tax rate for continuing operations during fiscal 20032005 was 39.1%37.5% compared to 33.0%39.2% in fiscal 2002.2004. The significantly lowerdecrease in our effective tax rate during the prior yearfor continuing operations was the result of the favorable impact ofour previously described investments in federal and state historic tax credits related to the renovation of the Hotel Phillips in Kansas City, Missouri. Without these historic tax credits, our fiscal 2002 net earnings would have been approximately $2.6 million, or $.09 per share, lower than we reported.tax-exempt short-term financial instruments.

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        Net earnings during fiscal 20032005 included after-tax income from discontinued operations of $1.3 million, compared to $6.0 million during the prior year. Net earnings for fiscal 2005 also included an after-tax gain on sale of discontinued operations of $1.3$78.3 million, or $.04$2.57 per share (ashare. A detailed discussion of this itemthese items is included in the Discontinued Operations section).section. Weighted average shares outstanding were 29.530.5 million for bothduring fiscal 20032005 and 29.9 million during fiscal 2002.2004.

Current Plans

        We incurred approximately $51 million inOur aggregate capital expenditures, including the purchase of two hotels, were approximately $76 million during fiscal 2004,2006, an increase over the prior two years but below our average of over $100approximately $12 million per year during the 5-year period from fiscal 1997 through 2001.and $25 million, respectively. We currently anticipate that our capital expenditures during fiscal 20052007 may increase toexceed $100 million, with the $65 to $75 million range, but weincreased capital spending funded by the remaining proceeds from the sale of our limited-service lodging division as well as additional proceeds from the expected sale of existing assets and specific project-related financing. We will, however, continue to monitor our operating results and economic and industry conditions so that we can respond appropriately. We have approximately $45 million of current capital projects already underway or approved, and we believe it is likely that we will approve additional maintenance and growth capital projects during fiscal 2005 to reach our estimated capital expenditures of $65 to $75 million.

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        Our current strategic plans may include the following goals and strategies:

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        The actual number, mix and timing of potential future new facilities and expansions and/or divestitures will depend, in large part, on industry and economic conditions, our financial performance and available capital, the competitive environment, evolving customer needs and trends and the availability of attractive opportunities. It is likely that our growth goals will continue to evolve and change in response to these and other factors, and there can be no assurance that these current goals will be achieved. The terrorist attacksEach of September 11, 2001our goals and strategies are subject to the subsequent war on terrorism, combined with the resulting economic downturn that followed the attacks, had an unprecedented impact on the travel and lodging industry. Although we are encouraged by indications that business travel is continuing to improve, we are unable to predict with certainty if or when lodging demand will return to pre-September 11 levels. Any additional domestic terrorist attacks may have a similar or worse effect on the lodging industry than that experienced as a result of the September 11, 2001 attacks.various risk factors discussed earlier in our Form 10-K.

Theatres

        Our oldest and largest division is our theatre division. The theatre division contributed 38.1%50.5% of our consolidated revenues from continuing operations and 63.0%67.5% of our consolidated operating income, excluding corporate items, during fiscal 2004.2006. The theatre division operates motion picture theatres in Wisconsin, Illinois, Ohio and Minnesota, and a family entertainment center in Wisconsin. The following tables set forth revenues, operating income, operating margin, screens and theatre locations for the last three fiscal years:

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        The following table further breaks down the components of revenues for the theatre division for the last three fiscal years:

Fiscal 20042006 versus Fiscal 20032005

        The increasedecrease in theatre division revenues, operating income and operating margin during fiscal 20042006 compared to the prior year occurred despite a slight decrease inwas entirely due to decreased overall attendance. We opened six new screensattendance at existing theatresour comparable theatres. Total theatre attendance decreased 4.5% during fiscal 2004, including four screens in Menomonee Falls, Wisconsin, one screen in Madison, Wisconsin and2006 compared to the prior year. As noted earlier, our fourth UltraScreen™ at a theatre in Elgin, Illinois. These new screens plus screens added in fiscal 2003 that were not open for a full year last year generated approximately $1.4 million of additional revenues during fiscal 2004. We closed and sold one budget-oriented theatre with six screens during fiscal 2004 and eliminated two screens at two existing theatres in conjunction with a project to convert two small auditoriums into one larger-capacity auditorium at each theatre. Closing those screens and one other theatre during fiscal 2003 negatively impacted comparisons of this year’s theatre division revenuesoperating results were primarily impacted by an overall weak slate of movies during our fiscal 2006 first quarter, compared to a strong first quarter the prior year that included record Memorial Day and July 4th holiday weeks. Total theatre attendance decreased 13.7% during our fiscal 2006 first quarter compared to the prior year’s first quarter, significantly impacting our overall fiscal 2006 results by $700,000, althoughdue to the fact that the summer quarter has historically accounted for 35-40% of our screen closings had a minimal impact ontotal year divisional operating income. AsIn fact, not one of May 27, 2004, we operated 477 first-run screensour five highest grossing films during the fiscal 2006 first quarter –War of the Worlds, Star Wars: Episode III – Revenge of the Sith, Batman Begins, Madagascar,and Charlie & The Chocolate Factory – performed as well as any of the previous summer’s top three films,Spider-Man 2, Shrek 2and Harry Potter and only 15 budget screens. Compared to first-run theatres, budget theatres generally have lower box office revenues and associated film costs, but higher concession salesthe Prisoner of Azkaban. However, attendance increased 2.4% during the second half of our fiscal 2006, with operating income increasing 5.2% during the same time period as a percentagethe quality of box office revenue.the movies improved.

