UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
      One)[X]
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the quarterly period ended September 30,
      2008Or[  ]
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from ______ to
______





Commission
File Number: 1-15935





OSI
RESTAURANT PARTNERS, LLC


(Exact
name of registrant as specified in its charter)


DELAWARE
            59-3061413(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)


2202
North West Shore Boulevard, Suite 500, Tampa, Florida 33607


(Address
of principal executive offices) (Zip Code)





(813)
282-1225


(Registrant's
telephone number, including area code)





N/A


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has 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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





YES x   NO
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):




Large accelerated filer oAccelerated
filer  oNon-accelerated filer xSmaller
reporting company o




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





YES  o  NO  x





As of
November 14, 2008, the registrant has 100 units, no par value, of Common Units
outstanding (all of which are owned by OSI HoldCo, Inc., the registrant’s direct
owner), and none are publicly traded.




Table of Contents








OSI RESTAURANT PARTNERS, LLC





INDEX TO
QUARTERLY REPORT ON FORM 10-Q


For the
Quarterly Period Ended September 30, 2008


(Unaudited)





TABLE OF
CONTENTS








PART
      I — FINANCIAL INFORMATIONPage
      No.Item 1.
            Consolidated
      Financial Statements (Unaudited):Consolidated Balance Sheets — September 30, 2008 (Successor)
      and December 31, 2007 (Successor)
            3Consolidated Statements of
      Operations  —
              For the Three and Nine Months Ended September 30, 2008
      (Successor) and the Three Months Ended September 30, 2007 (Successor), the
      Periods June 15, 2007 to September 30, 2007 (Successor) and January 1,
      2007 to June 14, 2007 (Predecessor)
            5Consolidated Statements of Cash
      Flows  —
              For the Nine Months Ended September 30, 2008 (Successor) and
      the Periods June 15, 2007 to September 30, 2007 (Successor) and January 1,
      2007 to June 14, 2007 (Predecessor)
            6Notes to Consolidated Financial
    Statements
            8Item 2.
            Management's Discussion and Analysis of Financial Condition
      and Results of Operations
            40Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            74Item 4.
            Controls and Procedures
            76PART
      II — OTHER INFORMATIONItem 1.
            Legal Proceedings
            77Item
      1A.
            Risk Factors
            78Item
      6.
            Exhibits
            79Signature
            80


2
 Table of Contents




PART I:FINANCIAL INFORMATION





Item
1. Consolidated Financial Statements




OSI
Restaurant Partners, LLC
 CONSOLIDATED
BALANCE SHEETS
 (IN
THOUSANDS, UNAUDITED)




SUCCESSORSEPTEMBER
      30,
              
              
              DECEMBER
      31,2008
              
              
              2007ASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              168,914
              
              
              $
              171,104Current
      portion of restricted cash
              
              
              4,958
              
              
              
              4,006Inventories
              
              
              89,039
              
              
              
              81,036Deferred
      income tax assets
              
              
              26,125
              
              
              
              24,618Other
      current assets
              
              
              79,735
              
              
              
              86,149Total
      current assets
              
              
              368,771
              
              
              
              366,913Restricted
      cash
              
              
              6,975
              
              
              
              32,237Property,
      fixtures and equipment, net
              
              
              1,124,574
              
              
              
              1,245,245Investments
      in and advances to unconsolidated affiliates, net
              
              
              26,357
              
              
              
              26,212Goodwill
              
              
              902,282
              
              
              
              1,060,529Intangible
      assets, net
              
              
              695,567
              
              
              
              716,631Other
      assets, net
              
              
              210,335
              
              
              
              223,242Notes
      receivable collateral for franchisee guarantee
              
              
              33,150
              
              
              
              32,450Total
      assets
              
              $
              3,368,011
              
              
              $
              3,703,459




(CONTINUED...)


3
 Table of Contents


OSI
Restaurant Partners, LLC


CONSOLIDATED
BALANCE SHEETS


(IN
THOUSANDS, EXCEPT COMMON UNITS, UNAUDITED)




SUCCESSORSEPTEMBER
      30,
              
              
              DECEMBER
      31,2008
              
              
              2007LIABILITIES
      AND UNITHOLDER’S EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              156,561
              
              
              $
              155,923Sales
      taxes payable
              
              
              12,086
              
              
              
              18,589Accrued
      expenses
              
              
              163,571
              
              
              
              136,377Current
      portion of accrued buyout liability
              
              
              16,851
              
              
              
              11,793Unearned
      revenue
              
              
              116,837
              
              
              
              196,298Income
      taxes payable
              
              
              1,100
              
              
              
              2,803Current
      portion of long-term debt
              
              
              87,143
              
              
              
              34,975Current
      portion of guaranteed debt
              
              
              33,283
              
              
              
              32,583Total
      current liabilities
              
              
              587,432
              
              
              
              589,341Partner
      deposit and accrued buyout liability
              
              
              110,581
              
              
              
              122,738Deferred
      rent
              
              
              45,759
              
              
              
              21,416Deferred
      income tax liability
              
              
              220,728
              
              
              
              291,709Long-term
      debt
              
              
              1,766,654
              
              
              
              1,808,475Guaranteed
      debt
              
              
              2,495
              
              
              
              2,495Other
      long-term liabilities, net
              
              
              255,621
              
              
              
              233,031Total
      liabilities
              
              
              2,989,270
              
              
              
              3,069,205Commitments
      and contingenciesMinority
      interests in consolidated entities
              
              
              29,588
              
              
              
              34,862Unitholder’s
      EquityCommon
      units, no par value, 100 units authorized, issued and
      outstandingas
      of September 30, 2008 and December 31, 2007
              
              
              -
              
              
              
              -Additional
      paid-in capital
              
              
              646,953
              
              
              
              641,647Accumulated
      deficit
              
              
              (282,532
              )
              
              
              (40,055
              )Accumulated
      other comprehensive loss
              
              
              (15,268
              )
              
              
              (2,200
              )Total
      unitholder’s equity
              
              
              349,153
              
              
              
              599,392$
              3,368,011
              
              
              $
              3,703,459




See notes
to unaudited consolidated financial statements.


4
 Table of Contents


OSIRestaurant Partners, LLC


CONSOLIDATED
STATEMENTS OF OPERATIONS


(IN
THOUSANDS, UNAUDITED)




SUCCESSOR
              
              
              PREDECESSORTHREE
              
              
              THREE
              
              
              NINE
              
              
              PERIOD
              
              
              PERIODMONTHS
              
              
              MONTHS
              
              
              MONTHS
              
              
              FROM
              
              
              FROMENDED
              
              
              ENDED
              
              
              ENDED
              
              
              JUNE
      15 to
              
              
              JANUARY
      1 toSEPTEMBER
      30,
              
              
              SEPTEMBER
      30,
              
              
              SEPTEMBER
      30,
              
              
              SEPTEMBER
      30,
              
              
              JUNE
      14,2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              2007RevenuesRestaurant
      sales
              
              $
              941,747
              
              
              $
              1,001,451
              
              
              $
              3,016,829
              
              
              $
              1,200,114
              
              
              $
              1,916,689Other
      revenues
              
              
              6,788
              
              
              
              5,121
              
              
              
              17,696
              
              
              
              5,956
              
              
              
              9,948Total
      revenues
              
              
              948,535
              
              
              
              1,006,572
              
              
              
              3,034,525
              
              
              
              1,206,070
              
              
              
              1,926,637Costs
      and expensesCost
      of sales
              
              
              340,458
              
              
              
              359,380
              
              
              
              1,068,516
              
              
              
              429,061
              
              
              
              681,455Labor
      and other related
              
              
              265,408
              
              
              
              283,061
              
              
              
              842,447
              
              
              
              338,380
              
              
              
              540,281Other
      restaurant operating
              
              
              255,970
              
              
              
              248,426
              
              
              
              776,985
              
              
              
              297,156
              
              
              
              440,545Depreciation
      and amortization
              
              
              47,548
              
              
              
              45,205
              
              
              
              141,589
              
              
              
              53,063
              
              
              
              74,846General
      and administrative
              
              
              62,823
              
              
              
              59,325
              
              
              
              189,303
              
              
              
              70,613
              
              
              
              158,147Provision
      for impaired assets andrestaurant
      closings
              
              
              15,277
              
              
              
              2,456
              
              
              
              204,458
              
              
              
              3,220
              
              
              
              8,530Loss
      (income) from operations ofunconsolidated
      affiliates
              
              
              1,366
              
              
              
              224
              
              
              
              (1,879
              )
              
              
              (139
              )
              
              
              692Total
      costs and expenses
              
              
              988,850
              
              
              
              998,077
              
              
              
              3,221,419
              
              
              
              1,191,354
              
              
              
              1,904,496(Loss)
      income from operations
              
              
              (40,315
              )
              
              
              8,495
              
              
              
              (186,894
              )
              
              
              14,716
              
              
              
              22,141Other
      expense, net
              
              
              (6,391
              )
              
              
              -
              
              
              
              (10,196
              )
              
              
              -
              
              
              
              -Interest
      income
              
              
              1,429
              
              
              
              2,401
              
              
              
              3,876
              
              
              
              3,271
              
              
              
              1,561Interest
      expense
              
              
              (36,564
              )
              
              
              (43,747
              )
              
              
              (106,351
              )
              
              
              (51,411
              )
              
              
              (6,212
              )(Loss)
      income before benefit from incometaxes
      and minority interest inconsolidated
      entities' income (loss)
              
              
              (81,841
              )
              
              
              (32,851
              )
              
              
              (299,565
              )
              
              
              (33,424
              )
              
              
              17,490Benefit
      from income taxes
              
              
              (35,256
              )
              
              
              (15,630
              )
              
              
              (66,738
              )
              
              
              (16,593
              )
              
              
              (1,656
              )(Loss)
      income before minority interest inconsolidated
      entities' income (loss)
              
              
              (46,585
              )
              
              
              (17,221
              )
              
              
              (232,827
              )
              
              
              (16,831
              )
              
              
              19,146Minority
      interest in consolidatedentities'
      income (loss)
              
              
              52
              
              
              
              (537
              )
              
              
              172
              
              
              
              (287
              )
              
              
              1,685Net
      (loss) income
              
              $
              (46,637
              )
              
              $
              (16,684
              )
              
              $
              (232,999
              )
              
              $
              (16,544
              )
              
              $
              17,461




See notes
to unaudited consolidated financial statements.




5
 Table of Contents





OSI RestaurantPartners, LLC


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(IN
THOUSANDS, UNAUDITED)




SUCCESSOR
              
              
              PREDECESSORNINE
              
              
              PERIOD
              
              
              PERIODMONTHS
              
              
              FROM
              
              
              FROMENDED
              
              
              JUNE
      15 to
              
              
              JANUARY
      1 toSEPTEMBER
      30,
              
              
              SEPTEMBER
      30,
              
              
              JUNE
      14,2008
              
              
              2007
              
              
              2007Cash
      flows from operating activities:Net
      (loss) income
              
              $
              (232,999
              )
              
              $
              (16,544
              )
              
              $
              17,461Adjustments
      to reconcile net (loss) income to cashprovided
      by operating activities:Depreciation
      and amortization
              
              
              141,589
              
              
              
              53,063
              
              
              
              74,846Amortization
      of deferred financing fees
              
              
              8,210
              
              
              
              2,779
              
              
              
              -Provision
      for impaired assets and restaurant closings
              
              
              204,458
              
              
              
              3,220
              
              
              
              8,530Stock-based
      and other non-cash compensation expense
              
              
              20,993
              
              
              
              11,382
              
              
              
              33,981Income
      tax benefit credited to equity
              
              
              -
              
              
              
              -
              
              
              
              3,052Excess
      income tax benefits from stock-based compensation
              
              
              -
              
              
              
              -
              
              
              
              (1,541
              )Minority
      interest in consolidated entities’ income (loss)
              
              
              172
              
              
              
              (287
              )
              
              
              1,685(Income)
      loss from operations of unconsolidated affiliates
              
              
              (1,879
              )
              
              
              (139
              )
              
              
              692Change
      in deferred income taxes
              
              
              (72,488
              )
              
              
              (5,112
              )
              
              
              (41,732
              )Loss
      on disposal of property, fixtures and equipment
              
              
              5,380
              
              
              
              1,652
              
              
              
              3,496Unrealized
      gain on interest rate collar
              
              
              (126
              )
              
              
              -
              
              
              
              -Loss
      (gain) on life insurance investments
              
              
              8,168
              
              
              
              (1,802
              )
              
              
              -Gain
      on restricted cash investments
              
              
              (566
              )
              
              
              (390
              )
              
              
              -Change
      in assets and liabilities, net of effects of acquisitions:(Increase)
      decrease in inventories
              
              
              (8,003
              )
              
              
              5,270
              
              
              
              5,235Decrease
      (increase) in other current assets
              
              
              5,563
              
              
              
              (8,717
              )
              
