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 26, 200525, 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 25, 200424, 2005 and August 5, 20054, 2006 was $456,165,744$523,986,379.35 and $435,287,820,$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 25, 200424, 2005 and August 5, 2005,4, 2006, there were 21,076,46621,352,968 and 21,282,29921,425,341 shares of our Common Stock, $1 par value, and 9,113,5829,090,471 and 9,090,4718,953,691 shares of our Class B, Common Stock, $1 par value, outstanding, respectively.

Portions of our definitive Proxy Statement for our 20052006 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: (1) the availability, in terms of both quantity and audience appeal, of motion pictures for our theatre division;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; (3) the effects of adverse economic conditions in our markets, particularly with respect to our hotels and resorts division; (4) the effects of adverse weather conditions, particularly during the winter in the Midwest and in our other markets; (5) the effects on our occupancy and room rates from the relative industry supply of available rooms at comparable lodging facilities in our markets; (6) the effects of competitive conditions in the markets served by us;our markets; (7) our ability to identify properties to acquire, develop and/or manage and continuing availability of funds for such development; and (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. 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 two business segments: movie theatres and hotels and resorts.

        As of May 26, 2005,25, 2006, our theatre operations included 45 movie theatres with 504 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 26, 2005,25, 2006, our hotels and resorts operations included fiveeight owned and operated hotels and resorts in Wisconsin, Missouri, Illinois and Missouri. Two additional owned and operated hotels in Wisconsin and Illinois were added to our operations after our fiscal year-end.Ohio. We also manage five hotels for third parties in Wisconsin, Minnesota, Texas and California and a vacation ownership club in Wisconsin.

        Both of these business segments are discussed in detail below.

Strategic Plans

        Our current strategic plans include the following goals and strategies:

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Theatre Operations

        At the end of fiscal 2005,2006, we owned or operated 45 movie theatre locations with a total of 504 screens in Wisconsin, Illinois, Minnesota and Ohio for an average of 11.2 screens per location, compared to an average of 10.711.2 screens per location at the end of fiscal 20042005 and 10.610.7 at the end of fiscal 2003.2004. Included in the fiscal 2006, 2005 and 2004 totals arewere four theatres with 40 screens that we manage for other owners and included in the fiscal 2003 totals are three theatres with 34 screens that we managed for other owners. Our 41 company-owned facilities include 20 megaplex theatres (12 or more screens), representing 68% of our total screens, 19 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.

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        During fiscal 2005,2006, we opened onebegan construction on our new 12-screen theatre with 12 screens, convertedin Green Bay, Wisconsin and on our new 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 former IMAX® screens into aSuperScreen™ (generally 45-65 feet wide) and our fifthUltraScreen™ (70-75 feet wide) and we opened eight new screens atsmaller existing theatres with 17 screens in the same market and is expected to feature 16 stadium-style auditoriums, including our sixthtwo 72-feet-wideUltraScreen. WeScreens®, a multi-use auditorium and will also closedinclude two theatres with seven screens during fiscal 2005cafés and eliminated one screen at an existing theatre in conjunction with a project to convert two small auditoriums into one larger-capacity auditorium.lounge. At fiscal year-end, we operated 489484 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 the general audience appeal of available films, together with studio marketing, advertising and support campaigns, factors over which we have no control. NoTwo fiscal 2005 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. The following five fiscal 20052006 films produced box office receipts in excess of $3 million:SpiderMan 2,Meetmillion for our circuit, compared to five films that reached that amount during fiscal 2005. The following five fiscal 2006 films produced the Fockers,Shrek 2,The Incredibles andmost box office receipts for our circuit:Harry Potter and the PrisonerGoblet of AzkabanFire,Chronicles of Narnia: The Lion, The Witch and The Wardrobe,War of the Worlds,Star Wars: Episode III – Revenge of the Sith andWedding 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 nearlyapproximately 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 13 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. We 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.

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        We also own a family entertainment center,Funset Boulevard, adjacent to our 14-screen movie theatre in Appleton, Wisconsin.Wisconsin. 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.

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 2005,2006, the Pfister Hotel earned its 2930^th consecutive four-diamond award from the American Automobile Association and its signature restaurant,Celia, earned its 3^rd consecutive four-diamond award from the American Automobile 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 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 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 2005,2006, the Grand Geneva Resort & Spa earned its 78^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.

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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.

Four Points by Sheraton Chicago Downtown/Magnificent Mile

        DuringWe own and operate the first week of fiscal 2006, we opened the company-owned and operated 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 that will open later in fiscal 2006.facility. The hotel will also lease space to several area restaurants.restaurants, with one restaurant currently under development.

Wyndham Milwaukee Center

        During the first week of fiscal 2006, we purchasedWe own and operate the Wyndham Milwaukee Center.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. We anticipate aA major renovation of this hotel is expected to begin during our fiscal 2006.2007 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. 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.

        Two new hotels are currently under construction or in development 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 late in our fiscal 2006 or early fiscalSeptember 2007. We are also participating, 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. We currently expect to be the principal equity partner in this public-private venture. Renovation of this historic hotel is expected to begin laterbegan in fiscal 2006 and is expected to be completed during our fiscalin February 2007. When completed, this hotel is expected to have 225 rooms and 25,000 square feet of meeting space.

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Competition

        Both 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. Movie exhibitors also generally compete with the home video, pay-per-view and cable television markets. 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 has historically established the demand for such movies in these ancillary markets.

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

        We believe that the principal factors of competition in both 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 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 business.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 2005,2006, we had approximately 4,2005,300 employees, a majorityover one-half of whom were employed on a part-time basis. A number of our (1) hotel employees in Minneapolis, Minnesota are covered by a collective bargaining agreement that expires on February 29, 2009;April 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; (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; (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; (5) projectionists at the Chicago, Illinois theatres that we manage for a third party are covered by a collective bargaining agreement that expires on 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;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 (8) projectionists in Milwaukee, Wisconsin are covered by a collective bargaining agreement that expires on May 30, 2007.

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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 26, 2005,25, 2006, the Pfister Hotel, the Hilton Milwaukee City Center, the Hilton Madison at Monona Terrace, the Grand Geneva Resort & Spa, the Hotel Phillips, the Wyndham Milwaukee Center, the Westin Columbus and the majority of our theatres. We lease the remainder of our facilities. As of May 26, 2005,25, 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 26, 2005,25, 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 20062007 (assuming we exercise all of our renewal and extension options).

IteIm 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 2005.2006.

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 2005.2006.

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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 4344 years.

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        Bruce J. Olson joined the Company in 1974. Mr. Olson served as the Executive Vice President and Chief Operating Officer of Marcus Theatres Corporation from August 1978 until October 1988, at which time he was appointed President of that corporation. Mr. Olson also served as our Vice President-Administration and Planning from September 1987 until July 1991. In July 1991, he was appointed as our Group Vice President and in October 2004, he was promoted to Senior Vice President. He was elected to serve on our Board of Directors in April 1996.

        H. Fred Delmenhorst has been our Vice President-Human Resources since he joined the Company in December 1984.

        Thomas F. Kissinger joined the Company in August 1993 as Secretary and Director of Legal Affairs. 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 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.

        Gregory S. Marcus joined the Company in March 1992 as Director of Property Management/Corporate Development. He was promoted in 1999 to Senior Vice President – Corporate Development and became an executive officer of the Company in July 2005. He was elected to serve on our Board of 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 20042005 and 2005,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, 2005, there were 2,282 shareholdersDuring the third and fourth quarters of recordfiscal 2006, we paid a dividend of $0.075 per share of our Common Stock and 49 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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        As of May 26, 2005,25, 2006, our boardBoard of directorsDirectors had authorized the repurchase of up to 4.7 million shares of our outstanding Common Stock. 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. Pursuant to this board authorization, we have repurchased approximately 2.83.1 million shares of Common Stock.Stock 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.