        Revenues for the theatre business and the motion picture industry in general are heavily dependent on the general audience appeal of available films, together with studio marketing, advertising and support campaigns and the maintenance of the current “windows” between the date a film is released in theatres and the date a motion picture is released to other channels, including video on-demand and DVD. These are factors over which we have no control. This was evident once again during fiscal 2004. Total theatre attendance was down 2.7%, up 0.9%, down 3.0% and up 5.1% during each of the four fiscal 2004 quarters, respectively, compared to the prior year comparable quarters. With no significant change in the number of competitive screens in our markets, with one exception (Columbus, Ohio), we believe the primarythat a significant factor contributing to these variations in attendance during fiscal 20042006 was the qualityquantity and quantityquality of film product released during the respective quarters compared to the films released during the same quarterquarters last year. Total theatreAdditional factors that are difficult to measure but may have had some continuing impact on attendance for the full year decreased 0.4% during fiscal 2004 compared to2006 include piracy and the prior yearongoing impact of DVDs and attendance athome entertainment options on consumer spending choices. Partially offsetting our comparable screens decreased 0.6%. The traditionally strong movie-going Memorial Day weekend, which was included in our fiscal 2003 fourth quarter last year, occurred during the first quarter of fiscal 2005, negatively impacting this year’s fourth quarter and fiscal 2004 comparisons.

        Despite the slight decrease inreduced attendance fiscal 2004 still was a record year at the box office for our theatre division. Contributing to our improved results was a 2.8%1.7% increase in our average ticket price during fiscal 20042006 compared to the prior year. Modestyear, attributable primarily to modest price increases contributed to the average ticket price increase, with the remainder of the increase due to the fact that this year’s first quarter film product included an unusually high number of R-rated movies. Such strong adult admission motion pictures appeal to a smaller audience but result in a higher average ticket price due to fewer child admissions.increases.

        Consistent with prior years in which blockbusters accounted for a significant portion of our total box office, our top 15 performing films accounted for 35%36% of our fiscal 20042006 and 2005 box office receipts, compared to 36% duringreceipts. Only two fiscal 2003. Four fiscal 20042006 films produced box office receipts in excess of $3 million for our circuit, compared to three films during the prior year, but only five films this year produced over $2 million in receipts compared to eight films last year, indicating that we were much more dependent on a few blockbustersreached that amount for us during fiscal 2004 compared to the prior year. The following five fiscal 20042006 films produced the most box office receipts in excessfor our circuit:Harry Potter and the Goblet of $2 million:LordFire, Chronicles of Narnia: The Lion, The Witch and The Wardrobe, War of the Rings: ReturnWorlds, Star Wars: Episode III – Revenge of the KingSith,andFinding NemoWedding Crashers,. The Passionquantity of the Christ,Pirates of theCaribbean andElf.films remained fairly constant during fiscal 2006. We played 181189 films at our theatres during fiscal 20042006 compared to 190188 during fiscal 2003. Included2005. We are currently estimating that we will show approximately 185 to 195 films on our screens during fiscal 2007. Generally, an increase in the totalquantity of films played were three and two new IMAX^®-exclusive films during each fiscal year, respectively. During fiscal 2005, we plan to convert one of our two IMAX^® theatres to anUltraScreen™ and begin showing only non-IMAX^® films onincreases the other. In connection with these changes, both of these theatres will stop using the IMAX^® name.potential for more blockbusters in any given year.

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        Our average concession sales per person increased 2.7%4.2% during fiscal 20042006 compared to the prior year. Average concession sales per person are impacted by changes in concession pricing, types of films played and changes in our geographic mix of theatre locations. On average, films that appeal to families and teenagers generally produce better than average concession sales compared to more adult-orientatedadult-oriented film product. As an example, our average concession sales per person increased by over 6% during our fiscal 2006 third quarter compared to the same period last year when our top films includedHarry Potter andChronicles of Narnia, compared to an increase of only 1.0% during our fourth quarter when our top pictures includedThe DaVinci Code andMission Impossible 3.