              
              44,853Decrease
      (increase) in other assets
              
              
              23,408
              
              
              
              2,724
              
              
              
              (5,352
              )Increase
      in accrued interest payable
              
              
              12,626
              
              
              
              17,721
              
              
              
              74(Decrease)
      increase in accounts payable, sales taxespayable
      and accrued expenses
              
              
              (15,930
              )
              
              
              (48,259
              )
              
              
              44,558Increase
      in deferred rent
              
              
              24,343
              
              
              
              13,860
              
              
              
              4,108Decrease
      in unearned revenue
              
              
              (79,461
              )
              
              
              (11,458
              )
              
              
              (68,311
              )(Decrease)
      increase in income taxes payable
              
              
              (1,703
              )
              
              
              (12,854
              )
              
              
              2,527Increase
      in other long-term liabilities
              
              
              1,684
              
              
              
              3,853
              
              
              
              27,471Net
      cash provided by operating activities
              
              
              43,439
              
              
              
              9,962
              
              
              
              155,633Cash
      flows used in investing activities:Purchase
      of investment securities
              
              
              -
              
              
              
              -
              
              
              
              (2,455
              )Maturities
      and sales of investment securities
              
              
              -
              
              
              
              839
              
              
              
              2,002Purchase
      of Company-owned life insurance
              
              
              (879
              )
              
              
              (63,932
              )
              
              
              -Cash
      paid for acquisition of business, net of cash acquired
              
              
              -
              
              
              
              -
              
              
              
              (250
              )Acquisition
      of OSI
              
              
              -
              
              
              
              (3,092,274
              )
              
              
              -Acquisitions
      of liquor licenses
              
              
              (1,898
              )
              
              
              -
              
              
              
              (1,553
              )Proceeds
      from sale-leaseback transaction
              
              
              8,100
              
              
              
              925,090
              
              
              
              -Capital
      expenditures
              
              
              (88,585
              )
              
              
              (56,586
              )
              
              
              (119,359
              )Proceeds
      from the sale of property, fixtures and equipment
              
              
              9,753
              
              
              
              -
              
              
              
              1,948Restricted
      cash received for capital expenditures, propertytaxes
      and certain deferred compensation plans
              
              
              119,381
              
              
              
              68,431
              
              
              
              -Restricted
      cash used to fund capital expenditures, propertytaxes
      and certain deferred compensation plans
              
              
              (94,505
              )
              
              
              (77,934
              )
              
              
              -Payments
      from unconsolidated affiliates
              
              
              311
              
              
              
              9
              
              
              
              -Investments
      in and advances to unconsolidated affiliates
              
              
              (1,067
              )
              
              
              (4,917
              )
              
              
              (86
              )Net
      cash used in investing activities
              
              $
              (49,389
              )
              
              $
              (2,301,274
              )
              
              $
              (119,753
              )




(CONTINUED...)


6
 Table of Contents


OSI
Restaurant Partners, LLC


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(IN
THOUSANDS, UNAUDITED)




SUCCESSOR
              
              
              PREDECESSORNINE
              
              
              PERIOD
              
              
              PERIODMONTHS
              
              
              FROM
              
              
              FROMENDED
              
              
              JUNE
      15 to
              
              
              JANUARY
      1 toSEPTEMBER
      30,
              
              
              SEPTEMBER
      30,
              
              
              JUNE
      14,2008
              
              
              2007
              
              
              2007Cash
      flows provided by (used in) financing activities:Proceeds
      from issuance of long-term debt
              
              $
              30,034
              
              
              $
              17,900
              
              
              $
              123,648Proceeds
      from the issuance of senior secured term loan facility
              
              
              -
              
              
              
              1,310,000
              
              
              
              -Proceeds
      from the issuance of revolving lines of credit
              
              
              -
              
              
              
              11,500
              
              
              
              -Proceeds
      from the issuance of senior notes
              
              
              -
              
              
              
              550,000
              
              
              
              -Repayments
      of long-term debt
              
              
              (12,878
              )
              
              
              (152,018
              )
              
              
              (210,834
              )Deferred
      financing fees
              
              
              -
              
              
              
              (66,963
              )
              
              
              -Contributions
      from KHI
              
              
              -
              
              
              
              42,413
              
              
              
              -Proceeds
      from minority interest contributions
              
              
              786
              
              
              
              674
              
              
              
              3,940Distributions
      to minority interest
              
              
              (5,974
              )
              
              
              (2,905
              )
              
              
              (4,579
              )Decrease
      in partner deposit andaccrued
      buyout liability
              
              
              (8,208
              )
              
              
              (1,382
              )
              
              
              (6,212
              )Excess
      income tax benefits from stock-based compensation
              
              
              -
              
              
              
              -
              
              
              
              1,541Dividends
      paid
              
              
              -
              
              
              
              -
              
              
              
              (9,887
              )Proceeds
      from the issuance of common stock
              
              
              -
              
              
              
              600,373
              
              
              
              -Proceeds
      from exercise of employee stock options
              
              
              -
              
              
              
              -
              
              
              
              14,477Net
      cash provided by (used in) financing activities
              
              
              3,760
              
              
              
              2,309,592
              
              
              
              (87,906
              )Net
      (decrease) increase in cash and cash equivalents
              
              
              (2,190
              )
              
              
              18,280
              
              
              
              (52,026
              )Cash
      and cash equivalents at the beginning of the period
              
              
              171,104
              
              
              
              42,830
              
              
              
              94,856Cash
      and cash equivalents at the end of the period
              
              $
              168,914
              
              
              $
              61,110
              
              
              $
              42,830Supplemental
      disclosures of cash flow information:Cash
      paid for interest
              
              $
              85,676
              
              
              $
              30,994
              
              
              $
              6,443Cash
      (received) paid for income taxes, net of refunds
              
              
              (46
              )
              
              
              4,343
              
              
              
              (25,097
              )Supplemental
      disclosures of non-cash items:Purchase
      of employee partners' interests in cash flowsof
      their restaurants
              
              $
              -
              
              
              $
              -
              
              
              $
              882Conversion
      of partner deposit and accrued buyout liability to notes
              
              
              4,566
              
              
              
              1,463
              
              
              
              3,198Acquisitions
      of property, fixtures and equipmentthrough
      accounts payable
              
              
              8,174
              
              
              
              11,960
              
              
              
              5,305Litigation
      liability and insurance receivable
              
              
              15,741
              
              
              
              -
              
              
              
              600




See notes
to unaudited consolidated financial statements.


7
 Table of Contents


OSI RestaurantPartners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.           Basis
of Presentation





Basis
of Presentation





On June
14, 2007, OSI Restaurant Partners, Inc., by means of a merger and related
transactions (the “Merger”), was acquired by Kangaroo Holdings, Inc. (the
“Ultimate Parent” or “KHI”), which is controlled by an investor group comprised
of Bain Capital Partners, LLC (“Bain Capital”), Catterton Partners
(“Catterton”), Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon (the
“Founders” of the Company) and certain members of management of the Company. In
connection with the Merger, OSI Restaurant Partners, Inc. converted into a
Delaware limited liability company named OSI Restaurant Partners, LLC (see Note
2).





The
accompanying consolidated financial statements are presented for two periods:
Predecessor and Successor, which relate to the period preceding the Merger and
the period succeeding the Merger, respectively.  The operations of OSI
Restaurant Partners, Inc. and its subsidiaries are referred to for the
Predecessor period and the operations of OSI Restaurant Partners, LLC and its
subsidiaries are referred to for the Successor period.  Unless the
context otherwise indicates, as used in this report, the term the “Company”
and other similar terms mean (a) prior to the Merger, OSI Restaurant
Partners, Inc. and (b) after the Merger, OSI Restaurant Partners,
LLC.





The
Company owns and operates casual dining restaurants primarily in the United
States.  Additional Outback Steakhouse and Bonefish Grill restaurants
in which the Company has no direct investment are operated under franchise
agreements.





The
accompanying consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”).  Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, all adjustments necessary
for the fair presentation of the Company’s interim results of operations,
financial position and cash flows for the periods presented have been
included.  These financial statements should be read in conjunction
with the financial statements and financial notes thereto included in Amendment
No. 3 to the Company’s Registration Statement on Form S-4 filed with the SEC on
May 29, 2008.





The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year.





2.           Transactions




On
November 5, 2006, OSI Restaurant Partners, Inc. entered into a definitive
agreement to be acquired by KHI.  On May 21, 2007, this agreement was
amended to provide for increased merger consideration of $41.15 per share in
cash, payable to all shareholders except the Founders, who instead converted a
portion of their equity interest to equity in the Ultimate Parent and received
$40.00 per share for their remaining shares.  Immediately following
consummation of the Merger on June 14, 2007, the Company converted into a
Delaware limited liability company named OSI Restaurant Partners,
LLC.
  The
assets and liabilities of the Company were assigned values, part carryover basis
pursuant to Emerging Issues Task Force Issue No. 88-16, “Basis in Leveraged
Buyout Transactions” (“EITF No. 88-16”), and part fair value, similar to a step
acquisition, pursuant to EITF No. 90-12, “Allocating Basis to Individual Assets
and Liabilities for Transactions within the Scope of Issue No. 88-16” (“EITF No.
90-12”).  As a result, retained earnings and accumulated depreciation were
zero after the allocation was completed.


The total
purchase price was approximately $3.1 billion.  The Merger was financed by
borrowings under new senior secured credit facilities (see Note 10), proceeds
from the issuance of senior notes (see Note 10), the proceeds from the Private
Restaurant Properties, LLC (“PRP”) Sale-Leaseback Transaction described below,
the investment made by Bain Capital and Catterton, rollover equity from the
Founders and investments made by certain members of management.


8
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.           Transactions
(continued)





In
connection with the Merger, the Company caused its wholly-owned subsidiaries to
sell substantially all of the Company’s domestic restaurant properties at fair
market value to its newly-formed sister company, PRP, for approximately
$987,700,000.  PRP then simultaneously leased the properties to
Private Restaurant Master Lessee, LLC (“Master Lessee”), the Company’s
wholly-owned subsidiary, under a market rate master lease.  In
accordance with Statement of Financial Accounting Standards No. 98,
“Accounting for Leases” (“SFAS No. 98”), the sale at fair market value
to PRP and subsequent leaseback by Master Lessee qualified for sale-leaseback
accounting treatment and no gain or loss was recorded.  The market
rate master lease is a triple net lease with a 15-year term.  The sale
of substantially all of the domestic wholly-owned restaurant properties to PRP
and entry into the market rate master lease and the underlying subleases
resulted in operating leases for the Company and is referred to as the “PRP
Sale-Leaseback Transaction.”





The
Company identified six restaurant properties included in the PRP Sale-Leaseback
Transaction that failed to qualify for sale-leaseback accounting treatment in
accordance with SFAS No. 98, as the Company had an obligation to
repurchase such properties from PRP under certain circumstances. If within one
year from the PRP Sale-Leaseback Transaction all title defects and construction
work at such properties were not corrected, the Company was required
to notify PRP of the intent to repurchase such properties at the original
purchase price.  The Company included approximately $17,825,000 for
the fair value of these properties in the line items “Property, fixtures and
equipment, net” and “Current portion of long-term debt” in its Consolidated
Balance Sheet at December 31, 2007. The lease payments made pursuant to the
lease agreement were treated as interest expense until the requirements for
sale-leaseback treatment were achieved or the Company notified PRP of the
intent to repurchase the properties.  Within the one-year period,
title transfer had occurred and sale-leaseback treatment was achieved for four
of the properties.  The Company notified PRP of the intent to
repurchase the remaining two properties for a total of $6,450,000 and had 150
days from the expiration of the one-year period in which to make this payment to
PRP in accordance with the terms of the agreement.  Since the payment
was not required to be made as of September 30, 2008, the Company included
$6,450,000 for the fair value of these properties in the line items “Property,
fixtures and equipment, net” and “Current portion of long-term debt” in its
Consolidated Balance Sheet at September 30, 2008 (see Note 16).





In
accordance with revised FASB Interpretation No. 46, “Consolidation of Variable
Interest Entities” (“FIN 46R”), the Company determined that PRP is a variable
interest entity; however the Company is not its primary beneficiary.  As a
result, PRP has not been consolidated into the Company’s financial
statements.  If the market rate master lease were to be terminated in
connection with any default by the Company or if the lenders under PRP’s real
estate credit facility were to foreclose on the restaurant properties as a
result of a PRP default under its real estate credit facility, the Company
could, subject to the terms of a subordination and nondisturbance agreement,
lose the use of some or all of the properties that it leases under the market
rate master lease.





The
following table reflects the pro forma total revenues and net loss for the
Predecessor periods presented as though the Merger had taken place at the
beginning of the period.  The pro forma results are not necessarily
indicative of the results of operations that would have occurred had the Merger
actually taken place on the first day of the respective periods, nor of future
results of operations.





PRO
      FORMA(UNAUDITED,
      IN THOUSANDS)PERIOD
      FROMJANUARY
      1 TO JUNE 14,2007Total
      revenues
            
            $
            1,926,637Net
      loss
            
            $
            (29,334
            )





9
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





3.           Recently
Issued Financial Accounting Standards





On
January 1, 2008, the Company adopted EITF Issue No. 06-4, “Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split Dollar Life Insurance Arrangements” (“EITF No. 06-4”), which requires
the application of the provisions of SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” to endorsement split dollar
life insurance arrangements.  EITF No. 06-4 requires recognition of a
liability for the discounted future benefit obligation owed to an insured
employee by the insurance carrier. The Company has endorsement split dollar
insurance policies for its Founders and four of its executive officers that
provide benefit to the respective Founders and executive officers that extends
into postretirement periods.  Upon adoption, the Company recorded a
cumulative effect adjustment that increased its Accumulated deficit and
Other long-term liabilities by $9,476,000 in its Consolidated Balance
Sheet.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”), which defines fair value, establishes a framework for measuring fair
value and expands the related disclosure requirements.  The provisions
of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007
for financial assets and liabilities or for nonfinancial assets and liabilities
that are re-measured at least annually.  In February 2008, the FASB
issued FASB Staff Position (“FSP”) SFAS No. 157-2, “Effective Date of FASB
Statement No. 157” to defer the effective date for nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a non-recurring basis until fiscal years beginning after November
15, 2008.  In February 2008, the FASB also issued FSP SFAS No. 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements that Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13,” which excludes SFAS No.
13, “Accounting for Leases” (“SFAS No. 13”), as well as other accounting
pronouncements that address fair value measurements on lease classification or
measurement under SFAS No. 13, from SFAS No. 157’s scope.  The Company
elected to apply the provisions of FSP SFAS No. 157-2, and therefore, will defer
the requirements of SFAS No. 157 as it relates to nonfinancial assets or
liabilities that are recognized or disclosed at fair value on a nonrecurring
basis until January 1, 2009. See Note 5 for the Company’s disclosure
requirements and accounting effect of the adoption of SFAS No. 157 on the
Company’s consolidated financial statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115” (“SFAS No. 159”).  SFAS No. 159
permits entities to choose to measure eligible items at fair value at specified
election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date.  The adoption of SFAS No. 159 on January 1, 2008 did not have an
effect on the Company’s consolidated financial statements as the Company did not
elect the fair value option.




In
December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations”
(“SFAS No. 141R”), a revision of SFAS No. 141.  SFAS No. 141R retains
the fundamental requirements of SFAS No. 141 but revises certain elements
including: the recognition and fair value measurement as of the acquisition date
of assets acquired and liabilities assumed and the accounting for goodwill and
financial statement disclosures.  SFAS No. 141R is effective for
fiscal years beginning on or after December 15, 2008 and is applicable to
business combinations with an acquisition date on or after this
date.  The Company is currently evaluating the impact that SFAS No.
141R will have on its financial statements.


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – Including an Amendment of ARB No. 51” (“SFAS
No. 160”).  SFAS No. 160 modifies the presentation of noncontrolling
interests in the consolidated balance sheet and the consolidated statement of
operations.  It requires noncontrolling interests to be clearly
identified, labeled and included separately from the parent’s equity and
consolidated net (loss) income.  The provisions of SFAS No. 160 are
effective for fiscal years beginning after December 15, 2008.  The
Company is currently evaluating the impact that SFAS No. 160 will have on its
financial statements.


10
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





3.           Recently
Issued Financial Accounting Standards (continued)





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS No. 161”), an amendment of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS
No. 133”). SFAS No. 161 is intended to enable investors to better
understand how derivative instruments and hedging activities affect the entity’s
financial position, financial performance and cash flows by enhancing
disclosures.  SFAS No. 161 requires disclosure of fair values of
derivative instruments and their gains and losses in a tabular format,
disclosure of derivative features that are credit-risk-related to provide
information about the entity’s liquidity and cross-referencing within the
footnotes to help financial statement users locate important information about
derivative instruments.  SFAS No. 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged.  The Company is currently evaluating the impact that
SFAS No. 161 will have on its financial statements.





In April
2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP SFAS No. 142-3”).  FSP SFAS No. 142-3 amends
the factors an entity should consider when developing renewal or extension
assumptions for determining the useful life of recognized intangible assets
under SFAS No. 142, “Goodwill and Other Intangible Assets.”  FSP SFAS
No. 142-3 is intended to improve the consistency between the useful life of
recognized intangible assets under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of assets under SFAS No. 141R and other
generally accepted accounting principles in the United States (“U.S.
GAAP”).   FSP SFAS No. 142-3 is effective for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal
years.  Early adoption is prohibited.  The Company is
currently evaluating the impact that FSP SFAS No. 142-3 will have on its
financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 is intended to
provide guidance to nongovernmental entities on accounting principles and the
framework for selecting principles to be used in the preparation of financial
statements presented in conformity with U.S. GAAP.  The provisions of
SFAS No. 162 will be effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.”  The Company does not expect SFAS No. 162 to materially
affect its financial statements.




In
September 2008, the FASB issued FSP SFAS No. 133-1 and Interpretation No. 45-4,
“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161” (“FSP SFAS No. 133-1 and FIN 45-4”).
FSP SFAS No. 133-1 and FIN 45-4 amends SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” to require disclosures by sellers of credit
derivatives, including credit derivatives embedded in a hybrid instrument, for
each statement of financial position presented.  FSP SFAS No. 133-1
and FIN 45-4 amends Interpretation No. 45, “Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” to  require the guarantor to provide an
additional disclosure about the current status of the payment/performance risk
of a guarantee.  FSP SFAS No. 133-1 and FIN 45-4 also provides
clarification of the effective date of SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS
No. 161 is effective for quarterly interim periods beginning after November 15,
2008, and fiscal years that include those quarterly interim periods, with early
application encouraged.  The provisions of FSP SFAS No. 133-1 and FIN
45-4 that amend SFAS No. 133 and FASB Interpretation No. 45 are effective for
interim and annual reporting periods ending after November 15, 2008, and the
Company does not expect these provisions to materially affect its financial
statements upon adoption at the end of the year.




11
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





4.           Stock-based
and Deferred Compensation Plans





The
Company’s Ultimate Parent permits the grant of stock options and restricted
stock of KHI to Company management and other key employees through the Kangaroo
Holdings, Inc. 2007 Equity Incentive Plan (the “Equity Plan”). The maximum term
of options and restricted stock granted under the Equity Plan is ten years. As
KHI is a holding company with no significant operations of its own, equity
transactions in KHI are pushed down to the Company and stock-based compensation
expense is recorded by the Company, where applicable.





On June
14, 2008, 941,512 shares of KHI restricted stock issued to four of the Company’s
officers and other members of management vested. The shares of restricted stock
that vested were originally “rolled over” from the Predecessor in conjunction
with the Merger, and therefore, were not issued under the Equity
Plan.





Compensation
expense from KHI restricted stock awards included in net (loss) income in the
Company’s Consolidated Statements of Operations for the three and nine months
ended September 30, 2008 was $1,764,000 and $5,253,000, respectively, and for
the three months ended September 30, 2007 and the period from June 15 to
September 30, 2007 was $1,764,000 and $2,071,000, respectively.





5.           Fair
Value Measurements





On
January 1, 2008, the Company adopted SFAS No. 157.  SFAS No. 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements.  SFAS No. 157 applies to
reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances.





SFAS No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement.  As defined in SFAS No. 157, fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price). To measure fair value, the Company incorporates
assumptions that market participants would use in pricing the asset or
liability, and utilizes market data to the maximum extent possible. In
accordance with SFAS No. 157, measurement of fair value incorporates
nonperformance risk (i.e., the risk that an obligation will not be fulfilled).
In measuring fair value, the Company reflects the impact of its own credit risk
on its liabilities, as well as any collateral. The Company also considers the
credit standing of its counterparties in measuring the fair value of its
assets.





As a
basis for considering market participant assumptions in fair value measurements,
SFAS No. 157 establishes a three-tier fair value hierarchy which prioritizes the
inputs used in measuring fair value as follows:





·
            Level
      1 – Observable inputs such as quoted prices (unadjusted) in active markets
      for identical assets or liabilities that the Company has the ability to
      access;


·
            Level
      2 – Inputs, other than the quoted market prices included in Level 1, which
      are observable for the asset or liability, either directly or indirectly;
      and


·
            Level
      3 - Unobservable inputs for the asset or liability, which are typically
      based on an entity’s own assumptions, as there is little, if any, related
      market data available.





In
instances where the determination of the fair value measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment and considers
factors specific to the asset or liability.


12
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





5.           Fair
Value Measurements (continued)





The
Company is highly leveraged and exposed to interest rate risk to the extent of
its variable-rate debt.  In September2007, the Companyentered into an interest
rate collar with a notional amount of $1,000,000,000 as a method to limit the
variability ofitsvariable-ratedebt.  The
valuation of the Company’s interest rate collar is based on a discountedcash flow analysis on the expected cash flows of the
derivative.  This analysis reflects the contractual terms of the
collar, including the period to maturity, and uses observable market-based
inputs, including interest rate curves and implied volatilities.





Although
the Company has determined that the majority of the inputs used to value its
interest rate collar fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with this derivative utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties.  However, as of September
30, 2008, the Company has assessed the significance of the impact of the credit
valuation adjustments on the overall valuation of its interest rate collar
derivative positions and has determined that the credit valuation adjustments
are not significant to the overall valuation of this derivative.  As a
result, the Company has determined that its interest rate collar derivative
valuations in their entirety are classified in Level 2 of the fair value
hierarchy.





Additionally,
the Company’s restaurants are dependent upon energy to operate and are affected
by changes in energy prices, including natural gas.  The Company uses
derivative instruments to mitigate its exposure to material increases in natural
gas prices.  The valuation of the Company’s natural gas derivatives is
based on quoted exchange prices.





The
following table presents the Company’s derivative liabilities measured at fair
value on a recurring basis as of September 30, 2008, aggregated by the level in
the fair value hierarchy within which those measurements fall (in
thousands):





TOTALSEPTEMBER
      30,LEVEL
      1
            
            
            LEVEL
      2
            
            
            LEVEL
      3
            
            
            2008Liabilities:Derivative
      financial instruments
            
            $
            935
            
            
            $
            5,230
            
            
            $
            -
            
            
            $
            6,165





A SFAS
No. 157 credit valuation adjustment of $758,000 decreased the liability recorded
for the interest rate collar as of September 30, 2008.





The
Company does not have any fair value measurements using significant,
unobservable inputs nor does it have any assets and liabilities measured at fair
value on a nonrecurring basis as of September 30, 2008.


13
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





6.           Property,
Fixtures and Equipment, Net





During
the three and nine months ended September 30, 2008, the Company recorded
impairment charges of $15,277,000 and $36,370,000, respectively, for certain of
the Company’s restaurants in the line item “Provision for impaired assets and
restaurant closings” in its Consolidated Statement of Operations.





During
the three months ended September 30, 2007, the Company recorded a provision
for impaired assets and restaurant closings of $2,456,000 for impairment charges
for certain of the Company’s restaurants.  For the period from January
1 to June 14, 2007, the Company recorded a provision for impaired assets and
restaurant closings of $8,530,000 which included $7,525,000 of impairment
charges for certain of the Company’s restaurants and an impairment charge of
$1,005,000 related to one of the Company’s corporate aircraft.  For
the period from June 15 to September 30, 2007, the Company recorded a provision
for impaired assets and restaurant closings of $3,220,000 for impairment charges
for certain of the Company’s restaurants.





The fixed
asset impairment charges occurred as a result of the book value of an asset
group exceeding its estimated fair value.  Each Company-owned restaurant is
evaluated individually for impairment since that is the lowest level at which
identifiable cash flows can be measured independently of other asset
groups.  Restaurant fair value is determined based on estimates of
future cash flows.





In the
fourth quarter of 2007, the Company began marketing the Roy’s concept for sale.
In May 2008, the Company determined that the Roy’s concept would not be marketed
for sale at this time due to poor overall market conditions.  The
Company, however, is marketing the sale of its Cheeseburger in Paradise
concept.  As of September 30, 2008, the Company determined that its
Cheeseburger in Paradise concept does not meet the assets held for sale criteria
defined in SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” (“SFAS No. 144”).


14
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





7.           Goodwill
and Intangible Assets, Net





The
change in the carrying amount of goodwill for the nine months ended September
30, 2008 is as follows (in thousands):




SUCCESSOR:December
      31, 2007
              
              $
              1,060,529Impairment
      loss
              
              
              (161,589
              )Purchase
      accounting adjustment
              
              
              3,342September
      30, 2008
              
              $
              902,282




During
the second quarter of 2008, the Company performed its annual assessment for
impairment of goodwill and other indefinite-lived intangible
assets.  The Company’s review of the recoverability of goodwill was
based primarily upon an analysis of the discounted cash flows of the related
reporting units as compared to the carrying values.  The Company also
used the discounted cash flow method to determine the fair value of its
intangible assets.  Due to poor overall economic conditions, declining
sales at Company-owned restaurants and a challenging environment for the
restaurant industry, the Company recorded an aggregate goodwill impairment loss
of $161,589,000 for the international Outback Steakhouse, Bonefish Grill and
Fleming’s Prime Steakhouse and Wine Bar concepts.  The Company also
recorded impairment charges of $3,037,000 for the Carrabba’s Italian Grill trade
name and $3,462,000 for the Blue Coral Seafood and Spirits
trademark.




Definite-lived
intangible assets have been amortized on a straight-line basis.  The
aggregate expense related to the amortization of the Company’s trademarks, trade
dress, favorable leases and franchise agreements was $4,137,000 and $13,027,000
for the three and nine months ended September 30, 2008, respectively, and
$4,005,000, $269,000 and $4,554,000 for the three months ended September 30,
2007 and the periods from January 1 to June 14, 2007 and June 15 to September
30, 2007, respectively.




8.           Other
Assets





On April
4, 2008, the Company sold a parcel of land in Las Vegas, Nevada for
$9,800,000. As additional consideration, the purchaser is obligated to
transfer and convey title for an approximately 6,800 square foot condominium
unit in the not yet constructed condominium tower for the Company to utilize as
a future full-service restaurant.  Conveyance of title must be no
later than September 9, 2012, subject to extensions, and both parties must agree
to the plans and specifications of the restaurant unit by September 9, 2010. If
title does not transfer or both parties do not agree to the plans and
specifications per the terms of the contract, then the Company will receive an
additional $4,000,000 from the purchaser.  The Company recorded a gain
of $6,662,000 for this sale in the line item “General and administrative”
expense in its Consolidated Statements of Operations for the nine months
ended September 30, 2008 and recorded a receivable of $1,200,000, which is
included in the line item “Other Assets” in its Consolidated Balance Sheet at
September 30, 2008, for the estimated fair market value of the condominium
unit.





9.           Accrued
Expenses





Accrued
expenses consisted of the following (in thousands):





SUCCESSORSEPTEMBER
      30,
            
            
            DECEMBER
      31,2008
            
            
            2007Accrued
      payroll and other compensation
            
            $
            67,044
            
            
            $
            57,473Accrued
      insurance
            
            
            22,277
            
            
            
            18,853Accrued
      interest
            
            
            17,074
            
            
            
            4,448Other
      accrued expenses
            
            
            57,176
            
            
            
            55,603$
            163,571
            
            
            $
            136,377


15
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





10.           Long-term
Debt





Long-term
debt consisted of the following (in thousands):





SUCCESSORSEPTEMBER
      30,
            
            
            DECEMBER
      31,2008
            
            
            2007Senior
      secured term loan facility, interest rate of 6.00% atSeptember
      30, 2008 and 7.13% at December 31, 2007
            
            $
            1,250,175
            
            
            $
            1,260,000Senior
      secured working capital revolving credit facility, interest rate
      of5.75%
      at September 30, 2008
            
            
            30,000
            
            
            
            -Senior
      notes, interest rate of 10.00% at September 30, 2008 and December 31,
      2007
            
            
            550,000
            
            
            
            550,000Other
      notes payable, uncollateralized, interest rates ranging from 2.28% to
      7.30%at
      September 30, 2008 and 2.07% to 7.30% at December 31, 2007
            
            
            12,247
            
            
            
            10,700Sale-leaseback
      obligations
            
            
            11,375
            
            
            
            22,750Guaranteed
      debt of franchisee
            
            
            33,283
            
            
            
            32,583Guaranteed
      debt of unconsolidated affiliate
            
            
            2,495
            
            
            
            2,4951,889,575
            
            
            
            1,878,528Less:
      current portion of long-term debt of OSI Restaurant Partners,
      LLC
            
            
            (87,143
            )
            
            
            (34,975
            )Less:
      guaranteed debt
            
            
            (35,778
            )
            
            
            (35,078
            )Long-term
      debt of OSI Restaurant Partners, LLC
            
            $
            1,766,654
            
            
            $
            1,808,475




On June
14, 2007, in connection with the Merger, the Company entered into senior secured
credit facilities with a syndicate of institutional lenders and financial
institutions.  These senior secured credit facilities provide for
senior secured financing of up to $1,560,000,000, consisting of a $1,310,000,000
term loan facility, a $150,000,000 working capital revolving credit facility,
including letter of credit and swing-line loan sub-facilities, and a
$100,000,000 pre-funded revolving credit facility that provides financing for
capital expenditures only.





The
$1,310,000,000 term loan facility matures June 14, 2014, and its proceeds were
used to finance the Merger.  At each rate adjustment, the Company has
the option to select a Base Rate plus 125 basis points or a Eurocurrency Rate
plus 225 basis points for the borrowings under this facility.  The
Base Rate option is the higher of the prime rate of Deutsche Bank AG New York
Branch and the federal funds effective rate plus 1⁄2 of 1% (5.00% at September 30,
2008 and 7.25% at December 31, 2007) (“Base Rate”).  The Eurocurrency
Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (ranging from 5.04%
to 5.37% at September 30, 2008 and from 4.60% to 4.70% at December 31, 2007)
(“Eurocurrency Rate”).  The Eurocurrency Rate may have a nine- or
twelve-month interest period if agreed upon by the applicable
lenders.  With either the Base Rate or the Eurocurrency Rate, the
interest rate is reduced by 25 basis points if the Company’s Moody’s Applicable
Corporate Rating then most recently published is B1 or higher (B2 at September
30, 2008 and December 31, 2007). Subsequent
to the end of the third quarter, the Company’s Moody’s Applicable Corporate
Rating was downgraded to Caa1.




The
Company will be required to prepay outstanding term loans, subject to certain
exceptions, with:





§
            50%
      of its “annual excess cash flow” (with step-downs to 25% and 0% based upon
      its rent-adjusted leverage ratio), as defined in the credit agreement and
      subject to certain exceptions;


§
            100%
      of its “annual minimum free cash flow,” as defined in the credit
      agreement, not to exceed $50,000,000 for the fiscal year ended December
      31, 2007 or $75,000,000 for each subsequent fiscal year, if its
      rent-adjusted leverage ratio exceeds a certain minimum
      threshold;


§
            100%
      of the net proceeds of certain assets sales and insurance and condemnation
      events, subject to reinvestment rights and certain other exceptions;
      and


§
            100%
      of the net proceeds of any debt incurred, excluding permitted debt
      issuances.


16
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





10.           Long-term
Debt (continued)





Additionally,
the Company will, on an annual basis, be required to (1) first, repay
outstanding loans under the pre-funded revolving credit facility and (2) second,
fund a capital expenditure account established on the closing date of the Merger
to the extent amounts on deposit are less than $100,000,000, in both cases with
100% of the Company’s “annual true cash flow,” as defined in the credit
agreement.  Since there were no loans outstanding under the pre-funded
revolving credit facility at December 31, 2007, the Company was not required to
make any repayments under the pre-funded revolving credit facility in
2008.  In April 2008, the Company funded its capital expenditure
account with $90,018,000 for the year ended December 31, 2007 using its “annual
true cash flow.”  This funding allows the Company to maintain its
required deposit amount, as specified in the credit agreement.





The
Company’s senior secured credit facilities require scheduled quarterly payments
on the term loans equal to 0.25% of the original principal amount of the term
loans for the first six years and three quarters following the closing of the
Merger.  These payments will be reduced by the application of any
prepayments, and any remaining balance will be paid at maturity.  The
outstanding balance on the term loans was $1,250,175,000 and $1,260,000,000 at
September 30, 2008 and December 31, 2007, respectively.  The Company
has classified $75,000,000 of its term loans as current at September 30, 2008
due to its prepayment requirements.





In
September 2007, the Company entered into an interest rate collar with a notional
amount of $1,000,000,000 as a method to limit the variability of its
$1,310,000,000 variable-rate term loan.   The collar consists of a
LIBOR cap of 5.75% and a LIBOR floor of 2.99%.  The collar’s first
variable-rate set date was December 31, 2007, and the option pairs expire at the
end of each calendar quarter beginning March 31, 2008 and ending September 30,
2010.   The quarterly expiration dates correspond to the scheduled
amortization payments of the Company’s term loan.  The Company paid
and recorded $490,000 and $1,239,000 of interest expense for the three and nine
months ended September 30, 2008, respectively, as a result of the quarterly
expiration of the collar’s option pairs.  The Company records any
marked-to-market changes in the fair value of its derivative instruments in
earnings in the period of change in accordance with SFAS No. 133.  The
Company included $5,230,000 and $5,357,000 in the line item “Accrued expenses”
in its Consolidated Balance Sheets as of September 30, 2008 and December 31,
2007, respectively, and included $1,484,000 of interest expense for the three
months ended September 30, 2008 and $12,459,000 of interest income and
$12,332,000 of interest expense for the nine months ended September 30, 2008 in
the line item “Interest expense” in its Consolidated Statement of Operations for
the effects of its interest rate collar.  A SFAS No. 157 credit
valuation adjustment of $758,000 decreased the liability recorded as of
September 30, 2008 (see Note 5).





Proceeds
of loans and letters of credit under the $150,000,000 working capital revolving
credit facility provide financing for working capital and general corporate
purposes and, subject to a rent-adjusted leverage condition, for capital
expenditures for new restaurant growth.  This revolving credit
facility matures June 14, 2013 and bears interest at rates ranging from 100 to
150 basis points over the Base Rate or 200 to 250 basis points over the
Eurocurrency Rate.  At September 30, 2008, the outstanding balance was
$30,000,000.  There were no loans outstanding under the revolving
credit facility at December 31, 2007.  In addition to outstanding
borrowings, if any, at September 30, 2008 and December 31, 2007, $53,040,000 and
$49,540,000, respectively, of the credit facility was not available for
borrowing as (i) $28,540,000 and $25,040,000, respectively, of the credit
facility was committed for the issuance of letters of credit as required by
insurance companies that underwrite the Company’s workers’ compensation
insurance and also, where required, for construction of new restaurants and (ii)
$24,500,000 of the credit facility was committed for the issuance of a letter of
credit for the Company’s guarantee of an uncollateralized line of credit for its
joint venture partner, RY-8, Inc. (“RY-8”), in the development of Roy's
restaurants (see Note 16).  Fees for the letters of credit range from
2.00% to 2.50% and the commitment fees for unused working capital revolving
credit commitments range from 0.38% to 0.50%.  Subsequent to the end
of the third quarter, the Company borrowed an additional $20,000,000 from its
working capital revolving credit facility.


17
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





10.           Long-term
Debt (continued)





Proceeds
of loans under the $100,000,000 pre-funded revolving credit facility are
available to provide financing for capital expenditures once the Company fully
utilizes $100,000,000 of restricted cash that was funded on the closing date of
the Merger.  At September 30, 2008 and December 31, 2007, $6,055,000
and $29,002,000 of restricted cash remains available for capital expenditures,
and no draws are outstanding on the pre-funded revolving credit
facility.  This facility matures June 14, 2013. At each rate
adjustment, the Company has the option to select the Base Rate plus 125 basis
points or a Eurocurrency Rate plus 225 basis points for the borrowings under
this facility.  In either case, the interest rate is reduced by 25
basis points if the Company’s Moody’s Applicable Corporate Rating then most
recently published is B1 or higher.




The
obligations under the Company’s senior secured credit facilities are guaranteed
by each of its current and future domestic 100% owned restricted subsidiaries in
its Outback Steakhouse, Carrabba’s Italian Grill and Cheeseburger in Paradise
concepts and certain non-restaurant subsidiaries (the “Guarantors”) and by OSI
HoldCo, Inc. (the Company’s direct owner and a wholly-owned subsidiary of the
Company’s Ultimate Parent) and, subject to the conditions described below, are
secured by a perfected security interest in substantially all of the Company’s
assets and assets of the Guarantors and OSI HoldCo, Inc., in each case, now
owned or later acquired, including a pledge of all of the Company’s capital
stock, the capital stock of substantially all of the Company’s domestic
wholly-owned subsidiaries and 65% of the capital stock of certain of the
Company’s material foreign subsidiaries that are directly owned by the Company,
OSI HoldCo, Inc., or a Guarantor.  Also, the Company is required to
provide additional guarantees of the senior secured credit facilities in the
future from other domestic wholly-owned restricted subsidiaries if the
consolidated EBITDA (earnings before interest, taxes, depreciation and
amortization as defined in the senior secured credit facilities) attributable to
the Company’s non-guarantor domestic wholly-owned restricted subsidiaries as a
group exceeds 10% of the Company’s consolidated EBITDA as determined on a
Company-wide basis.  If this occurs, guarantees would be required from
additional domestic wholly-owned restricted subsidiaries in such number that
would be sufficient to lower the aggregate consolidated EBITDA of the
non-guarantor domestic wholly-owned restricted subsidiaries as a group to an
amount not in excess of 10% of the Company-wide consolidated
EBITDA.


