You would think higher box office and concession sales would translate into raised profits for Cineplex Galaxy Income Fund.

You would be wrong.

Toronto-based Cineplex Galaxy, which has a 76% interest in Cineplex Entertainment, the operator of 1,337 screens at 132 theaters across Canada, on Wednesday posted second-quarter revenue up 4.7% to $209.3 million.

Box-office revenue rose 5.2% to $126.4 million during the three months to June 30, surpassing a 1.6% rise in overall Canadian industry box office, according to the Motion Picture Theatre Associations of Canada.

But Cineplex Galaxy is experiencing growing pains at it diversifies away from traditional 35mm projection to new digital platforms.

The exhibitor, which operates the Cineplex Odeon- and Famous Players-branded multiplexes, did boffo business with Hollywood releases like Sex in the City, Iron Man and Indiana Jones and the Kingdom of the Crystal Skull during the latest quarter.

And all-important concession sales also jumped during the latest quarter to $62 million, against a year-earlier $59.7 million.

But the bottom line for Cineplex Galaxy suffered on higher film costs related to its product mix, increased interest charges, a larger non-cash amortization expense and reduced overall margins.

The result was earnings at Canada’s largest exhibitor fell 39% to $5.04 million, compared to $8.3 million in 2007.

‘Our strategic focus has been to grow attendance and purchase incidence both in terms of theatre visits and concession purchases and these results reflect the success of that strategy,’ Cineplex Galaxy president and CEO Ellis Jacob said.

But that expansion comes at a price. The exhibitor saw its adjusted EBITDA fall 4% to $33.6 million on higher expenditures for employee incentives, business development, which includes interactive businesses, and introducing point-of-sale gift cards in major retail outlets.

‘We believe that this investment in our future comes with current costs that will deliver strong results and enhance overall revenues for the future,’ Jacob argued.

As part of its digital growth plans, Cineplex Galaxy recently said it will install at least 175 3D projection systems in its theaters by December 2009.