        Our theatre division’s operating margin increaseddecreased to 25.0%22.2% during fiscal 2004,2006, compared to 24.0%23.3% in fiscal 2003. Contributing2005, due in part to the improvedimpact of our fixed expenses on our decreased box office receipts. In addition, our fiscal 20042006 operating margin was reducednegatively impacted by a one-time charge of approximately $500,000 related to a minor restructuring of our administrative and theatre supervision organization and a one-time impairment charge of approximately $500,000 related to theatres scheduled to close during fiscal 2007. Our overall concession costs and film rental concession and advertising costs as a percentage of revenues. Increases in otherrevenues decreased during fiscal 2006. Other revenues, which included management fees, and pre-show advertising income also contributedand family entertainment center revenues, remained unchanged compared to the prior year. If our improved operating margin. We expect these ancillary revenues to continue to increasebox office performance improves during fiscal 2005. If box office and concession revenues continue to improve as they have in recent years,2007, we anticipate that the expected improvements in other revenues and other various cost controls may be enough to offset anticipated increases in labor and health insurance costs,could potentially resulting in continued improvement inreturn our theatre division operating margins.margins to fiscal 2005 levels.

        We continue to use technology to further enhance our operating results. During fiscal 2004, the number of tickets sold over the internet increased by 17%. In addition, we introduced a new stored-value entertainment card during fiscal 2003 which contributed to a nearly 31% increase in gift certificate sales during fiscal 2004. Both of these programs are designed to differentiate our theatres from competing theatres and increase customer loyalty.

        We began operating a new six-screen theatre in Tomah, Wisconsin during fiscal 2004 which is owned by the Ho-Chunk Nation and represents our second management agreement.        As noted earlier in the Current Plans section of this discussion, in addition to pursuing additional management contracts, we expect to make selected investments inadd three new locations and new screens at existing strategic locations during fiscal 20052007, ultimately replacing five existing theatres. The impact of these anticipated new theatres on fiscal 2007 operating results will likely be minimal, due to the timing of the openings later in the fiscal year and beyond. We have also sold a four-screen theatre duringthe fact that the first quarter of fiscal 2005year will include preopening expenses. Excluding the existing theatres in Racine, Green Bay and Brookfield, Wisconsin that are expected to be replaced with the new locations previously noted, we have identified approximately fivesix other theatres with up to 1627 screens that we may close over the next two to three years with minimal impact on operating results. One three-screen theatre closed early in our fiscal 2007 first quarter.

        We believe that we are strengthening our long-term competitive position has been strengthened as a result ofwith our significantaforementioned capital investments, overbut ultimately, our future operating performance will be dependent upon strong film product and the past few years.maintenance of suitable “windows” as referred to earlier. Box office receipts during the first half of the summer have exceeded last year’s summer results to-date, due to strong performances from films such asX-Men 3, Cars, Superman Returnsand Pirates of the Caribbean: Dead Man’s Chest. Although it is difficult to predict future box office performance, our performance inwe are hopeful that the first halfremaining films of this summer, wasincludingSnakes on a Plane, Talladega Nights:The Ballad of Ricky Bobby andThe Ant Bully, will perform favorably compared to prior year product. Our fiscal 2007 third quarter may have difficult comparisons (our top two pictures in fiscal 2006 played during our third quarter), but the end of our fiscal 2007 is expected to be very strong, with sevenfilms such asSpider-Man 3, Shrek the ThirdandPirates of the first nine weeks outperforming the comparativeCaribbean 3 all scheduled to open in May 2007. Our theatre division, in particular, is expected to benefit from our 53rd week during fiscal 2004. Film product for2007, as it will include the remainder of calendar 2004 appears solid. We believe that it is important for this division to have atraditionally strong first quarter of fiscal 2005 due toMemorial Day weekend and the fact that we will have difficult year-over-year comparisons to films such asLordopening of the RingsandaforementionedThe PassionPirates of the ChristCaribbean 3. later in the year.

Fiscal 20032005 versus Fiscal 20022004

        The increasedecrease in theatre division revenues, operating income and operating margin during fiscal 20032005 compared to the prior year occurred despite a slight decrease inwas entirely due to decreased overall attendance at our comparable theatres. During fiscal 2005, we converted our two former IMAX® screens into aSuperScreen™ (generally 45-65 feet wide) and a reduction in the number ofour fifthUltraScreen (70-75 feet wide) and we opened eight new screens at existing theatres, including four screens in operation throughout the year. We openedLaCrosse, Wisconsin, three new screens includingin Oshkosh, Wisconsin and our thirdUltraScreen™,sixth UltraScreen at a theatre in Appleton,Oakdale, Minnesota. We also opened a 12-screen small-town prototype theatre in Saukville, Wisconsin during the fiscal 2003, generating $500,0002005 fourth quarter. These new screens, plus screens added in fiscal 2004 that were not open for a full year last year, generated approximately $1.8 million of additional revenues during the year.fiscal 2005. We closed one theatretwo theatres with fiveseven screens during fiscal 2003.2005 and eliminated one screen at an existing theatre in conjunction with a project to convert two small auditoriums into one larger-capacity auditorium. Closing that theatre and fivethose screens along with several other theatresscreens we closed during fiscal 20022004 negatively impacted comparisons of thethis year’s theatre division revenues during fiscal 2003 to prior year results by $1.0$1.4 million, although our screen closings had a minimal impact on operating income.