On June
14, 2007, the Company issued senior notes in an aggregate principal amount of
$550,000,000 under an indenture among the Company, as issuer, OSI Co-Issuer,
Inc., a wholly-owned subsidiary, as co-issuer (“Co-Issuer”), Wells Fargo Bank,
National Association, as trustee, and the Guarantors.  Proceeds from
the issuance of the notes were used to finance the Merger, and the notes mature
on June 15, 2015.  Interest is payable semiannually in arrears, at 10%
per annum, in cash on each June 15 and December 15, commencing on December 15,
2007.  Interest payments to the holders of record of the notes occur
on the immediately preceding June 1 and December 1.  Interest is
computed on the basis of a 360-day year consisting of twelve 30-day
months.





The notes
are initially guaranteed on a senior unsecured basis by each restricted
subsidiary that guarantees the senior secured credit facility (see Note
13).  As of September 30, 2008 and December 31, 2007, all of the
Company’s consolidated subsidiaries were restricted subsidiaries. The notes
are general, unsecured senior obligations of the Company, Co-Issuer and the
Guarantors and are equal in right of payment to all existing and future senior
indebtedness, including the senior secured credit facility.  The notes
are effectively subordinated to all of the Company’s, Co-Issuer’s and the
Guarantors’ secured indebtedness, including the senior secured credit facility,
to the extent of the value of the assets securing such
indebtedness.  The notes are senior in right of payment to all of the
Company’s, Co-Issuer’s and the Guarantors’ existing and future subordinated
indebtedness.





The
Company filed a Registration Statement on Form S-4 (which became effective on
June 2, 2008) for an exchange offer relating to its senior notes.  As
a result, the Company is required to file reports under Section 15(d) of the
Securities Exchange Act of 1934, as amended.


18
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





10.           Long-term
Debt (continued)





On June
13, 2008, the Company renewed a one-year line of credit with a maximum borrowing
amount of 12,000,000,000 Korean won ($10,103,000 at September 30, 2008 and
$12,790,000 at December 31, 2007) to finance development of its restaurants in
South Korea.  The line bears interest at 1.50% and 0.80% over the
Korean Stock Exchange three-month certificate of deposit rate (7.29% and 6.48%
at September 30, 2008 and December 31, 2007, respectively).  The line
matures June 13, 2009.  There were no draws outstanding on this line
of credit as of September 30, 2008 and December 31, 2007.





On June
13, 2008, the Company renewed a one-year overdraft line of credit with a maximum
borrowing amount of 5,000,000,000 Korean won ($4,210,000 at September 30, 2008
and $5,329,000 at December 31, 2007).  The line bears interest at
1.15% over the Korean Stock Exchange three-month certificate of deposit rate
(6.94% at September 30, 2008 and 6.83% at December 31, 2007) and matures June
12, 2009.  There were no draws outstanding on this line of credit as
of September 30, 2008 and December 31, 2007.





As of
September 30, 2008 and December 31, 2007, the Company had approximately
$12,247,000 and $10,700,000, respectively, of notes payable at interest rates
ranging from 2.28% to 7.30% and from 2.07% to 7.30%,
respectively.  These notes have been primarily issued for buyouts of
general manager and area operating partner interests in the cash flows of their
restaurants and generally are payable over five years.





DEBT
GUARANTEES





The
Company is the guarantor of an uncollateralized line of credit that permits
borrowing of up to $35,000,000 for a limited liability company, T-Bird Nevada,
LLC (“T-Bird”), owned by its California franchisee. This line of credit matures
in December 2008. The line of credit bears interest at rates ranging from
50 to 90 basis points over LIBOR.  The Company was required to
consolidate T-Bird effective January 1, 2004 upon adoption of FIN
46R.  At September 30, 2008 and December 31, 2007, the outstanding
balance on the line of credit was approximately $33,283,000 and $32,583,000,
respectively, and is included in the Company’s Consolidated Balance Sheets.
T-Bird uses proceeds from the line of credit for the purchase of real estate and
construction of buildings to be opened as Outback Steakhouse restaurants and
leased to the Company’s franchisees. According to the terms of the line of
credit, T-Bird may borrow, repay, re-borrow or prepay advances at any time
before the termination date of the agreement.




If a
default under the line of credit were to occur or if the line of credit is not
renewed at the December 31, 2008 maturity date and T-Bird is unable to pay the
outstanding balance, the Company would be required to perform under its
guarantee obligation.  If this occurs, the Company has the right to
call into default all of its franchise agreements in California and exercise any
rights and remedies under those agreements as well as the right to recourse
under loans T-Bird has made to individual corporations in California which own
the land and/or building that is leased to those franchise locations. Events of
default are defined in the line of credit agreement. The Company is not the
primary obligor on the line of credit and it is not aware of any non-compliance
with the underlying terms of the line of credit agreement that would result in
it having to perform in accordance with the terms of the guarantee.


The
consolidated financial statements include the accounts and operations of the
Roy’s consolidated venture in which the Company has a less than majority
ownership. The Company consolidates this venture because it controls the
executive committee (which functions as a board of directors) through
representation on the board by related parties, and it is able to direct or
cause the direction of management and operations on a day-to-day basis.
Additionally, the majority of capital contributions made by the Company’s
partner in the Roy’s consolidated venture have been funded by loans to the
partner from a third party which the Company is required to
guarantee.  The guarantee provides the Company control through its
collateral interest in the joint venture partner’s membership
interest.  As a result of the Company’s controlling financial interest
in this venture, it is included in the Company’s consolidated financial
statements. The portion of income or loss attributable to the minority
interests, not to exceed the minority interest’s equity in the subsidiary, is
eliminated in the line item in the Consolidated Statements of Operations
entitled “Minority interest in consolidated entities’ income (loss).” All
material intercompany balances and transactions have been
eliminated.


19
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





10.           Long-term
Debt (continued)





DEBT
GUARANTEES (continued)





The
Company is the guarantor of an uncollateralized line of credit that permits
borrowing of up to a maximum of $24,500,000 for its joint venture partner, RY-8,
in the development of Roy's restaurants.  The line of credit
originally expired in December 2004 and was renewed three times with a revised
termination date in April 2009. According to the terms of the credit agreement,
RY-8 may borrow, repay, re-borrow or prepay advances at any time before the
termination date of the agreement. On the termination date of the agreement, the
entire outstanding principal amount of the loan then outstanding and any accrued
interest is due. At September 30, 2008 and December 31, 2007, the outstanding
balance on the line of credit was $24,500,000.





RY-8’s
obligations under the line of credit are unconditionally guaranteed by the
Company and Roy’s Holdings, Inc. (“RHI”). If an event of default occurs, as
defined in the agreement, then the total outstanding balance, including any
accrued interest, is immediately due from the guarantors.  At
September 30, 2008 and December 31, 2007, $24,500,000 of the Company’s
$150,000,000 working capital revolving credit facility was committed for the
issuance of a letter of credit for this guarantee.





If an
event of default occurs or the line of credit is not renewed at the April 2009
termination date and RY-8 is unable to pay the outstanding balance owed, the
Company would, as guarantor, be liable for this balance. However, in conjunction
with the credit agreement, RY-8 and RHI have entered into an Indemnity Agreement
and a Pledge of Interest and Security Agreement in the Company’s favor. These
agreements provide that if the Company is required to perform its obligation as
guarantor pursuant to the credit agreement, then RY-8 and RHI will indemnify it
against all losses, claims, damages or liabilities which arise out of or are
based upon its guarantee of the credit agreement. RY-8’s and RHI’s obligations
under these agreements are collateralized by a first priority lien upon and a
continuing security interest in any and all of RY-8’s interests in the joint
venture.





The
Company is a partial guarantor of $68,000,000 in bonds issued by Kentucky
Speedway, LLC (“Speedway”).  Speedway is an unconsolidated affiliate
in which the Company has a 22.5% equity interest and for which the Company
operates catering and concession facilities.  Payments on the bonds
began in December 2003 and will continue according to a redemption schedule with
final maturity in December 2022.  The bonds have a put feature that
allows the lenders to require full payment of the debt on or after June
2011.  At September 30, 2008 and December 31, 2007, the outstanding
balance on the bonds was approximately $63,300,000, and the Company’s guarantee
was $17,585,000.  The Company’s guarantee will proportionally decrease
as payments are made on the bonds.





As part
of the guarantee, the Company and other Speedway equity owners are obligated to
contribute, either as equity or subordinated debt, any amounts necessary to
maintain Speedway’s defined fixed charge coverage ratio.  The Company
is obligated to contribute 27.78% of such amounts.  Speedway has not
yet reached its operating break-even point.  Since the initial
investment, the Company has increased its investment by making additional
working capital contributions and subordinated loans to this affiliate in
payments totaling $8,703,000 as of September 30, 2008.  Of this
amount, the Company made subordinated loans of $1,067,000 and $2,133,000 during
the nine months ended September 30, 2008 and 2007, respectively.  The
Company did not make any working capital contributions during the nine months
ended September 30, 2008.  Subsequent to the end of the third quarter,
the Company made an additional subordinated loan of $533,000.





Each
guarantor has unconditionally guaranteed Speedway’s obligations under the bonds
not to exceed its maximum guaranteed amount.  The Company’s maximum
guaranteed amount is $17,585,000.  If an event of default occurs as
defined by the amended guarantee, or if the lenders exercise the put feature,
the total outstanding amount on the bonds, plus any accrued interest, is
immediately due from Speedway and each guarantor would be obligated to make
payment under its guaranty up to its maximum guaranteed amount.


20
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





10.           Long-term
Debt (continued)





DEBT
GUARANTEES (continued)





In June
2006, in accordance with FASB Interpretation No. 45, “Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (“FIN 45”), the Company recognized a liability of
$2,495,000, representing the estimated fair value of the guarantee and a
corresponding increase to the Company’s investment in Speedway, which is
included in the line item entitled “Investments in and advances to
unconsolidated affiliates, net” in the Company’s Consolidated Balance
Sheets.  Prior to the June 2006 modifications, the guarantee was not
subject to the recognition or measurement requirements of FIN 45 and no
liability related to the guarantee was recorded at December 31, 2005 or any
prior period.





In May
2008, Speedway entered into an asset purchase agreement with Speedway
Motorsports, Inc. (“Motorsports”), a Delaware corporation.  In
accordance with the terms of the agreement, Speedway’s assets and liabilities
will be sold to Motorsports for a purchase price equal to a $10,000
non-refundable deposit, the assumption of Speedway’s debt and a $7,500,000 note
payable in 60 equal $125,000 monthly installments. Additionally, Speedway
will receive a contingent payment of $7,500,000 (also payable in 60 equal
monthly installments) if the existing sales tax rebate program is extended by
the legislature for an additional 20 years and a Sprint Cup Race is scheduled at
the Kentucky Speedway. The sale of Speedway is expected to close in the fourth
quarter of 2008.





The
Company’s Korean subsidiary is the guarantor of debt owed by landlords of two of
the Company’s Outback Steakhouse restaurants in Korea.  The Company is
obligated to purchase the building units occupied by its two restaurants in the
event of default by the landlords on their debt obligations, which were
approximately $1,400,000 and $1,500,000 as of each of September 30, 2008 and
December 31, 2007.  Under the terms of the guarantees, the Company’s
monthly rent payments are deposited with the lender to pay the landlords’
interest payments on the outstanding balances.  The guarantees are in
effect until the earlier of the date the principal is repaid or the entire lease
term of ten years for both restaurants, which expire in 2014 and
2016.  The guarantees specify that upon default the purchase price
would be a maximum of 130% of the landlord’s outstanding debt for one restaurant
and the estimated legal auction price for the other restaurant, approximately
$1,900,000 and $2,300,000, respectively, as of each of September 30, 2008 and
December 31, 2007.  If the Company were required to perform under
either guarantee, it would obtain full title to the corresponding building unit
and could liquidate the property, each having an estimated fair value of
approximately $3,000,000 and $2,800,000, respectively.  The Company
has considered these guarantees and accounted for them in accordance with FIN
45.  The Company has various depository and banking relationships with
the lender.





The
Company’s contractual debt guarantees as of September 30, 2008 are summarized in
the table below (in thousands):





MAXIMUM
            
            
            AMOUNTAVAILABILITY
            
            
            OUTSTANDING
            
            
            CARRYINGOF
      DEBT
            
            
            UNDER
      DEBT
            
            
            AMOUNT
      OFGUARANTEES
            
            
            GUARANTEES
            
            
            LIABILITIEST-Bird Nevada,
      LLC
            
            $
            35,000
            
            
            $
            33,283
            
            
            $
            33,283RY-8,
      Inc.
            