Five-Year Financial Summary

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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 2006, 2005 2004 and 20032004 were 52-week years. Our upcoming fiscal 20062007 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 two business segments: theatres and hotels and resorts. As a result of the sale of our KFC restaurants during fiscal 2001 and substantially all of the assets of our limited-service lodging division during fiscal 2005, we have presented the restaurant and limited-service lodging business segmentssegment as discontinued operations in the accompanying financial statements and in this discussion. As a result of our recent sale of the remaining inventory of real estate and development costs associated with our vacation ownership development adjacent to the Grand Geneva Resort and our sale of the Miramonte Resort during fiscal 2005, we have also presented this assetthese assets and related results of operations, previously included in our hotels and resorts segment, as part of our discontinued operations in the 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 the lodging 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 hotelstheatre division has historically been our second strongest quarter but is heavily dependent upon the quantity and resorts division.quality of films released during the Thanksgiving to Christmas holiday period.

Consolidated Financial Comparisons

        The following table sets forth revenues, operating income, other income (loss)(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 2006 versus Fiscal 2005

        An increase in revenues and operating income from our hotels and resorts division during fiscal 2006 offset a decrease in revenues and operating income from our theatre division compared to the prior year. Operating results from our hotels and resorts division benefited 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 results were negatively impacted by a particularly weak first quarter slate of movies compared to the prior year, as the division’s operating results during the last three quarters of fiscal 2006 improved slightly compared to the last three quarters of fiscal 2005. Increased investment income and reduced interest expense contributed to an 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 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 $7.9 million during fiscal 2006, representing an increase of $1.7 million, or 27.1%, compared to investment income of $6.2 million during the prior year. Investment income includes 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. The fiscal 2006 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. Our cash and cash equivalents totaled $34.5 million at the end of our fiscal year, but 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 our 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 fiscal 2006 fourth quarter and will be significantly reduced in fiscal 2007 compared to fiscal 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 private letter ruling, the Internal Revenue Service determined that the special dividend would be treated as a distribution in partial liquidation pursuant to Sections 302(b)(4) and 302(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 exchange for stock in the Company that is constructively redeemed. Non-corporate shareholders will generally recognize capital gain or loss on this 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 eligible for capital gains treatment with respect to the special distribution. Shareholders should consult with their tax advisors with respect to the tax consequences of the special distribution.

        Our interest expense totaled $14.4 million for fiscal 2006, representing a decrease of $500,000, or 3.2%, compared to fiscal 2005 interest expense of $14.9 million. The decrease in interest expense was primarily the result of making scheduled payments on our long-term debt during the year. We do not expect our interest expense to change substantially in fiscal 2007, other than as a result of the 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.

        Our continuing operations recognized net gains on disposition of property, equipment and investments in joint ventures of $1.7 million during fiscal 2006, compared to gains from continuing operations of $2.2 million during fiscal 2005. The fiscal 2006 net gain was primarily the result of our first quarter sales of a theatre outlot and real estate development in Appleton, Wisconsin and a strip shopping center developed by a joint venture 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 results in variations in the gains or losses that we report on disposition of property and equipment each year. We anticipate periodic additional sales of non-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.

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        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 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 any joint venture earnings on the commercial areas, such as the restaurants, spa and bars.

        We reported income tax expense on continuing operations for fiscal 2006 of $10.4 million, a decrease of $1.3 million, or 11.3%, compared to fiscal 2005. Our effective income tax rate for continuing operations during fiscal 2006 was 31.7%, significantly lower than our fiscal 2005 effective rate of 37.5% and our historical 39-40% range. This was primarily due to 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 2007 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 may be less than 30.0%.

        Net earnings during fiscal 2006 included an after-tax loss 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 $7.7 million and $78.3 million, respectively. A detailed discussion of these items is included in the Discontinued Operations section. Weighted average shares outstanding were 30.9 million during fiscal 2006 and 30.5 million during fiscal 2005. All per share data is presented on a diluted basis.

Fiscal 2005 versus Fiscal 2004

        An increase in revenues and operating income from our hotels and resorts division was offset by reduced theatre division revenues,results, resulting in a slightan overall decrease in total revenues and operating income from continuing operations. Both operating divisions experienced decreases in operating incomeoperations during fiscal 2005 compared to the prior year. Theatre division operating results were negatively impacted by a weaker slate of movies compared to the prior year. Operating results from our hotels and resorts division for the same properties improved during fiscal 2005, but our overall segment results were negatively impactedpartially offset by reduced earnings from our timeshare operation and combined start-up and preopening costs associated with our ongoing development projects.new Chicago hotel. Significantly increased investment income and reduced interest expense contributed to an overall increase in earnings from continuing operations during fiscal 2005, offsetting the reduced operating income from our two continuing business segments.income. Our overall net earnings increased significantly during fiscal 2005 compared to the prior year due to significant gains on the disposition of the previously noted discontinued operations.

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        We recognized investment income of $6.0$6.2 million during fiscal 2005, representing an increase of $4.2$4.5 million, or 233.5%257.6%, compared to investment income of $1.8$1.7 million during the prior year. Investment income includes 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. 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 the fiscal year is2005 was invested in federal tax-exempt short-term financial instruments. A portion of these funds werewas 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 investment income will continue to exceed prior year amounts in future periods until a further determination for the potential uses of the sales proceeds is made.

        Our interest expense totaled $14.9 million for fiscal 2005, representing a decrease of $1.6$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. Pending a final determination of the uses of our sales proceeds, we currently expect our interest expense to continue to decrease during fiscal 2006 as a result of the additional payments of scheduled current maturities of our long-term debt, partially offset by the fact that we anticipate capitalizing significantly less interest during fiscal 2006 due to the recent completion of the Chicago hotel project.

        Our continuing operations recognized gains on disposition of property and equipment of $2.2 million during fiscal 2005, compared to gains from continuing operations of $2.8 million during fiscal 2004. The fiscal 2005 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. The timing

        During fiscal 2005, we reported net equity losses from unconsolidated joint ventures of our periodic sales$1.1 million, compared to net equity losses of property and equipment results in variations in the gains or losses that we report on disposition of property and equipment each year. We are actively attempting to sell additional non-core property and equipment and we believe that additional net gains on disposition of property and equipment will be recognizedapproximately $400,000 during the comingprior fiscal year. Losses during fiscal 2005 were primarily the result of preopening costs from our 50% ownership interest in Platinum Condominium Development, LLC and operating losses from our minority ownership interest in Cinema Screen Media.

        We reported income tax expense on continuing operations for fiscal 2005 of $11.5$11.7 million, a decrease of $370,000,$200,000, or 3.1%1.8%, compared to fiscal 2004. Our effective tax rate for continuing operations during fiscal 2005 was 37.5% compared to 39.2% in fiscal 2004. The decrease in our effective tax rate for continuing operations was the result of our previously described investments in federal tax-exempt short-term financial instruments. We anticipate that our effective tax rate during fiscal 2006 will continue to remain below our historical 39-40% range until further determinations are made of the potential uses of our sales proceeds.

        Net earnings during fiscal 2005 included after-tax income from discontinued operations of $1.7$1.3 million, compared to $6.1$6.0 million during the prior year. Net earnings for fiscal 2005 also included an after-tax gain on sale of discontinued operations of $78.3 million, or $2.57 per share. A detailed discussion of these items is included in the Discontinued Operations section. Weighted average shares outstanding were 30.5 million during fiscal 2005 and 29.9 million during fiscal 2004. All per share data is presented on a diluted basis.

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Fiscal 2004 versus Fiscal 2003

        Both continuing operating divisions contributed to our increase in revenues during fiscal 2004. A third consecutive year of record operating performance from our theatre division and a second consecutive year of improved operating results from our hotels and resorts division resulted in an increase in overall operating income. A significant decrease in interest expense during fiscal 2004 contributed to our increased earnings from continuing operations and net earnings during fiscal 2004.

        We recognized investment income of $1.8 million during fiscal 2004, representing a decrease of $600,000, or 25.2%, compared to fiscal 2003 investment income of $2.4 million. Investment income has historically included interest earned on cash, cash equivalents and notes receivable, including notes related to the sale of timeshare units in our hotels and resorts division. Investment income on these items was down from the prior year due primarily to an overall reduction in our notes receivable during fiscal 2004. Comparisons to fiscal 2003, however, were favorably impacted by the fact that we recognized 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. During fiscal 2004 and in years prior to fiscal 2003, gains and losses on these available for sale investments were included in “accumulated other comprehensive income (loss)” in our consolidated statements of shareholders’ equity, consistent with current accounting pronouncements.

        Our interest expense totaled $16.5 million for fiscal 2004, representing a decrease of $2.7 million, or 13.9%, compared to fiscal 2003 interest expense of $19.2 million. The decrease in interest expense was primarily the result of a $38.5 million, or 16.5%, reduction in our total long-term debt, including current maturities, at the end of fiscal 2004 compared to the end of the prior year.

        We recognized gains on disposition of property and equipment of $2.8 million during fiscal 2004, compared to gains from continuing operations of $2.4 million during fiscal 2003. The fiscal 2004 net gain was primarily the result of our sale of six parcels of excess land and our sale of a former theatre in Minnesota.

        We reported income tax expense on continuing operations for fiscal 2004 of $11.9 million, representing an increase of $2.2 million, or 23.1%, over fiscal 2003. Our effective tax rate for fiscal 2004 was 39.2%, compared to 39.1% in fiscal 2003.

        Net earnings during fiscal 2004 included after-tax income from discontinued operations of $6.1 million, representing an increase of $1.9 million, or 44.7%, compared to fiscal 2003 after-tax income from discontinued operations of $4.2 million. Fiscal 2003 net earnings also included an after-tax gain on sale of discontinued operations of $1.3 million, or $.04 per share. A detailed discussion of these items is included in the Discontinued Operations section. Weighted average shares outstanding were 29.9 million during fiscal 2004 and 29.5 million during fiscal 2003.

Current Plans

        Our aggregate capital expenditures, including the purchase of two hotels, were approximately $63$76 million during fiscal 2005,2006, an increase over the prior two years of approximately $12 million and $37$25 million, respectively. We currently anticipate that our capital expenditures during fiscal 20062007 may increase to the $80 toexceed $100 million, range, but wewith the increased 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.

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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. Business travel and lodging demandvarious risk factors discussed earlier in general is just now beginning to return to pre-September 11 levels, nearly four years later. Any additional domestic or foreign terrorist attacks may have a similar or worse effect on the lodging or theatre industries than that experienced as a result of the September 11, 2001 attacks.our Form 10-K.

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Theatres

        Our oldest and largest division is our theatre division. The theatre division contributed 54.7%50.5% of our consolidated revenues from continuing operations and 75.6%67.5% of our consolidated operating income, excluding corporate items, during fiscal 2005.2006. 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 2006 versus Fiscal 2005

        The decrease in theatre division revenues, operating income and operating margin during fiscal 2006 compared to the prior year was entirely due to decreased overall attendance at our comparable theatres. Total theatre attendance decreased 4.5% during fiscal 2006 compared to the prior year. As noted earlier, our theatre division operating 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 due to the fact that the summer quarter has historically accounted for 35-40% of our total year divisional operating income. In fact, not one of our 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 the 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 the quality of 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. With no significant change in the number of competitive screens in our markets, with one exception (Columbus, Ohio), we believe that a significant factor contributing to these variations in attendance during fiscal 2006 was the quantity and quality of film product released during the respective quarters compared to the films released during the same quarters last year. Additional factors that are difficult to measure but may have had some continuing impact on attendance during fiscal 2006 include piracy and the ongoing impact of DVDs and home entertainment options on consumer spending choices. Partially offsetting our reduced attendance was a 1.7% increase in our average ticket price during fiscal 2006 compared to the prior year, attributable primarily to modest price 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 36% of our fiscal 2006 and 2005 box office receipts. Only two fiscal 2006 films produced box office receipts in excess of $3 million for our circuit, compared to five films that reached that amount for us during the prior year. The following five fiscal 2006 films produced the most box office receipts for our circuit:Harry Potter and the Goblet of Fire, Chronicles of Narnia: The Lion, The Witch and The Wardrobe, War of the Worlds, Star Wars: Episode III – Revenge of the SithandWedding Crashers. The quantity of films remained fairly constant during fiscal 2006. We played 189 films at our theatres during fiscal 2006 compared to 188 during fiscal 2005. We are currently estimating that we will show approximately 185 to 195 films on our screens during fiscal 2007. Generally, an increase in the quantity of films increases the potential for more blockbusters in any given year.

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        Our average concession sales per person increased 4.2% during fiscal 2006 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-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 decreased to 22.2% during fiscal 2006, compared to 23.3% in fiscal 2005, due in part to the impact of our fixed expenses on our decreased box office receipts. In addition, our fiscal 2006 operating margin was negatively 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 costs as a percentage of revenues decreased during fiscal 2006. Other revenues, which included management fees, pre-show advertising income and family entertainment center revenues, remained unchanged compared to the prior year. If our box office performance improves during fiscal 2007, we could potentially return our theatre division operating margins to fiscal 2005 levels.

        As noted earlier in the Current Plans section of this discussion, we expect to add three new locations during fiscal 2007, 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 the fact that the first year 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 six other theatres with up to 27 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 with our aforementioned capital investments, but ultimately, our future operating performance will be dependent upon strong film product and the 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, we are hopeful that the remaining films of this summer, includingSnakes 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 films such asSpider-Man 3, Shrek the ThirdandPirates of the Caribbean 3 all scheduled to open in May 2007. Our theatre division, in particular, is expected to benefit from our 53rd week during fiscal 2007, as it will include the traditionally strong Memorial Day weekend and the opening of the aforementionedPirates of the Caribbean 3.

Fiscal 2005 versus Fiscal 2004

        The decrease in theatre division revenues, operating income and operating margin during fiscal 2005 compared to the prior year was 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 our fifthUltraScreen™Screen (70-75 feet wide) and we opened eight new screens at existing theatres, including four screens in LaCrosse, Wisconsin, three screens in Oshkosh, Wisconsin and our sixth UltraScreen™UltraScreen at a theatre in Oakdale, Minnesota. We also opened a 12-screen small-town prototype theatre in Saukville, Wisconsin during the fiscal 2005 fourth quarter. These new screens, plus screens added in fiscal 2004 that were not open for a full year last fiscal year, generated approximately $1.8 million of additional revenues during fiscal 2005. We closed two theatres with seven screens during fiscal 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 those screens along with several other screens we closed during fiscal 2004 negatively impacted comparisons of this year’s theatre division revenues to prior year results by $1.4 million, although our screen closings had a minimal impact on operating income. As of May 26, 2005, we operated 489 first-run screens 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 sales as a percentage of box office revenue.

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        Revenues for theTotal 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. These factors were particularly evidentattendance decreased 7.5% during fiscal 2005.2005 compared to the prior year and attendance at our comparable screens decreased 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 screens in our markets, we believe that a significant factor contributing to these variations in attendance during fiscal 2005 was the quality of film product released during the respective quarters compared to the films released during the same quarterquarters last year. Additional factors that are difficult to measure but may have had some impact on attendance during fiscal 2005 include an increasing concern over piracy and the ongoing impact of DVD’s and home entertainment options on consumer spending choices. Total theatre attendance for the full year decreased 7.5% during fiscal 2005 compared to the prior year and attendance at our comparable screens decreased 7.8%. Due primarily to the unusually strong March and early April 2004 performance ofThe Passion of the Christlast year,, attendance during our fiscal 2005 fourth quarter was nearly 20% below that of the prior year, despite the strong opening nine days of the final installment ofStar Warsin late May. Partially offsetting our reduced attendance was a 2.7% increase in our average ticket price during fiscal 2005 compared to the prior year, attributable primarily to modest price increases. Our average concession sales per person increased 5.9% during fiscal 2005 compared to the prior year.

        Consistent 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 fiscal 2005 box office receipts, compared to 35% during fiscal 2004. No fiscal 2005 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 NemoandThe Passion of the Christ). The following five fiscal 2005 films produced box office receipts in excess of $3 million:Spider-Man 2, Meet the Fockers, Shrek 2, The IncrediblesandHarry Potter and the Prisoner of Azkaban. We played 188 films at our theatres during fiscal 2005 compared to 181 during fiscal 2004.

        Our average concession sales per person increased 5.9% during fiscal 2005 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-oriented film product. As an example, our average concession sales per person increased by over 11% during our fiscal 2005 fourth quarter compared to the same period last year due primarily to the fact that last year’s top fourth quarter film was the adult-orientedThe Passion of the Christ.