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        Total theatre attendance decreased 1.3%7.5% during fiscal 20032005 compared to the prior year and attendance at our comparable locationsscreens decreased 0.3%7.8%. After a very strong summer box office, which included record Memorial Day and July 4th holiday weeks, we experienced decreases in attendance during each of our last three fiscal quarters as compared to fiscal 2004 comparable periods. With no significant change in the number of competitive theatre screens in our markets, the primarywe believe that a significant factor contributing to the slight decreasethese variations in attendance during fiscal 20032005 was the quality and quantity of film product released during the fourth quarterrespective quarters compared to the films that generated record performancereleased during the same quarters last year. Due primarily to the unusually strong March and early April 2004 performance ofThe Passion of the Christ, attendance during our fiscal 2005 fourth quarter was nearly 20% below that of the prior year. We believe attendance duringyear, despite the fourth quarter was further impacted by the fact that Easter (a time period which historically has higher theatre attendance) was three weeks later than the prior year, effectively shortening the spring film release season. In addition, we believe that television coveragestrong opening nine days of the warfinal installment ofStar Wars in Iraq also had a negative impact on theatre attendance.

        Despite the factors noted above, fiscal 2003 stilllate May. Partially offsetting our reduced attendance was a record year at the box office for our theatre division. Contributing to our improved results was a 3.8%2.7% increase in our average ticket price during fiscal 20032005 compared to the prior year. The entire increase in average ticketyear, attributable primarily to modest price occurred at our first-run theatres. As of May 29, 2003, we operated 467 first-run screens and 21 budget screens.increases. Our average concession sales per person increased 1.9%5.9% during fiscal 20032005 compared to the prior year.

        OurConsistent with prior years in which blockbusters accounted for a significant portion of our total box office, our top 15 performing films accounted for 36% of our totalfiscal 2005 box office receipts, compared to 37%35% during fiscal 2002. Three2004. No fiscal 20032005 films produced box office receipts in excess of $4 million for our circuit, compared to three films that reached that amount for us during the prior year (Lord of the Rings: Return of the King, Finding Nemoand The Passion of the Christ). The following five fiscal 2005 films produced box office receipts in excess of $3 million.million:Spider-Man 2, Meet the Fockers, Shrek 2, The following eight fiscal 2003 films produced box office receipts in excess of $2 million:IncrediblesandLord of the Rings: Two Towers,Harry Potter and the ChamberPrisoner of Secrets,My Big Fat Greek Wedding,Signs,Austin Powers in Goldmember,Matrix Reloaded,Chicago andCatch Me If You CanAzkaban. We played 190188 films at our theatres during fiscal 20032005 compared to 183181 during fiscal 2002. Included in the total films played were two new IMAX^®-exclusive films during each fiscal year, respectively.2004.

        Our theatre division’s operating margin increaseddecreased to 24.0%23.3% during fiscal 2003,2005, compared to 23.5%25.0% in fiscal 2002. Contributing2004, due primarily to the improved fiscal 2003 operating margin were reducedimpact of our fixed expenses on our decreased box office receipts. Our overall concession and advertising costs and reduced fixed occupancy costs as a percentage of revenues partially offset bydecreased slightly higherduring the current year, while our film rental costs. Increases in other revenues also contributed to our improved operating margin.

        During the fourth quarter of fiscal 2002, we entered the theatre management contract business by signing an agreement to manage 34 screens at three Chicago locations for another owner. Due to the timing of this transaction, the management contract had minimal impact on fiscal 2002 operating results but fiscal 2003 results were favorably impacted.

Limited-Service Lodging

        Our second largest division is the limited-service lodging division, which contributed 31.2% of our consolidated revenues and 22.4% of our consolidated operating income, excluding corporate items, during fiscal 2004. The division’s business consists of owning and franchising Baymont Inns & Suites and Woodfield Suites, which respectively operate in the segments of the lodging industry designated as “limited-service mid-price without food and beverage” and “limited-service all-suites.” We also own and operate one Budgetel Inn. The following tables set forth revenues, operating income, operating margin, number of units and rooms data for the limited-service lodging division for the last three fiscal years: