Aside from short sellers, it's doubtful that many investors will think of 2006 as a memorable year for IMAX (NASDAQ:IMAX). Earlier, we chronicled all of the problems that have plagued the company over the past six months, so there's no need to revisit them in any detail now.

Suffice it to say that things have been bad, very bad, and the shares have tumbled more than 50% as a result.

By no means is the suspense over, though, and I'm betting that this rapidly unfolding story gets even more interesting in the year ahead.

Rabid customer base
I must admit to being a partisan IMAX fan, having impulsively bought the stock (not a habit I recommend, by the way) within days of seeing my first IMAX 3-D film in Las Vegas more than 10 years ago.

To be sure, a great product doesn't always translate into a great investment, but more than 800 million people have sampled that "product" so far, and I've yet to encounter one who didn't come away impressed.

Let's face it: The fact that customers are more than willing to drive 50 miles (or more) to the nearest IMAX theater and then shell out nearly twice as much money to see the same film that's playing at their local multiplex is the very definition of a competitive advantage -- so much so that IMAX has successfully turned its rivals into partners.

With a relative handful of IMAX screens grabbing a disproportionate amount of global box-office receipts, it's not surprising that leading theater chains like Cinemark and Regal Entertainment (NYSE:RGC) are so eager to give IMAX a shot, particularly when their own clientele has grown apathetic in a world of home theater systems and high-definition programming.

Digital remastering. MPX retrofitting. I know what you're thinking -- we were talking about these same breakthroughs years ago; what's going to drive the company forward from here?

If it ain't broke
To a certain extent (and overlooking recent miscues), one could argue that management's growth strategy already has the company moving in the right direction.

Recent troubles have overshadowed any operational improvements, but let's not forget that IMAX has come a long way from its days as a novelty act found at museums and science centers. The company now has 280 theaters operating in 40 countries around the world.

More importantly, system orders have been trending steadily higher over the past three years, and the current order backlog for 2007 stands at 24. The revenue from theater installations may be choppy, but sooner or later it hits the books.

Meanwhile, film revenues have jumped nearly 50% year to date, climbing from $18.3 million to $26.4 million -- and this is just a hint of things to come. Only 16 movies have been released thus far in IMAX DMR format, and it wasn't that long ago that the multi-story screens were showing nature documentaries, not Hollywood feature films produced by the likes of Time Warner (NYSE:TWX).

In 2002, management was essentially begging for studios to distribute previously released films on the IMAX platform. But the success of Harry Potter and the Prisoner of Azkaban raised a few eyebrows, generating $10 million in revenues within 10 weeks. Soon after, The Polar Express steamed past that key mark in just 19 days, at one point capturing 14% of the total box office revenues ($13.3 million of $96.1 million) on just 2% of the available screens (61 of 3,650).

And then last summer, Superman Returns earned a whopping $7 million in its opening week, which worked out to a per-screen average of nearly $90,000. As my Foolish colleague Rick Munarriz pointed out, that was nearly triple the production of the average conventional theater.

Clearly, something is working, and the string of recent box-office success stories bodes well for the future -- when films are released to a much wider network.

Let's get digital
Unfortunately, the firm's expansion plans have been handcuffed by a highly leveraged balance sheet (the same thing that might have scared away potential private equity suitors).

To get around that little problem, management is turning to joint-venture deals, whereby IMAX supplies the theater systems, the exhibitors cover the retrofit costs, and after the expenses have been recouped, all box-office profits are split 50/50.

According to CEO Richard Gelfond, the company is hoping to sign as many as 20 to 30 of these joint ventures in each of the next two years.

By that time, the transition to digital projection systems should be well under way. This upgrade has been in the works for years, beginning with the firm's acquisition of Digital Projection International in 1999. Though the UK-based company was later sold, the move underscored IMAX's commitment to developing superior digital technology.

Unlike celluloid, movies shown digitally have no imperfections and won't degrade over time, but superior quality is only the beginning. As it stands, the bulky release prints of movies printed on standard 35-mm film are approximately 10,000 feet long and cost roughly $1,300 each to produce ($22,000 for an IMAX film). By contrast, digital movies can be copied for next to nothing and delivered almost instantly to a computer hard drive via the Internet.

Both studios and theater owners stand to benefit greatly from the cost savings, which should expedite the transition to digital. Two years ago, there were less than 400 theatres equipped with digital projection systems. That total has since more than doubled to 850, and some estimates are forecasting that it could surge to 17,000 within the next few years.

Perhaps the company's PR team summed it up best: "Lower print costs should lead to more films and more films should lead to more theatres and more revenues per theatre." Both studio execs and cinema owners have a vested interest in seeing IMAX remain viable, and digital is a win-win for everybody.

At the crossroads
It has been a difficult stretch for IMAX, and it might get worse before it gets better. Film revenues are unpredictable, and there is the possibility that some exhibitors on the fence could decide to hold off on any orders until the switch to digital is complete. Therefore, bottom-feeders waiting on a quick bounce might wind up disappointed if the shares continue trading for about the price of a box of Raisinets.

However, those valuing the company by its long-term cash flow potential who don't mind waiting for those cash flows to develop could walk away with IMAX-sized gains.

Can't-miss blockbuster hits like Spider-Man 3 and Harry Potter and the Order of the Golden Phoenix should boost revenues and help generate interest in the stock next year. Beyond that, IMAX has barely cracked its potential global market, and once additional customers are introduced to the medium, momentum should feed on itself.

If nothing else, any tangible operating improvements should give the company a few extra bargaining chips if and when any buyout talks heat up.

For now, I think IMAX is worth more than the price of admission, so sit back and enjoy the show.

In fact, the Motley Fool Rule Breakers team agrees with me that IMAX has some tricks up its sleeve. To see what other picks the service has recommended to subscribers, take a free 30-day trial today. Time Warner is a Stock Advisor pick.

Check out the other companies included in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Fool contributor Nathan Slaughter owns none of the companies mentioned. The Fool has a disclosure policy.