            
            24,500
            
            
            
            24,500
            
            
            
            -Kentucky Speedway,
      LLC
            
            
            17,585
            
            
            
            17,585
            
            
            
            2,495Korean
      landlords
            
            
            4,200
            
            
            
            4,200
            
            
            
            -$
            81,285
            
            
            $
            79,568
            
            
            $
            35,778


21
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





11.           Comprehensive
(Loss) Income and Foreign Currency Translation and Transactions





Comprehensive
(loss) income includes net (loss) income and foreign currency translation
adjustments.  Total comprehensive loss for the three months ended
September 30, 2008 and 2007 was $52,934,000, and $15,908,000, respectively,
which included the effect of (losses) and gains from translation adjustments of
approximately ($6,297,000) and $776,000, respectively.





Total
comprehensive (loss) income for the nine months ended September 30, 2008 and the
periods from January 1 to June 14, 2007 and June 15 to September 30, 2007 was
($246,067,000), $16,507,000 and ($14,936,000), respectively, which included the
effect of (losses) and gains from translation adjustments of approximately
($13,068,000), ($954,000) and $1,608,000, respectively.





Accumulated
other comprehensive loss contained only foreign currency translation adjustments
as of September 30, 2008 and December 31, 2007.





Foreign
currency transaction gains and losses are recorded in “Other expense, net” in
the Company’s Consolidated Statements of Operations and included a net loss of
$6,391,000 and $10,196,000 for the three and nine months ended September 30,
2008, respectively.





12.           Income
Taxes





Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”), which clarifies the accounting for and disclosure
of uncertainty in tax positions.





As of
September 30, 2008 and December 31, 2007, the Company had $14,858,000 and
$18,463,000, respectively, of unrecognized tax benefits ($9,111,000 and
$13,202,000, respectively, in “Other long-term liabilities” and $5,747,000 and
$5,261,000, respectively, in “Accrued expenses”).  Of these amounts,
$12,867,000 and $14,813,000, respectively, if recognized, would impact the
Company’s effective tax rate.  The difference between the total amount
of unrecognized tax benefits and the amount that would impact the effective tax
rate consists of items that are offset by deferred tax assets and the federal
tax benefit of state income tax items.





The
Company’s liability for unrecognized tax benefits decreased by $2,349,000 and
$3,605,000 during the three and nine months ended September 30, 2008,
respectively, as a result of lapses in the applicable statutes of limitations
and settlements of state tax contingencies with state tax
authorities.  The decrease during the nine months ended September 30,
2008 was partially offset by an increase for tax positions taken during a prior
period.





In many
cases, the Company’s uncertain tax positions are related to tax years that
remain subject to examination by the relevant taxable authorities.  Based
on the outcome of these examinations, or as a result of the expiration of the
statute of limitations for specific jurisdictions, it is reasonably possible
that the related recorded unrecognized tax benefits for tax positions taken on
previously filed tax returns will significantly decrease by
approximately $6,700,000 to $7,400,000 within the next twelve
months.





The
Company is currently open to audit under the statute of limitations by the
Internal Revenue Service for the years ended December 31, 2005 through
2007. The Company and its subsidiaries’ state income tax returns and foreign
income tax returns also are open to audit under the statute of limitations for
the years ended December 31, 2000 through 2007.


22
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





12.           Income
Taxes (continued)





As of
September 30, 2008 and December 31, 2007, the Company accrued $4,813,000
and $4,489,000, respectively, of interest and penalties related to
uncertain tax positions.  The Company accounts for interest and
penalties related to uncertain tax positions as part of its benefit
from income taxes and recognized related (benefit) and expense of
($282,000) and $268,000 for the three and nine months ended September 30, 2008,
respectively, and expense of $336,000, $703,000 and $375,000 for the three
months ended September 30, 2007, the period from  January 1 to June
14, 2007 and the period from June 15 to September 30, 2007,
respectively.  The Company’s policy on classification of interest and
penalties did not change as a result of the adoption of FIN 48, and it has not
changed since the adoption of FIN 48.





The
benefit from income taxes reflects expected income taxes due at federal
statutory and state income tax rates, net of the federal benefit.  The
effective income tax rate for the third quarter of 2008 was 43.1% compared to
47.6% for the third quarter of 2007.  The decrease in the effective
income tax rate is primarily due to a decrease in the expected FICA tax credit
for employee-reported tips as a percentage of projected pretax
loss.





The
effective income tax rate for the first nine months of 2008 was 22.3% compared
to (9.5)% and 49.6% for the periods from January 1 to June 14, 2007 and from
June 15 to September 30, 2007, respectively.  The increase in the
effective income tax rate for the nine months ended September 30, 2008 as
compared to the period from January 1 to June 14, 2007 is primarily due to a
change from pretax income in the prior period to pretax loss in the current
period.  Additionally, the $161,589,000 goodwill impairment charge,
which is not deductible for income tax purposes as the goodwill is related to
KHI’s acquisition of the Company stock, partially offset the increase in the
effective income tax rate.  The decrease in the effective income tax
rate for the nine months ended September 30, 2008 as compared to the period from
June 15 to September 30, 2007 was due to the non-deductible goodwill impairment
charge and to the expected FICA tax credit for employee-reported tips being such
a large percentage of projected pretax income (loss) in the prior
period.


23
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements




On
June 14, 2007, in connection with the Merger, the Company issued senior
notes in an aggregate principal amount of $550,000,000 under an indenture
agreement. The notes are jointly and severally, fully and unconditionally
guaranteed on a senior unsecured basis by the Guarantors, or each of its current
and future domestic 100% owned restricted subsidiaries in its Outback
Steakhouse, Carrabba’s Italian Grill and Cheeseburger in Paradise concepts and
certain non-restaurant subsidiaries (see Note 10). All other concepts and
certain non-restaurant subsidiaries of the Company do not guarantee the senior
notes (“Non-Guarantors”).


The
following unaudited condensed consolidating financial statements present the
financial position, results of operations and cash flows for the periods
indicated of OSI Restaurant Partners, LLC—Parent only (“OSI Parent”), OSI
Co-Issuer, which is a wholly-owned subsidiary and exists solely for the purpose
of serving as a co-issuer of the exchange notes, the Guarantors, the
Non-Guarantors and the elimination entries necessary to consolidate the Company.
Investments in subsidiaries are accounted for using the equity method for
purposes of the consolidated presentation. The principal elimination entries
relate to senior notes presented as an obligation of both OSI Parent and OSI
Co-Issuer, investments in subsidiaries, and intercompany balances and
transactions.




CONDENSED
      CONSOLIDATING BALANCE SHEET (SUCCESSOR)AS
      OF SEPTEMBER 30, 2008OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              95,880
              
              
              $
              -
              
              
              $
              34,527
              
              
              $
              38,507
              
              
              $
              -
              
              
              $
              168,914Current
      portion of restricted cash
              
              
              -
              
              
              
              -
              
              
              
              4,958
              
              
              
              -
              
              
              
              -
              
              
              
              4,958Inventories
              
              
              38,280
              
              
              
              -
              
              
              
              32,983
              
              
              
              17,776
              
              
              
              -
              
              
              
              89,039Deferred
      income tax assets
              
              
              24,801
              
              
              
              -
              
              
              
              1,341
              
              
              
              (17
              )
              
              
              -
              
              
              
              26,125Other
      current assets
              
              
              21,458
              
              
              
              -
              
              
              
              25,708
              
              
              
              32,569
              
              
              
              -
              
              
              
              79,735Total
      current assets
              
              
              180,419
              
              
              
              -
              
              
              
              99,517
              
              
              
              88,835
              
              
              
              -
              
              
              
              368,771Restricted
      cash
              
              
              6,975
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,975Property,
      fixtures and equipment, net
              
              
              26,955
              
              
              
              -
              
              
              
              698,404
              
              
              
              399,215
              
              
              
              -
              
              
              
              1,124,574Investments
      in and advances tounconsolidated
      affiliates, net
              
              
              1,066
              
              
              
              -
              
              
              
              -
              
              
              
              25,291
              
              
              
              -
              
              
              
              26,357Investments
      in Subsidiaries
              
              
              -
              
              
              
              -
              
              
              
              1,844
              
              
              
              -
              
              
              
              (1,844
              )
              
              
              -Due
      from (to) Subsidiaries
              
              
              2,472,644
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,472,644
              )
              
              
              -Goodwill
              
              
              -
              
              
              
              -
              
              
              
              560,655
              
              
              
              341,627
              
              
              
              -
              
              
              
              902,282Intangible
      assets, net
              
              
              -
              
              
              
              -
              
              
              
              508,941
              
              
              
              186,626
              
              
              
              -
              
              
              
              695,567Other
      assets, net
              
              
              142,284
              
              
              
              -
              
              
              
              22,202
              
              
              
              45,849
              
              
              
              -
              
              
              
              210,335Notes
      receivable collateral forfranchisee
      guarantee
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,150
              
              
              
              -
              
              
              
              33,150Total
      assets
              
              $
              2,830,343
              
              
              $
              -
              
              
              $
              1,891,563
              
              
              $
              1,120,593
              
              
              $
              (2,474,488
              )
              
              $
              3,368,011




(CONTINUED...)





24
 Table of Contents





OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)




CONDENSED
      CONSOLIDATING BALANCE SHEET (SUCCESSOR)AS
      OF SEPTEMBER 30, 2008OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedLIABILITIES
      AND UNITHOLDER’SEQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              7,017
              
              
              $
              -
              
              
              $
              101,030
              
              
              $
              48,514
              
              
              $
              -
              
              
              $
              156,561Sales
      taxes payable
              
              
              44
              
              
              
              -
              
              
              
              8,695
              
              
              
              3,347
              
              
              
              -
              
              
              
              12,086Accrued
      expenses
              
              
              54,165
              
              
              
              -
              
              
              
              81,799
              
              
              
              27,607
              
              
              
              -
              
              
              
              163,571Current
      portion of accruedbuyout
      liability
              
              
              -
              
              
              
              -
              
              
              
              12,229
              
              
              
              4,622
              
              
              
              -
              
              
              
              16,851Unearned
      revenue
              
              
              -
              
              
              
              -
              
              
              
              90,693
              
              
              
              26,144
              
              
              
              -
              
              
              
              116,837Income
      taxes payable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,100
              
              
              
              -
              
              
              
              1,100Current
      portion of long-term debt
              
              
              81,450
              
              
              
              -
              
              
              
              4,031
              
              
              
              1,662
              
              
              
              -
              
              
              
              87,143Current
      portion of guaranteed debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,283
              
              
              
              -
              
              
              
              33,283Total
      current liabilities
              
              
              142,676
              
              
              
              -
              
              
              
              298,477
              
              
              
              146,279
              
              
              
              -
              
              
              
              587,432Partner
      deposit and accruedbuyout
      liability
              
              
              -
              
              
              
              -
              
              
              
              82,716
              
              
              
              27,865
              
              
              
              -
              
              
              
              110,581Deferred
      rent
              
              
              828
              
              
              
              -
              
              
              
              28,439
              
              
              
              16,492
              
              
              
              -
              
              
              
              45,759Deferred
      income tax liability
              
              
              66,945
              
              
              
              -
              
              
              
              159,577
              
              
              
              (5,794
              )
              
              
              -
              
              
              
              220,728Long-term
      debt
              
              
              1,748,725
              
              
              
              550,000
              
              
              
              16,144
              
              
              
              1,785
              
              
              
              (550,000
              )
              
              
              1,766,654Guaranteed
      debt
              
              
              2,495
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,495Accumulated
      losses in Subsidiariesin
      excess of investment
              
              
              132,948
              
              
              
              -
              
              
              
              -
              
              
              
              1,202
              
              
              
              (134,150
              )
              
              
              -Due
      to (from) Subsidiaries
              
              
              238,654
              
              
              
              -
              
              
              
              1,165,885
              
              
              
              1,068,105
              
              
              
              (2,472,644
              )
              
              
              -Other
      long-term liabilities, net
              
              
              147,919
              
              
              
              -
              
              
              
              76,332
              
              
              
              31,370
              
              
              
              -
              
              
              
              255,621Total
      liabilities
              
              
              2,481,190
              
              
              
              550,000
              
              
              
              1,827,570
              
              
              
              1,287,304
              
              
              
              (3,156,794
              )
              
              
              2,989,270Minority
      interests in consolidatedentities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              29,588
              
              
              
              -
              
              
              
              29,588Unitholder’s
      EquityAdditional
      paid-in capital
              
              
              646,953
              
              
              
              (550,000
              )
              
              
              -
              
              
              
              -
              
              
              
              550,000
              
              
              
              646,953(Accumulated
      deficit) retained earnings
              
              
              (282,532
              )
              
              
              -
              
              
              
              63,993
              
              
              
              (181,031
              )
              
              
              117,038
              
              
              
              (282,532
              )Accumulated
      other comprehensive(loss)
      income
              
              
              (15,268
              )
              
              
              -
              
              
              
              -
              
              
              
              (15,268
              )
              