        Our theatre division’s operating margin decreased to 23.3% during fiscal 2005, compared to 25.0% in fiscal 2004, due primarily to the impact of our fixed expenses on our decreased box office receipts. Our overall concession costs as a percentage of revenues decreased slightly during the current year, while our film rental costs remained essentially unchanged as a percentage of revenues. A decrease in other revenues, which included management fees, pre-show advertising income and family entertainment center revenues, also contributed to our lower operating margin. The decrease in other revenues compared to fiscal 2004 was primarily due to the fact that last year’s revenues (and resulting operating income and operating margin) were favorably impacted by an approximately $400,000 insurance settlement. We expect other revenues to increase slightly during fiscal 2006, due primarily to expected increases from in-lobby advertising. If box office performance improves during fiscal 2006, we anticipate that the expected improvements in other revenues and other various cost controls could potentially return our theatre division operating margins to prior year levels.

        As noted earlier in the Current Plans section of this discussion, we expect to make selected investments in new locations and new screens at existing strategic locations during fiscal 2006 and beyond, in addition to pursuing additional management contracts. The impact of these anticipated new screens on fiscal 2006 operating results will likely be minimal, as the largest projects – i.e., new theatres – would not open until the latter months of fiscal 2006 at the earliest. Excluding existing theatres in Racine, Green Bay and Brookfield, Wisconsin that are expected to be replaced with new locations previously noted, we have identified approximately four other theatres with up to 13 screens that we may close over the next three years with minimal impact on operating results.

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        We believe that our long-term competitive position has been strengthened as a result of our significant capital investments over the past few years, but ultimately, our future operating performance will be dependent upon strong film product. Box office receipts during the first half of the summer have been very disappointing compared to last year’s record summer results. We are encouraged by the fact that our performance in recent weeks has improved due to films such asCharlie and the Chocolate FactoryandWedding Crashers, but it is likely that our fiscal 2006 first quarter theatre operating results will again decline compared to the same quarter last year. Although it is difficult to predict future box office performance, we are hopeful that upcoming fall films such asChicken Little, The Legend of ZorroandHarry Potter and the Goblet of Fire, coupled with potentially strong holiday fare includingThe Chronicles of Narnia: The Lion, the Witch and the Wardrobe, King Kong, Fun with Dick and JaneandThe Producers, will perform favorably compared to prior year product.

Fiscal 2004 versus Fiscal 2003

        The increase in theatre division revenues during fiscal 2004 compared to the prior year occurred despite a slight decrease in overall attendance. We opened six new screens at existing theatres during fiscal 2004, including four screens in Menomonee Falls, Wisconsin, one screen in Madison, Wisconsin and our fourthUltraScreen™ 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 fiscal 2004 theatre division revenues to prior year results by $700,000, although our screen closings had a minimal impact on operating income. We also began operating a new six-screen theatre in Tomah, Wisconsin during fiscal 2004 that is owned by the Ho-Chunk Nation and represents our second management agreement.

        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, we believe the primary factor contributing to these variations in attendance during fiscal 2004 was the quality and quantity of film product released during the respective quarters compared to the films released during the same quarters last year. Total theatre attendance for the full year decreased 0.4% during fiscal 2004 compared to the prior year and attendance at our comparable screens decreased 0.6%. The traditionally strong movie-going Memorial Day weekend, which was included in our fiscal 2003 fourth quarter, occurred during the first quarter of fiscal 2005, negatively impacting fiscal 2004 comparisons.

        Despite the slight decrease in 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% increase in our average ticket price during fiscal 2004 compared to the prior year. Modest price increases contributed to the average ticket price increase, with the remainder of the increase due to the fact that the fiscal 2004 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. Our average concession sales per person increased 2.7% during fiscal 2004 compared to the prior year.

        Our top 15 performing films accounted for 35% of our fiscal 2004 box office receipts, compared to 36% during fiscal 2003. Four fiscal 2004 films produced box office receipts in excess of $3 million compared to three films during the prior year, but only five fiscal 2004 films produced over $2 million in receipts compared to eight films during fiscal 2003, indicating that we were much more dependent on a few blockbusters during fiscal 2004 compared to the prior year. The following five fiscal 2004 films produced box office receipts in excess of $2 million: Lord of the Rings: Return of the King, Finding Nemo, The Passion of the Christ, Pirates of the Caribbean and Elf. We played 181 films at our theatres during fiscal 2004 compared to 190 during fiscal 2003. Included in the total films played were three and two new IMAX®-exclusive films during each fiscal year, respectively.

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        Our theatre division’s operating margin increased to 25.0% during fiscal 2004, compared to 24.0% in fiscal 2003. Contributing to the improved fiscal 2004 operating margin was reduced film rental, concession and advertising costs as a percentage of revenues. Increases in other revenues also contributed to our improved operating margin.

Hotels and Resorts

        The hotels and resorts division contributed 44.8%49.1% of our consolidated revenues from continuing operations and 24.4%32.5% of our consolidated operating income, excluding corporate items, during fiscal 2005.2006. As of May 26, 2005,25, 2006, the hotels and resorts division owned and operated twothree full-service hotels in downtown Milwaukee, Wisconsin, a full-facility destination resort in Lake Geneva, Wisconsin and full-service hotels in Madison, Wisconsin, and downtown Kansas City, Missouri.Missouri, Chicago, Illinois and Columbus, Ohio. In addition, we managed five hotels for other owners. We also managed a vacation ownership development in Lake Geneva, Wisconsin. The following table sets forth revenues, operating income, operating margin and rooms data for the hotels and resorts division for the last three fiscal years (prior year revenues, operating income and operating margin have been restated to reflect the current presentation of the Miramonte Resort and Marcus Vacation Club timesharing operation as discontinued operations):

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Fiscal 2006 versus Fiscal 2005

        Division revenues and operating income increased during fiscal 2006 compared to the prior year due to improved overall performance from our five comparable company-owned hotels and resorts and the addition of three new company-owned hotels during the year. Continued improvement in business travel, particularly from the short-term transient business traveler, contributed to our improved results. Our operating income and operating margin increased despite over $500,000 in start-up and preopening costs associated with our Oklahoma City Hilton Skirvin project.

        The division’s total revenue per available room, or RevPAR, for comparable company-owned properties increased 6.8% during fiscal 2006 compared to the prior year. Our occupancy percentage (number of occupied rooms as a percentage of available rooms) increased 1.7 percentage points and our average daily room rate, or ADR, increased 4.1% during fiscal 2006 compared to fiscal 2005. The relative lack of new hotel supply growth and continued improvement in business travel demand contributed to this ADR increase after several years of stagnant or declining rates at our hotels and throughout the hotel industry. According to data received from Smith Travel Research, comparable upper upscale hotels throughout the United States experienced an increase in RevPAR of 9.1% during our fiscal 2006. Hotels located in the Midwest, where all of our comparable hotels reside, generally did not achieve as high year-over-year RevPAR increases as those on the East and West Coasts.

        During the first week of fiscal 2006, we purchased the 220-room Wyndham Milwaukee Center hotel for a total cash purchase price of $23.6 million. The hotel features 12,000 square feet of meeting space, on-site parking, a restaurant and two lounges and complements our other two downtown Milwaukee, Wisconsin hotels. We anticipate our major renovation of this property will begin in our fiscal 2007 second quarter. This renovation will likely have some negative impact on this hotel’s operating results during the renovation period.

        We also opened another new hotel during the first week of fiscal 2006 — the Four Points by Sheraton Chicago Downtown/Magnificent Mile. This hotel features 226 units (including 130 suites), an indoor swimming pool and fitness center, high-tech meeting rooms and an on-site parking facility. It also will lease space to several area restaurants. Our operating results from this property contributed favorably to our year-over-year comparison to fiscal 2005, primarily due to significant preopening expenses incurred at this property during the fiscal 2005 fourth quarter. The initial guest response to this new hotel has exceeded our expectations to-date. We expect this hotel to benefit from favorable comparisons to fiscal 2006 during our fiscal 2007 first quarter due to preopening expenses incurred at this property during that period last year, as well as continued improvement in operating performance as the property continues to mature.

        On May 2, 2006, we purchased the Westin Columbus hotel in downtown Columbus, Ohio for a total cash purchase price of $16.3 million. The Westin Columbus is a AAA four-diamond full-service historic hotel that currently includes 186 guest rooms and suites, more than 12,000 square feet of meeting, banquet and ballroom space, a restaurant and a cocktail lounge. We plan on remodeling the guest rooms and food and beverage facilities to further enhance the historic features of this hotel. We will consider adding a majority equity partner to this hotel in the future, while maintaining a long-term management contract, consistent with our previously stated preferred method of growth for our hotels and resorts division.

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        Construction is nearing completion on our Las Vegas condominium hotel joint venture, the Platinum Hotel & Spa, with the property currently expected to open around September 2006. The Platinum Hotel & Spa will feature 255 condo units, a luxury spa, indoor and outdoor swimming pools, restaurants, lounge, upscale bar and 8,440 square feet of meeting space, including a 4,500 square-foot rooftop terrace overlooking the Las Vegas Strip. The hotel will be located just over one block east of the Strip near Bellagio, Bally’s and Caesars Palace. The condo units were priced between $300,000 and $1.0 million. Our hotels and resorts division will manage a unit rental program for owners which will generate income for the owners from their units as well as associated management fees for us. As noted earlier in the Consolidated Financial Comparisons discussion, we will also recognize equity earnings and losses from our ongoing investment in this joint venture, including a potential development profit from this project.

        During fiscal 2006, we also completed work on the creation of a public-private venture that will restore the historic Skirvin Hotel in Oklahoma City, the oldest existing hotel in Oklahoma. Renovation of this landmark hotel has begun, with a target opening date of February 2007. When completed, this hotel is expected to have 225 rooms and 25,000 square feet of meeting space and will be our fifth historic hotel, representing a particular area of expertise of our hotels and resorts division. We will be the principal equity partner in this venture and, as a result, the hotel will be reported as a company-owned hotel when opened. We currently anticipate that our total equity investment in this venture will be approximately $10 million, the majority of which will be recouped during fiscal 2007 from previously described federal and state historic tax credits related to this project. The remaining funds for this nearly $50 million project are being provided by contributions from Oklahoma City, new markets tax credits and non-recourse project debt. We expect this project to have a significant negative impact on fiscal 2007 operating results as a result of initial start-up, financing and preopening costs that will be expensed prior to the hotel opening. Once completed, we expect this hotel to contribute positively to fiscal 2008 operating results.

        The near-term outlook for the future performance of this division remains promising. Group business, which was inconsistent during fiscal 2006, particularly at our Grand Geneva Resort, appears to be improving. Our advanced bookings for the early months of fiscal 2007 are very encouraging. The group business segment is very important to several of our properties, as this is a segment of our customer base that typically provides non-room revenues to our hotels and resorts which are a key to increasing profitability levels. Subject to economic conditions and the potential negative impact of the start-up costs associated with new hotel projects, we currently expect continued improvement in our division operating results during fiscal 2007.

        We continue to endeavor to maintain our properties consistent with our traditional high standards, making capital investments necessary to improve operating results in the future. In addition to normal maintenance projects at all of our properties, several significant improvements were made to our Grand Geneva Resort & Spa during fiscal 2006, including golf course improvements and a renovation of its front entrance and restaurants. We have currently begun and are considering several additional projects at the Grand Geneva and at our Pfister Hotel during fiscal 2007 in order to further enhance the value of those properties, including adding additional convention space and a significantly enhanced outdoor pool complex to the Grand Geneva and a new restaurant, spa and salon to the Pfister Hotel. As noted in the Current Plans section of this discussion, we also continue to explore several new growth opportunities, with a focus on attempting to expand our hotel management business. We recently expanded our internal development team in order to help facilitate our future growth.

Fiscal 2005 versus Fiscal 2004

        Division revenues increased during fiscal 2005 compared to the prior year due to revenue increases at all five of our company-owned hotels and resorts, with the largest improvements attributed to our newest hotels (the Hotel Phillips in Kansas City, Missouri and the Hilton Madison at Monona Terrace) and our business travel-oriented Pfister Hotel. Increased food and beverage revenues also contributed to our fiscal 2005 increase in overall revenues. After two consecutive years of declining timeshare revenues, our revenues from this operation stabilizedOperating income increased during fiscal 2005 totaling $5.6 million compared to $5.7 during fiscal 2004. Our decrease in fiscal 2005 operating income compared to the prior year is entirely attributed to reduced earnings from our timeshare operations due to increased marketing and selling costs and approximately $1.5 milliondespite over $600,000 of combined start-up losses and preopening expenses associated with our Las Vegas condominium hotel and downtown Chicago hotel projects. Excluding the combined $1.9 million negative year-over-year impact on our division’s overall operating results related to these items, our remaining operations, including our five company-owned properties, contributed increased operating income of nearly 12% over the prior year.project.

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        The division’s total revenue per available room, or RevPAR for continuing company-owned properties increased 4.2% during fiscal 2005 compared to the prior year. Our occupancy percentage (number of occupied rooms as a percentage of available rooms) increased 2.0 percentage points and our average daily room rate (“ADR”)ADR increased 1.0% during fiscal 2005 compared to fiscal 2004. Our fiscal year ended on a very strong note, as our RevPAR increased 14.2% during our fiscal 2005 fourth quarter compared to the same period last year. Our occupancy percentage increased over four percentage points and our ADR increased nearly 7% during this last quarter.

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According to data received from Smith Travel Research, comparable upper upscale hotels experienced an increase in RevPAR of 8.6% during our fiscal 2005. We attempted to retain the integrity of our rate structure during the past several years (a period when others in the industry were heavily discounting), believing that this strategy was in our best long-term interest. As a result, our comparative changes in RevPAR during fiscal 2003 and 2004 consistently outperformed others in our segment of the industry but underperformed compared to others during fiscal 2005. As the economy and the industry have recovered, it appears that those that heavily discounted or operated in markets that were impacted more severely by the economic downturn are generally now experiencing larger increases in RevPAR and ADR than our hotels and resorts. Historically, our hotels and resorts have generally performed at or better than others in our segment of the industry and we are hopeful that this trend will resume as conditions stabilize in the industry. We believe that our most recent fourth quarter results support that expectation.

        The near-term outlook for our properties appears promising.        Despite a brief decline in group travel during our fiscal 2005 third quarter, group bookings were strong during fiscal 2005, particularly during our fourth quarter and beginning of fiscal 2006 and our advanced booking pace for group business is encouraging. The group business segment is very important to several of our properties, as this is a segment of our customer base that typically provides non-room revenues to our hotels and resorts which are a key to increasing profitability levels.quarter. The leisure customer segment has continued to perform well for us and the individual business travel segment continuescontinued to show steady improvement, as evidenced by the strong performance of our Pfister Hotel. As a result, with cost controls remaining a high priority, subject to economic and industry conditions, we expect our overall operating results and margins to improve in this division during fiscal 2006.

        During the fiscal 2004 third quarter, we announced that we had entered into a joint venture with the developer of the Timber Ridge Lodge to develop a luxury condominium hotel just off the Las Vegas Strip.Strip, the The Platinum Suite Hotel & Spa will feature 255 condo units, a luxury spa, indoor and outdoor swimming pools, 8,440 square feet of meeting space, including a 4,500 square-foot rooftop terrace overlooking the Strip, restaurants, lounge and upscale bar. The hotel will be located just over one block east of the Strip near Bellagio, Bally’s and Caesars Palace. The condo units were priced between $300,000 and $1.0 million and the hotel will manage a unit rental program for owners which will generate income for the owners from their units.

        During the fiscal 2005 third quarter, we began construction on this facility, with a targeted opening date in late spring 2006. We expect to incur additional preopening expenses and other initial start-up losses from this project during fiscal 2006, but we currently expect that the amounts will be less than those incurred during fiscal 2005 during the condominium sales process.Spa. We contributed an initial $3.5 million to this joint venture during fiscal 2004 and an additional $3.9 million during fiscal 2005 as construction began. Upon completion of construction and closing of the condominium unit sales (the project is sold out), 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 would be recognized late in fiscal 2006 or more likely early fiscal 2007. The division would then manage the hotel for a fee and share in any joint venture earnings on the common areas, such as the restaurants, spa and bars.