              
              15,268
              
              
              
              (15,268
              )Total
      unitholder’s equity
              
              
              349,153
              
              
              
              (550,000
              )
              
              
              63,993
              
              
              
              (196,299
              )
              
              
              682,306
              
              
              
              349,153$
              2,830,343
              
              
              $
              -
              
              
              $
              1,891,563
              
              
              $
              1,120,593
              
              
              $
              (2,474,488
              )
              
              $
              3,368,011
  25
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)





CONDENSED
      CONSOLIDATING BALANCE SHEET (SUCCESSOR)AS
      OF DECEMBER 31, 2007OSI
      Parent
            
            
            OSI
      Co-Issuer
            
            
            Guarantors
            
            
            Non-Guarantors
            
            
            Eliminations
            
            
            ConsolidatedASSETSCurrent
      AssetsCash
      and cash equivalents
            
            $
            -
            
            
            $
            -
            
            
            $
            148,005
            
            
            $
            84,562
            
            
            $
            (61,463
            )
            
            $
            171,104Current
      portion of restricted cash
            
            
            4,006
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,006Inventories
            
            
            31,870
            
            
            
            -
            
            
            
            31,585
            
            
            
            17,581
            
            
            
            -
            
            
            
            81,036Deferred
      income tax assets
            
            
            23,554
            
            
            
            -
            
            
            
            1,081
            
            
            
            (17
            )
            
            
            -
            
            
            
            24,618Other
      current assets
            
            
            40,468
            
            
            
            -
            
            
            
            23,616
            
            
            
            22,065
            
            
            
            -
            
            
            
            86,149Total
      current assets
            
            
            99,898
            
            
            
            -
            
            
            
            204,287
            
            
            
            124,191
            
            
            
            (61,463
            )
            
            
            366,913Restricted
      cash
            
            
            32,237
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            32,237Property,
      fixtures and equipment, net
            
            
            34,168
            
            
            
            -
            
            
            
            776,847
            
            
            
            434,230
            
            
            
            -
            
            
            
            1,245,245Investments
      in and advances tounconsolidated
      affiliates, net
            
            
            2,116
            
            
            
            -
            
            
            
            -
            
            
            
            24,096
            
            
            
            -
            
            
            
            26,212Investments
      in Subsidiaries
            
            
            40,212
            
            
            
            -
            
            
            
            1,022
            
            
            
            260
            
            
            
            (41,494
            )
            
            
            -Due
      from (to) Subsidiaries
            
            
            2,838,305
            
            
            
            -
            
            
            
            451,007
            
            
            
            8,402
            
            
            
            (3,297,714
            )
            
            
            -Goodwill
            
            
            -
            
            
            
            -
            
            
            
            559,532
            
            
            
            500,997
            
            
            
            -
            
            
            
            1,060,529Intangible
      assets, net
            
            
            -
            
            
            
            -
            
            
            
            524,277
            
            
            
            192,354
            
            
            
            -
            
            
            
            716,631Other
      assets, net
            
            
            143,999
            
            
            
            -
            
            
            
            20,893
            
            
            
            58,350
            
            
            
            -
            
            
            
            223,242Notes
      receivable collateral forfranchisee
      guarantee
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            32,450
            
            
            
            -
            
            
            
            32,450Total
      assets
            
            $
            3,190,935
            
            
            $
            -
            
            
            $
            2,537,865
            
            
            $
            1,375,330
            
            
            $
            (3,400,671
            )
            
            $
            3,703,459





(CONTINUED...)





26
 Table of Contents





OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)





CONDENSED
      CONSOLIDATING BALANCE SHEET (SUCCESSOR)AS
      OF DECEMBER 31, 2007OSI
      Parent
            
            
            OSI
      Co-Issuer
            
            
            Guarantors
            
            
            Non-Guarantors
            
            
            Eliminations
            
            
            ConsolidatedLIABILITIES
      AND UNITHOLDER’SEQUITYCurrent
      LiabilitiesAccounts
      payable
            
            $
            6,058
            
            
            $
            -
            
            
            $
            87,916
            
            
            $
            61,949
            
            
            $
            -
            
            
            $
            155,923Bank
      overdraft payable
            
            
            61,463
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (61,463
            )
            
            
            -Sales
      taxes payable
            
            
            28
            
            
            
            -
            
            
            
            13,589
            
            
            
            4,972
            
            
            
            -
            
            
            
            18,589Accrued
      expenses
            
            
            36,050
            
            
            
            -
            
            
            
            68,704
            
            
            
            31,623
            
            
            
            -
            
            
            
            136,377Current
      portion of accruedbuyout
      liability
            
            
            -
            
            
            
            -
            
            
            
            9,081
            
            
            
            2,712
            
            
            
            -
            
            
            
            11,793Unearned
      revenue
            
            
            184
            
            
            
            -
            
            
            
            155,998
            
            
            
            40,116
            
            
            
            -
            
            
            
            196,298Income
      taxes payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,803
            
            
            
            -
            
            
            
            2,803Current
      portion of long-term debt
            
            
            30,925
            
            
            
            -
            
            
            
            2,705
            
            
            
            1,345
            
            
            
            -
            
            
            
            34,975Current
      portion of guaranteed debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            32,583
            
            
            
            -
            
            
            
            32,583Total
      current liabilities
            
            
            134,708
            
            
            
            -
            
            
            
            337,993
            
            
            
            178,103
            
            
            
            (61,463
            )
            
            
            589,341Partner
      deposit and accruedbuyout
      liability
            
            
            3,339
            
            
            
            -
            
            
            
            89,462
            
            
            
            29,937
            
            
            
            -
            
            
            
            122,738Deferred
      rent
            
            
            735
            
            
            
            -
            
            
            
            12,709
            
            
            
            7,972
            
            
            
            -
            
            
            
            21,416Deferred
      income tax liability
            
            
            137,698
            
            
            
            -
            
            
            
            159,573
            
            
            
            (5,562
            )
            
            
            -
            
            
            
            291,709Long-term
      debt
            
            
            1,796,900
            
            
            
            550,000
            
            
            
            9,294
            
            
            
            2,281
            
            
            
            (550,000
            )
            
            
            1,808,475Guaranteed
      debt
            
            
            2,495
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,495Due
      to (from) Subsidiaries
            
            
            377,284
            
            
            
            -
            
            
            
            1,823,638
            
            
            
            1,096,792
            
            
            
            (3,297,714
            )
            
            
            -Other
      long-term liabilities, net
            
            
            138,384
            
            
            
            -
            
            
            
            70,107
            
            
            
            24,540
            
            
            
            -
            
            
            
            233,031Total
      liabilities
            
            
            2,591,543
            
            
            
            550,000
            
            
            
            2,502,776
            
            
            
            1,334,063
            
            
            
            (3,909,177
            )
            
            
            3,069,205Minority
      interests in consolidatedentities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            34,862
            
            
            
            -
            
            
            
            34,862Unitholder’s
      EquityAdditional
      paid-in capital
            
            
            641,647
            
            
            
            (550,000
            )
            
            
            -
            
            
            
            -
            
            
            
            550,000
            
            
            
            641,647(Accumulated
      deficit) retained earnings
            
            
            (40,055
            )
            
            
            -
            
            
            
            35,089
            
            
            
            8,605
            
            
            
            (43,694
            )
            
            
            (40,055
            )Accumulated
      other comprehensive(loss)
      income
            
            
            (2,200
            )
            
            
            -
            
            
            
            -
            
            
            
            (2,200
            )
            
            
            2,200
            
            
            
            (2,200
            )Total
      unitholder’s equity
            
            
            599,392
            
            
            
            (550,000
            )
            
            
            35,089
            
            
            
            6,405
            
            
            
            508,506
            
            
            
            599,392$
            3,190,935
            
            
            $
            -
            
            
            $
            2,537,865
            
            
            $
            1,375,330
            
            
            $
            (3,400,671
            )
            
            $
            3,703,459  27
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)




CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONS (SUCCESSOR)THREE
      MONTHS ENDED SEPTEMBER 30, 2008OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedRevenuesRestaurant
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              679,158
              
              
              $
              262,589
              
              
              $
              -
              
              
              $
              941,747Other
      revenues
              
              
              -
              
              
              
              -
              
              
              
              1,892
              
              
              
              4,896
              
              
              
              -
              
              
              
              6,788Total
      revenues
              
              
              -
              
              
              
              -
              
              
              
              681,050
              
              
              
              267,485
              
              
              
              -
              
              
              
              948,535Costs
      and expensesCost
      of sales
              
              
              (520
              )
              
              
              -
              
              
              
              253,088
              
              
              
              87,890
              
              
              
              -
              
              
              
              340,458Labor
      and other related
              
              
              (3,269
              )
              
              
              -
              
              
              
              193,133
              
              
              
              75,544
              
              
              
              -
              
              
              
              265,408Other
      restaurant operating
              
              
              -
              
              
              
              -
              
              
              
              183,793
              
              
              
              72,177
              
              
              
              -
              
              
              
              255,970Depreciation
      and amortization
              
              
              630
              
              
              
              -
              
              
              
              30,117
              
              
              
              16,801
              
              
              
              -
              
              
              
              47,548General
      and administrative
              
              
              17,913
              
              
              
              -
              
              
              
              27,705
              
              
              
              17,205
              
              
              
              -
              
              
              
              62,823Provision
      for impaired assetsand
      restaurant closings
              
              
              -
              
              
              
              -
              
              
              
              9,162
              
              
              
              6,115
              
              
              
              -
              
              
              
              15,277Loss
      from operationsof
      unconsolidated affiliates
              
              
              901
              
              
              
              -
              
              
              
              -
              
              
              
              465
              
              
              
              -
              
              
              
              1,366Total
      costs and expenses
              
              
              15,655
              
              
              
              -
              
              
              
              696,998
              
              
              
              276,197
              
              
              
              -
              
              
              
              988,850Loss
      from operations
              
              
              (15,655
              )
              
              
              -
              
              
              
              (15,948
              )
              
              
              (8,712
              )
              
              
              -
              
              
              
              (40,315
              )Equity
      in (losses) earnings of subsidiaries
              
              
              (33,845
              )
              
              
              -
              
              
              
              63
              
              
              
              (741
              )
              
              
              34,523
              
              
              
              -Other
      expense, net
              
              
              -
              
              
              
              -
              
              
              
              (20
              )
              
              
              (6,371
              )
              
              
              -
              
              
              
              (6,391
              )Interest
      income
              
              
              1,684
              
              
              
              -
              
              
              
              408
              
              
              
              1,688
              
              
              
              (2,351
              )
              
              
              1,429Interest
      expense
              
              
              (35,684
              )
              
              
              -
              
              
              
              (2,228
              )
              
              
              (1,003
              )
              
              
              2,351
              
              
              
              (36,564
              )(Loss)
      income before (benefit) provisionfor
      income taxes and minority interestin
      consolidated entities' income
              
              
              (83,500
              )
              
              
              -
              
              
              
              (17,725
              )
              
              
              (15,139
              )
              
              
              34,523
              
              
              
              (81,841
              )(Benefit)
      provision for income taxes
              
              
              (36,863
              )
              
              
              -
              
              
              
              195
              
              
              
              1,412
              
              
              
              -
              
              
              
              (35,256
              )(Loss)
      income before minority interest inconsolidated
      entities' income
              
              
              (46,637
              )
              
              
              -
              
              
              
              (17,920
              )
              
              
              (16,551
              )
              
              
              34,523
              
              
              
              (46,585
              )Minority
      interest in consolidatedentities'
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              52
              
              
              
              -
              
              
              
              52Net
      (loss) income
              
              $
              (46,637
              )
              
              $
              -
              
              
              $
              (17,920
              )
              
              $
              (16,603
              )
              
              $
              34,523
              
              
              $
              (46,637
              )
  28
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)




CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONS (SUCCESSOR)NINE
      MONTHS ENDED SEPTEMBER 30, 2008OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedRevenuesRestaurant
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              2,189,143
              
              
              $
              827,686
              
              
              $
              -
              
              
              $
              3,016,829Other
      revenues
              
              
              -
              
              
              
              -
              
              
              
              9,328
              
              
              
              8,368
              
              
              
              -
              
              
              
              17,696Total
      revenues
              
              
              -
              
              
              
              -
              
              
              
              2,198,471
              
              
              
              836,054
              
              
              
              -
              
              
              
              3,034,525Costs
      and expensesCost
      of sales
              
              
              (134
              )
              
              
              -
              
              
              
              791,540
              
              
              
              277,110
              
              
              
              -
              
              
              
              1,068,516Labor
      and other related
              
              
              (5,707
              )
              
              
              -
              
              
              
              612,413
              
              
              
              235,741
              
              
              
              -
              
              
              
              842,447Other
      restaurant operating
              
              
              -
              
              
              
              -
              
              
              
              560,102
              
              
              
              216,883
              
              
              
              -
              
              
              
              776,985Depreciation
      and amortization
              
              
              1,922
              
              
              