        Construction was recently completed on a company-owned hotel in downtown Chicago, Illinois that was originally expected to be a Baymont Inn & Suites. This project was not included in the sale of our limited-service lodging division and was taken over by our hotels and resorts division. Recently named the Four Points by Sheraton Chicago Downtown/Magnificent Mile, this hotel opened during the first week of June 2006 and features 226 units (including 130 suites), an indoor swimming pool and fitness center, high-tech meeting rooms, an on-site parking facility (open later in fiscal 2006) and will lease space to several area restaurants. Like most new hotels, we expect that this property will incur some additional start-up operating losses during fiscal 2006 prior to stabilizing, but given that the hotel incurred significant preopening expenses during fiscal 2005, we do not expect a significant negative impact on year-over-year comparisons.

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        During the first week of our fiscal 2006 first quarter, we purchased the 220-room Wyndham Milwaukee Center hotel in the heart of Milwaukee’s theatre and financial district. The hotel features 12,000 square feet of meeting space, on-site parking, a restaurant and two lounges and complements our other two downtown Milwaukee, Wisconsin hotels. We currently anticipate a major renovation of this property during fiscal 2006, which may have some negative impact on this hotel’s operating results during the year due to the impact of selected functional areas taken out of service during the renovation .

        During fiscal 2004, we announced our participation in a joint venture to restore and then manage the Skirvin Hotel in Oklahoma City, the oldest existing hotel in Oklahoma. After several delays in this public-private project, we now expect renovation of this historic hotel to begin later in fiscal 2006 and to be completed during our fiscal 2007. When completed, this hotel is expected to have 225 rooms and 25,000 square feet of meeting space. Under the currently proposed structure for this project, we will be the principal equity partner in this venture and, as a result, we anticipate including the results from this operation in our consolidated operating results. The project includes various tax credits and we currently expect to benefit from federal historic tax credits associated with the renovation during fiscal 2007. We do not expect this project to have a significant impact on fiscal 2006 operating results.

        We continue to endeavor to maintain our properties consistent with our traditional high standards, making the investments necessary to improve operating results in the future. In addition to normal maintenance projects at all of our properties, several significant improvements were made to our Grand Geneva Resort & Spa during fiscal 2005, including a renovation of its lobby, front entrance and restaurants. We are currently considering several additional projects at the Grand Geneva and at our Pfister Hotel during fiscal 2006 in order to further enhance the value of those properties. As noted in the Current Plans section of this discussion, we also continue to explore several new growth opportunities, with a focus on expanding our hotel management business. We recently expanded our internal development team in order to help facilitate our future growth.

Fiscal 2004 versus Fiscal 2003

        Division revenues and operating income increased during fiscal 2004 compared to the prior year due to the continued improvement from our newest hotels (the Hotel Phillips in Kansas City, Missouri, the Hilton Madison at Monona Terrace and our Timber Ridge Lodge management contract) and improved results from our group-oriented hotels and resorts. In addition, fiscal 2004 revenues benefited from increased food and beverage revenues, which was at least partially attributable to the successful introduction of our “chop house” restaurant concept at our Madison and Kansas City hotels. Conversely, reduced revenues at our Marcus Vacation Club timeshare development (negatively impacted by reduced tour flow as a result of the new “no-call” laws) negatively impacted the division’s overall operating results. Excluding timeshare revenues, which decreased from $7.4 million during fiscal 2003 to $5.7 million during the current year, total revenues from this division increased 8.4% during fiscal 2004 compared to the prior year. Fiscal 2004 comparisons to the prior year were also unfavorably impacted by approximately $300,000 of preopening expenses related to the new restaurant concepts and by the fact that the division’s fiscal 2003 operating results included approximately $700,000 of favorable real estate tax adjustments, the result of reductions in our tax assessments in the wake of September 11 and the subsequent impact it had on our industry.

        The division’s total RevPAR for company-owned properties increased 7.6% during fiscal 2004 compared to the prior year, excluding the discontinued Miramonte Resort. According to data received from Smith Travel Research, comparable upper upscale hotels experienced an increase in RevPAR of 4.1% during our fiscal 2004. Our hotels and resorts have generally performed at or better than others in our segment of the industry, likely due at least partially to our property and location mix. Our occupancy percentage increased 3.0 percentage points and our ADR also increased 0.7% during fiscal 2004 compared to fiscal 2003.

        During fiscal 2004, we contributed an initial $3.5 million to the previously mentioned Las Vegas joint venture, representing our 50% share of the land acquisition costs and estimated initial pre-development costs. The initial sales phase of the project began in February 2004 with the opening of a sales center and model unit, along with an aggressive marketing program targeting both U.S. and international markets. Our hotels and resorts division operating income was negatively impacted by approximately $400,000 during fiscal 2004, representing our share of the sales and marketing expenses related to this phase of the project.

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Discontinued Operations

        On September 3, 2004, we sold substantially all of the assets of our limited-service lodging division to La Quinta Corporation of Dallas, Texas for a total purchase price of approximately $415 million in cash. La Quinta purchased our Baymont Inns & Suites, Woodfield Suites and Budgetel Inns brands, substantially all of the division’s real estate and related assets and assumed the operation of 90 company-owned and operated Baymont Inns & Suites, seven Woodfield Suites, one Budgetel Inn and the 87-unit Baymont franchise system (including four joint venture Baymont Inns & Suites that were excluded from the transaction and became franchisees). The total purchase price noted above includesincluded approximately $19 million of proceeds related to the sale of four joint venture properties to LaQuinta. OurAt the time of the sale, a portion of sale proceeds was held in escrow pending completion of certain customary transfer requirements on several locations. During fiscal 2006, the necessary transfer requirements for the six remaining escrowed locations were met and one of the three remaining joint venture properties was sold. As a result, additional net proceeds as of the end$25.0 million were received and additional after-tax gains on sale of discontinued operations of $7.8 million were recognized during fiscal 2005,2006. Our combined two-year net proceeds from this transaction, before the payment of income taxes resulting from the gain on sale, were $365.4$390.4 million, net of transaction costs and excluding approximately $22 million in proceeds held in escrow pending completion of certain customary transfer requirements on six remaining locations. The net proceeds amount above excludes $10.5 million of proceeds related to the sale of a joint venture property to a third party. The assets sold to-date consist primarily of land, buildings and equipment with a net book value of approximately $242 million.properties. As a result, we reported ana combined two-year after-tax gain on sale of discontinued operations of $74.7 million during fiscal 2005. Upon completion of the transfer requirements associated with the $22 million in funds currently held in escrow, assets with a net book value of approximately $12 million will be sold and we would expect to report additional after-tax gains on sale of approximately $6 million in future periods.$82.5 million.

        We have accounted for the results of our limited-service lodging division as discontinued operations in our consolidated financial statements for fiscal 2005 and have restated prior year results to conform with the current year presentation.all years presented. The following table sets forth revenues, operating income (loss), income (loss) from discontinued operations and income fromgain on sale of discontinued operations, net of applicable taxes, for our limited-service lodging division for the last three fiscal years (in millions, exceptyears:

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        Our fiscal 2006 operating results included results from the remaining joint venture Baymont Inns & Suites that were excluded from the sale and are now operating as Baymont franchises. We are actively exploring opportunities to sell the remaining two properties and, as a result, we continue to include their operating results in discontinued operations. Our fiscal 2006 loss from discontinued operations included a one-time charge to earnings related to the costs associated with exiting leased office space for variance percentage):our former limited-service lodging division.

        Operating results of the limited-service lodging division for fiscal 2005 includeincluded 14 weeks of operation prior to completion of the sale. Results reported subsequent to September 3, 2004 includeincluded various remaining costs associated with the limited-service lodging division, as well as results from four of our joint venture Baymont Inns & Suites that were excluded from the transaction and began operating as Baymont franchises. As noted earlier, oneOne of the original four joint venture properties excluded from the sale to LaQuinta was sold early in our fiscal 2005 third quarter and we are exploring opportunities to sellanother was sold during the remaining three properties.second quarter of fiscal 2006. The limited-service lodging division’s operating income and income from discontinued operations, net of applicable taxes, during fiscal 2005 included various costs associated with exiting the business, including approximately $1.8 million of severance-related costs.

        On December 1, 2004, we sold the Miramonte Resort for $28.7 million in cash, before transaction costs. The assets sold consisted primarily of land, building and equipment. As a result of this transaction, we reported a gain of $5.9 million before tax and $3.6 million after tax during fiscal 2005. Settlement of a dispute with a contractor during fiscal 2006 resulted in a $135,000 before tax reduction in the reported gain.

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        We have accounted for the results of the Miramonte Resort, which had previously been included in our hotels and resorts segment results, as discontinued operations in our consolidated financial statements for fiscal 2005 and have restated prior year results to conform with the current year presentation.all years presented. The following table sets forth revenues, operating loss, and loss from discontinued operations and gain (loss) on sale of discontinued operations, net of applicable taxes, for the Miramonte Resort for the last three fiscal years (in millions, except for variance percentage):years:

        Operating results for the Miramonte Resort for fiscal 2005 includeincluded almost 27 weeks of operation prior to completion of the sale, generally during the slowest seasons (summer and fall) for that property. Operating results for the period the hotel was open during fiscal 2005 benefited from increased revenues as a result of aits then recently opened spa. Fiscal 2004 operating results were negatively impacted by construction delays on the aforementioned spa.

        On May 24, 2001,Early in our fiscal 2007 first quarter, we sold the remaining timeshare inventory of our 30 KFCMarcus Vacation Club at Grand Geneva vacation ownership development to Orange Lake Resort & Country Club of Orlando, Florida. The assets sold consisted primarily of real estate and KFC/Taco Bell 2-in-1 restaurants. The asset purchase agreementdevelopment costs — Orange Lake acquired the remaining 34 units of the 136-unit Marcus Vacation Club property. Our hotels and resorts division will continue to provide hospitality management services for the property and continues to hold notes receivable from prior buyers of timeshare units, but will no longer be in the business of selling timeshare units to customers.

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        We have accounted for the results of the Marcus Vacation Club, which had previously been included in our hotels and resorts segment results, as discontinued operations in our consolidated financial statements for fiscal 2006 and have restated prior year results to conform with the buyer provided for a potential additional future purchase price payment if certain performance conditions were met. During the first quarter of fiscal 2003, the buyer elected to terminate this provision of the agreement by paying us an additional $2.1 million. As a result, an additional gain on sale ofcurrent year presentation. The following table sets forth revenues, operating loss and loss from discontinued operations, net of tax,applicable taxes, for the Marcus Vacation Club for the last three fiscal years:

        Operating results from our timeshare operation were negatively impacted in each of approximately $1.3 million, or $.04 per share, is includedthe last two years by new rules related to telephone solicitation of potential customers. With just one vacation ownership development in our reported resultsportfolio and no ability to leverage the cost of alternate marketing methods across multiple developments, this resulted in significantly increased marketing and selling costs for fiscal 2003.our operation.

Financial Condition

Liquidity and Capital Resources

        Our movie theatre and hotels and resorts businesses each generate significant and relatively consistent daily amounts of cash, subject to previously noted seasonality, because each segment’s revenue is derived predominantly from consumer cash purchases. We believe that these relatively consistent and predictable cash sources, together with the funds from our sale of the limited-service lodging division, as well as the availability of $125 million of unused credit lines at fiscal 20052006 year-end, should be adequate to support the ongoing operational liquidity needs of our businesses.

        Net cash provided by operating activities totaled $39.6 million during fiscal 2006, an increase of $52.6 million compared to net cash used in operating activities totaledof $13.0 million during fiscal 2005, a decrease of $105.2 million, or 114.1%, compared to net cash provided by operating activities of $92.2 million during fiscal 2004.2005. The decreaseincrease was due primarily to $75.7 million in income taxes, including a reduction in deferred income taxes, during fiscal 2005 related principally to the gain on sale of discontinued operations, as well as a difference in the collectiontiming of a large note receivable in fiscal 2004, resulting in anpayments of accounts payable and taxes other than income, partially offset by unfavorable comparisoncomparisons in collections of accounts and notes receivable.receivable and other current assets.

        Net cash used in investing activities during fiscal 2006 totaled $20.5 million, compared to net cash provided by investing activities during fiscal 2005 totaledof $302.4 million, compared to net cash used in investing activities of $46.7 million during fiscal 2004.2005. Our fiscal 2005 results includeincluded $365.4 million of net proceeds from the disposal of our limited-service lodging division.division, compared to $25.0 million during fiscal 2006. In addition, fiscal 2005 results includeincluded $28.5 million of net proceeds from the sale of the Miramonte Resort, all of which was invested with intermediaries to facilitate potential tax deferral opportunities. The cash held by intermediaries was released shortly after year-end, a portion of which was used to purchase the Wyndham Milwaukee Center hotel. Cash proceeds from the disposals of other property and equipment totaled $4.2$6.9 million and $8.8$4.2 million during fiscal 2006 and 2005, respectively. The cash proceeds received during fiscal 2006 were primarily the result of our sale of a non-operating real estate development, a former restaurant location and 2004, respectively.several excess parcels of land. The cash proceeds received during fiscal 2005 were primarily the result of our sale of two outlots on existing theatre land parcels, a four-screen theatre and an excess land parcel. The cash proceeds receivedIn addition, during fiscal 2004 were primarily2006, we received $7.4 million from Oklahoma City in conjunction with their contribution to the resultrenovation of the Hilton Skirvin Hotel. Upon completion of this project, the city’s total contribution, which is expected to be over $11 million, will be reported as a reduction to our sale of a theatreproperty and six excess parcels of land.equipment and will reduce future depreciation expense for this asset.

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        Total capital expenditures (including normal continuing capital maintenance projects) totaled $75.5 million during fiscal 2006, including the previously noted acquisitions of the Wyndham Milwaukee Center and Westin Columbus, compared to $63.4 million and $50.9 million wereof capital expenditures incurred in fiscal 2005 and 2004, respectively.2005. We incurred $35.9$65.8 million of capital expenditures during fiscal 20052006 in our hotels and resorts division, the majority of which was related to our purchases of the aforementioned two hotels, completion of our Chicago hotel construction and beginning of construction on the Oklahoma City hotel project. In addition, we incurred $8.4 million of capital expenditures during fiscal 2006 in our theatre division, to fund one new theatre, multiple screen additions, Project 2010 renovationincluding costs associated with a parking structure at one of our Chicago-area theatres, Project 2010 renovation costs and four land parcels for future theatre development, as well as ongoing maintenance capital projects. In addition, we incurred $21.5 million of capital expenditures during fiscal 2005 inbeginning the construction on our hotels and resorts division to fund construction of the downtown Chicago hotel, renovations at our Grand Geneva Resort & Spa and various other ongoing maintenance projects. Also included in our capital expenditure totals for fiscal 2005 are $4.1 million of expenditures in our former limited-service lodging division incurred prior to the sale related to previously committed capital projects.new Racine-area theatre. In addition to capital expenditures, we also incurred $4.3$1.7 million and $4.5$4.3 million, respectively, during fiscal 2006 and 2005 and 2004 onin connection with the purchase of interests in joint ventures, including our interest in the Las Vegas project for our hotels and resorts division and our interest in a theatre advertising company for our theatre division. During fiscal 2004,2005, we incurred $24.5$35.9 million of capital expenditures for discontinued limited-service lodgingour theatre division, and Miramonte Resort projects, $15.1$21.5 million for our hotels and resorts division projects (including the downtown Chicago project) and $11.0$4.5 million for theatre divisiondiscontinued operation projects.

        Pending a decision regarding the use of the proceeds from the sale of the limited-service lodging division, total Estimated current planned fiscal 2007 capital expenditures, in fiscal 2006 are currently expected to be as high as $80 towhich may exceed $100 million, and are expected to be funded by cash generated from operations and existing cash balances, including proceeds fromdescribed in greater detail in the saleCurrent Plans section of the Miramonte Resort, which were used to purchase the Wyndham Milwaukee Center. Excluding the purchase and renovation of the Wyndham Milwaukee Center hotel, we currently expect the remaining capital to be divided approximately equally across our theatre and hotels and resorts divisions and will likely include selected theatre screen additions and potential new locations, potential strategic equity investments in hotel projects and maintenance and project capital.this discussion.

        Net cash used in financing activities in fiscal 20052006 totaled $40.0$243.6 million, compared to $42.0$40.0 million in fiscal 2004.2005, with the increase primarily related to the previously described $214.6 million special dividend paid during our fiscal 2006 fourth quarter. During fiscal 2005,2006, we received $13.6$5.6 million of net proceeds from the issuance of notes payable and long-term debt, compared to $10.8$13.6 million during fiscal 2004.2005. The proceeds during both fiscal years were from mortgage debt related to the Chicago development. We made total principal payments on notes payable and long-term debt of $53.7$27.3 million and $49.3$53.7 million during fiscal 20052006 and 2004,2005, respectively, representing the payment of current maturities during both years and payment of borrowings on commercial paper and revolving credit facilities with the excess operating cash flow and sales proceeds available.available during fiscal 2005. As a result, our total debt (including current maturities) decreased to $196.7$176.5 million at the close of fiscal 2005,2006, compared to $233.0$196.7 million at the end of fiscal 2004.2005. Our debt-capitalization ratio was 0.280.37 at May 26, 2005,25, 2006, compared to 0.370.28 at the prior fiscal year end.year-end. Based upon our current expectations for fiscal 20062007 capital expenditure levels and potential asset sales proceeds, includingas well as the remaining escrowed net proceeds fromexpected addition of debt related to the sale of the limited-service lodging division,Oklahoma City hotel, we anticipate our long-term debt total will again decreaseincrease slightly during fiscal 2006 by the amount of scheduled current maturities at year-end (approximately $26 million) and that2007. We also currently expect our debt-capitalization ratio will remain significantly below historical levels.to increase slightly as a result. Our actual long-term debt total and debt-capitalization ratio at the end of fiscal 20062007 will be dependent upon our decisions regardingactual capital expenditures and asset sales proceeds during the use of the Baymont sale proceeds.year.

        During fiscal 2005,2006, we repurchased 28,000313,000 of our common shares for approximately $518,000$6.5 million in conjunction with the exercise of stock options and purchase of shares in the open market, compared to 34,00028,000 of common shares repurchased for approximately $512,000$518,000 during fiscal 2004. Through May 26, 2005, our2005. Our Board of Directors has authorized the repurchase of up to 4.7 million shares of our outstanding Common Stock.common stock. As of May 26, 2005,25, 2006, approximately 1.91.6 million shares remained available under these authorizations for repurchase.this repurchase authorization. Any suchadditional repurchases are expected to be executed on the open market or in privately negotiated transactions depending upon a number of factors, including prevailing market conditions.

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Contractual Obligations

        We have obligations and commitments to make future payments under debt and operating leases. The following schedule details these obligations at May 26, 200525, 2006 (in thousands):

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        Additional detail describing our long-term debt is included in Note 45 to our consolidated financial statements.

        As of May 26, 2005,25, 2006, we had no additional material purchase obligations other than those created in the ordinary course of business related to property and equipment, which generally have terms of less than 90 days. We also have long-term obligations related to our employee benefit plans, which are discussed in detail in Note 67 of our consolidated financial statements.

        We guarantee debt of our 50% unconsolidated joint ventures and other entities. Our joint venture partners also guarantee all or a portion of this same debt. During fiscal 2004, we paid $930,000 in connection with our guarantee of debt on a joint venture that was liquidated.

        We have approximately seven and one-half years remaining on a ten and one-half year office lease. During fiscal 2006, the lease was amended in order to exit leased office space for our former limited-service lodging division. To induce the landlord to amend the lease, we guaranteed the lease obligations of the new tenant of the relinquished space throughout the remaining term of the lease.

        The following schedule details our guarantee obligations at May 26, 200525, 2006 (in thousands):

Quantitative and Qualitative Disclosures About Market Risk

        We are exposed to market risk related to changes in interest rates and we manage our exposure to this market risk by monitoring available financing alternatives.

        Variable interest rate debt outstanding as of May 26, 200525, 2006 was $21.9$25.0 million, carried an average interest rate of 5.3%7.3% and represented 11.1%14.2% of our total debt portfolio. Our earnings are affected by changes in short-term interest rates as a result of our borrowings under our revolving credit agreements and floating-rate mortgages, industrial development revenue bonds and unsecured term notes.mortgages.

        Fixed interest rate debt totaled $174.8$151.5 million as of May 26, 2005,25, 2006, carried an average interest rate of 7.31%7.3% and represented 88.9%85.8% of our total debt portfolio. Fixed interest rate debt included the following: senior notes bearing interest monthly at 10.22%, maturing in 2005; senior notes bearing interest semiannually at fixed rates ranging from 6.66% to 7.93%, maturing in 2008fiscal 2009 through 2014; and fixed rate mortgages and other debt instruments bearing interest from 6.50% to 8.22%, maturing in 20092010 through 2014.2025. The fair value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of our fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The fair value of our $172.7$148.1 million of senior notes is approximately $183.8$151.5 million. Based upon the respective ratesrate and prepayment provisions of our remaining fixed interest rate senior notesmortgage and mortgagesunsecured term note at May 26, 2005,25, 2006, the carrying amounts of such debt approximates fair value.

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        The variable interest rate debt and fixed interest rate debt outstanding as of May 26, 200525, 2006 matures as follows (in thousands):

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        We periodically enter into interest rate swap agreements to manage our exposure to interest rate changes. TheThese swaps involve the exchange of fixed and variable interest rate payments without exchanging the notional principal amount. Payments or receipts on the agreements are recorded as adjustments to interest expense. We had no outstanding interest rate swap agreements at May 26, 2005.25, 2006. On May 3, 2002, we terminated a swap agreement that had effectively converted $25 million of our borrowings under revolving credit agreements from floating-rate debt to fixed-rate debt. The fair value of the swap on the date of the termination resulted in a liability of $2.8 million. The remaining loss in other comprehensive income at May 26, 2005 of $184,000 ($111,000 net of tax) will be, previously included in other comprehensive income, was reclassified into earnings as interest expense through November 15, 2005,during fiscal 2006 in conjunction with the remainingend of the original life of the original hedge, as interest payments affect earnings.hedge.

Critical Accounting Policies and Estimates

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United Statesaccounting principles generally accepted accounting principles.in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

        On an on-going basis, we evaluate our estimates, including those related to bad debts, insurance reserves, carrying value of investments in long-lived assets, intangible assets, income taxes, pensions, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.

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Item 7A.     QuantitativeImpact of Future Adoption of Accounting Standards

        On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004)(SFAS No. 123R), “Share Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and Qualitative Disclosures About Market Risk.amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

        We will adopt SFAS No. 123R at the beginning of our 2007 fiscal year. We expect that our total stock compensation expense will be similar to the fiscal 2006 pro-forma stock compensation expense included in Note 1 to our Consolidated Financial Statements.

        In December 2004, the American Institute of Certified Public Accountants issued Statement of Position 04-2, “Accounting for Real Estate Time-Sharing Transactions” (the SOP) and the FASB amended SFAS No. 66, “Accounting for Sales of Real Estate,” and SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Project,” to exclude accounting for real estate time-sharing transactions from these statements. The SOP is effective for fiscal years beginning after June 15, 2005. The impact of the SOP on our required reserves on our remaining notes receivable for interval ownership is currently being evaluated.

        In June 2006, the FASB issued FASB interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” This interpretation prescribes a recognition threshold and measurement criteria for a tax position taken or expected to be taken in a tax return. The new standard will be effective for the Company in the first quarter of fiscal 2008. The impact of FIN 48 on our financial results is currently being evaluated.

        The information required by this item is set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk” above.

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Item 8.     Financial Statements and Supplementary Data.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of May 26, 2005.25, 2006. The Company’s auditors, Ernst & Young, LLP, have issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. That attestation report is set forth immediately following this report.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders
      of the Marcus Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that The Marcus Corporation (the Company) maintained effective internal control over financial reporting as of May 26, 2005,25, 2006, based on criteria established in Internal Control—Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of May 26, 2005,25, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 26, 2005,25, 2006, based ontheon the COSO criteria.criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Marcus Corporation as of May 26, 200525, 2006 and May 27, 2004,26, 2005, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the three years in the period ended May 26, 200525, 2006, and our report dated August 5, 20054, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Milwaukee, Wisconsin
August 5, 20054, 2006

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
      of The Marcus Corporation

We have audited the accompanying consolidated balance sheets of The Marcus Corporation (the Company) as of May 26, 200525, 2006 and May 27, 2004,26, 2005, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the three years in the period ended May 26, 2005.25, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at May 26, 200525, 2006 and May 27, 2004,26, 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 26, 2005,25, 2006, in conformity with United States generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of May 26, 2005,25, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 5, 20054, 2006 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Milwaukee, Wisconsin
August 5, 20054, 2006