              -
              
              
              
              89,900
              
              
              
              49,767
              
              
              
              -
              
              
              
              141,589General
      and administrative
              
              
              44,536
              
              
              
              -
              
              
              
              87,988
              
              
              
              56,779
              
              
              
              -
              
              
              
              189,303Provision
      for impaired assetsand
      restaurant closings
              
              
              -
              
              
              
              -
              
              
              
              22,500
              
              
              
              181,958
              
              
              
              -
              
              
              
              204,458Loss
      (income) from operationsof
      unconsolidated affiliates
              
              
              2,105
              
              
              
              -
              
              
              
              -
              
              
              
              (3,984
              )
              
              
              -
              
              
              
              (1,879
              )Total
      costs and expenses
              
              
              42,722
              
              
              
              -
              
              
              
              2,164,443
              
              
              
              1,014,254
              
              
              
              -
              
              
              
              3,221,419(Loss)
      income from operations
              
              
              (42,722
              )
              
              
              -
              
              
              
              34,028
              
              
              
              (178,200
              )
              
              
              -
              
              
              
              (186,894
              )Equity
      in (losses) earnings of subsidiaries
              
              
              (160,093
              )
              
              
              -
              
              
              
              822
              
              
              
              (1,461
              )
              
              
              160,732
              
              
              
              -Other
      expense, net
              
              
              -
              
              
              
              -
              
              
              
              (19
              )
              
              
              (10,177
              )
              
              
              -
              
              
              
              (10,196
              )Interest
      income
              
              
              6,274
              
              
              
              -
              
              
              
              1,549
              
              
              
              3,780
              
              
              
              (7,727
              )
              
              
              3,876Interest
      expense
              
              
              (104,577
              )
              
              
              -
              
              
              
              (6,467
              )
              
              
              (3,034
              )
              
              
              7,727
              
              
              
              (106,351
              )(Loss)
      income before (benefit) provisionfor
      income taxes and minority interestin
      consolidated entities' income
              
              
              (301,118
              )
              
              
              -
              
              
              
              29,913
              
              
              
              (189,092
              )
              
              
              160,732
              
              
              
              (299,565
              )(Benefit)
      provision for income taxes
              
              
              (68,119
              )
              
              
              -
              
              
              
              1,008
              
              
              
              373
              
              
              
              -
              
              
              
              (66,738
              )(Loss)
      income before minority interest inconsolidated
      entities' income
              
              
              (232,999
              )
              
              
              -
              
              
              
              28,905
              
              
              
              (189,465
              )
              
              
              160,732
              
              
              
              (232,827
              )Minority
      interest in consolidatedentities'
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              172
              
              
              
              -
              
              
              
              172Net
      (loss) income
              
              $
              (232,999
              )
              
              $
              -
              
              
              $
              28,905
              
              
              $
              (189,637
              )
              
              $
              160,732
              
              
              $
              (232,999
              )
  29
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)




CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONS (SUCCESSOR)THREE
      MONTHS ENDED SEPTEMBER 30, 2007OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedRevenuesRestaurant
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              730,231
              
              
              $
              271,220
              
              
              $
              -
              
              
              $
              1,001,451Other
      revenues
              
              
              -
              
              
              
              -
              
              
              
              5,825
              
              
              
              1,712
              
              
              
              (2,416
              )
              
              
              5,121Total
      revenues
              
              
              -
              
              
              
              -
              
              
              
              736,056
              
              
              
              272,932
              
              
              
              (2,416
              )
              
              
              1,006,572Costs
      and expensesCost
      of sales
              
              
              -
              
              
              
              -
              
              
              
              268,393
              
              
              
              90,987
              
              
              
              -
              
              
              
              359,380Labor
      and other related
              
              
              9,712
              
              
              
              -
              
              
              
              198,130
              
              
              
              75,219
              
              
              
              -
              
              
              
              283,061Other
      restaurant operating
              
              
              -
              
              
              
              -
              
              
              
              180,500
              
              
              
              70,342
              
              
              
              (2,416
              )
              
              
              248,426Depreciation
      and amortization
              
              
              2,149
              
              
              
              -
              
              
              
              28,446
              
              
              
              14,610
              
              
              
              -
              
              
              
              45,205General
      and administrative
              
              
              12,725
              
              
              
              -
              
              
              
              29,383
              
              
              
              17,217
              
              
              
              -
              
              
              
              59,325Provision
      for impaired assetsand
      restaurant closings
              
              
              -
              
              
              
              -
              
              
              
              112
              
              
              
              2,344
              
              
              
              -
              
              
              
              2,456Loss
      (income) from operationsof
      unconsolidated affiliates
              
              
              1,316
              
              
              
              -
              
              
              
              (3
              )
              
              
              (1,089
              )
              
              
              -
              
              
              
              224Total
      costs and expenses
              
              
              25,902
              
              
              
              -
              
              
              
              704,961
              
              
              
              269,630
              
              
              
              (2,416
              )
              
              
              998,077(Loss)
      income from operations
              
              
              (25,902
              )
              
              
              -
              
              
              
              31,095
              
              
              
              3,302
              
              
              
              -
              
              
              
              8,495Equity
      in earnings (losses) of subsidiaries
              
              
              32,058
              
              
              
              -
              
              
              
              (1,433
              )
              
              
              (184
              )
              
              
              (30,441
              )
              
              
              -Other
      (expense) income, net
              
              
              (250
              )
              
              
              -
              
              
              
              250
              
              
              
              -
              
              
              
              -
              
              
              
              -Interest
      income
              
              
              3,079
              
              
              
              -
              
              
              
              (77
              )
              
              
              487
              
              
              
              (1,088
              )
              
              
              2,401Interest
      expense
              
              
              (42,778
              )
              
              
              -
              
              
              
              (1,501
              )
              
              
              (556
              )
              
              
              1,088
              
              
              
              (43,747
              )(Loss)
      income before (benefit) provisionfor
      income taxes and minority interestin
      consolidated entities' loss
              
              
              (33,793
              )
              
              
              -
              
              
              
              28,334
              
              
              
              3,049
              
              
              
              (30,441
              )
              
              
              (32,851
              )(Benefit)
      provision for income taxes
              
              
              (17,109
              )
              
              
              -
              
              
              
              294
              
              
              
              1,185
              
              
              
              -
              
              
              
              (15,630
              )(Loss)
      income before minority interest inconsolidated
      entities' loss
              
              
              (16,684
              )
              
              
              -
              
              
              
              28,040
              
              
              
              1,864
              
              
              
              (30,441
              )
              
              
              (17,221
              )Minority
      interest in consolidatedentities'
      loss
              
              
              -
              
              
              
              -
              
              
              
              (20
              )
              
              
              (517
              )
              
              
              -
              
              
              
              (537
              )Net
      (loss) income
              
              $
              (16,684
              )
              
              $
              -
              
              
              $
              28,060
              
              
              $
              2,381
              
              
              $
              (30,441
              )
              
              $
              (16,684
              )
  30
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)




CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONS (SUCCESSOR)PERIOD
      FROM JUNE 15, 2007 TO SEPTEMBER 30, 2007OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedRevenuesRestaurant
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              881,728
              
              
              $
              318,386
              
              
              $
              -
              
              
              $
              1,200,114Other
      revenues
              
              
              -
              
              
              
              -
              
              
              
              6,502
              
              
              
              1,870
              
              
              
              (2,416
              )
              
              
              5,956Total
      revenues
              
              
              -
              
              
              
              -
              
              
              
              888,230
              
              
              
              320,256
              
              
              
              (2,416
              )
              
              
              1,206,070Costs
      and expensesCost
      of sales
              
              
              -
              
              
              
              -
              
              
              
              322,290
              
              
              
              106,771
              
              
              
              -
              
              
              
              429,061Labor
      and other related
              
              
              9,914
              
              
              
              -
              
              
              
              240,589
              
              
              
              87,877
              
              
              
              -
              
              
              
              338,380Other
      restaurant operating
              
              
              -
              
              
              
              -
              
              
              
              218,704
              
              
              
              80,868
              
              
              
              (2,416
              )
              
              
              297,156Depreciation
      and amortization
              
              
              2,398
              
              
              
              -
              
              
              
              33,608
              
              
              
              17,057
              
              
              
              -
              
              
              
              53,063General
      and administrative
              
              
              14,910
              
              
              
              -
              
              
              
              36,071
              
              
              
              19,632
              
              
              
              -
              
              
              
              70,613Provision
      for impaired assetsand
      restaurant closings
              
              
              -
              
              
              
              -
              
              
              
              862
              
              
              
              2,358
              
              
              
              -
              
              
              
              3,220Loss
      (income) from operationsof
      unconsolidated affiliates
              
              
              1,158
              
              
              
              -
              
              
              
              (8
              )
              
              
              (1,289
              )
              
              
              -
              
              
              
              (139
              )Total
      costs and expenses
              
              
              28,380
              
              
              
              -
              
              
              
              852,116
              
              
              
              313,274
              
              
              
              (2,416
              )
              
              
              1,191,354(Loss)
      income from operations
              
              
              (28,380
              )
              
              
              -
              
              
              
              36,114
              
              
              
              6,982
              
              
              
              -
              
              
              
              14,716Equity
      in earnings (losses) of subsidiaries
              
              
              39,779
              
              
              
              -
              
              
              
              353
              
              
              
              -
              
              
              
              (40,132
              )
              
              
              -Other
      (expense) income, net
              
              
              (250
              )
              
              
              -
              
              
              
              250
              
              
              
              -
              
              
              
              -
              
              
              
              -Interest
      income
              
              
              4,087
              
              
              
              -
              
              
              
              -
              
              
              
              690
              
              
              
              (1,506
              )
              
              
              3,271Interest
      expense
              
              
              (50,267
              )
              
              
              -
              
              
              
              (1,898
              )
              
              
              (752
              )
              
              
              1,506
              
              
              
              (51,411
              )(Loss)
      income before (benefit) provisionfor
      income taxes and minority interestin
      consolidated entities' loss
              
              
              (35,031
              )
              
              
              -
              
              
              
              34,819
              
              
              
              6,920
              
              
              
              (40,132
              )
              
              
              (33,424
              )(Benefit)
      provision for income taxes
              
              
              (18,487
              )
              
              
              -
              
              
              
              325
              
              
              
              1,569
              
              
              
              -
              
              
              
              (16,593
              )(Loss)
      income before minority interest inconsolidated
      entities' loss
              
              
              (16,544
              )
              
              
              -
              
              
              
              34,494
              
              
              
              5,351
              
              
              
              (40,132
              )
              
              
              (16,831
              )Minority
      interest in consolidatedentities'
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (287
              )
              
              
              -
              
              
              
              (287
              )Net
      (loss) income
              
              $
              (16,544
              )
              
              $
              -
              
              
              $
              34,494
              
              
              $
              5,638
              
              
              $
              (40,132
              )
              
              $
              (16,544
              )
  31
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)





CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONS (PREDECESSOR)PERIOD
      FROM JANUARY 1, 2007 TO JUNE 14, 2007OSI
      Parent
            
            
            OSI
      Co-Issuer
            
            
            Guarantors
            
            
            Non-Guarantors
            
            
            Eliminations
            
            
            ConsolidatedRevenuesRestaurant
      sales
            
            $
            -
            
            
            $
            -
            
            
            $
            1,406,275
            
            
            $
            510,414
            
            
            $
            -
            
            
            $
            1,916,689Other
      revenues
            
            
            -
            
            
            
            -
            
            
            
            7,012
            
            
            
            2,936
            
            
            
            -
            
            
            
            9,948Total
      revenues
            
            
            -
            
            
            
            -
            
            
            
            1,413,287
            
            
            
            513,350
            
            
            
            -
            
            
            
            1,926,637Costs
      and expensesCost
      of sales
            
            
            -
            
            
            
            -
            
            
            
            512,356
            
            
            
            169,099
            
            
            
            -
            
            
            
            681,455Labor
      and other related
            
            
            7,916
            
            
            
            -
            
            
            
            391,685
            
            
            
            140,680
            
            
            
            -
            
            
            
            540,281Other
      restaurant operating
            
            
            -
            
            
            
            -
            
            
            
            314,617
            
            
            
            125,928
            
            
            
            -
            
            
            
            440,545Depreciation
      and amortization
            
            
            2,153
            
            
            
            -
            
            
            
            49,465
            
            
            
            23,228
            
            
            
            -
            
            
            
            74,846General
      and administrative
            
            
            58,952
            
            
            
            -
            
            
            
            65,143
            
            
            
            34,052
            
            
            
            -
            
            
            
            158,147Provision
      for impaired assetsand
      restaurant closings
            
            
            946
            
            
            
            -
            
            
            
            5,823
            
            
            
            1,761
            
            
            
            -
            
            
            
            8,530Loss
      (income) from operationsof
      unconsolidated affiliates
            
            
            1,733
            
            
            
            -
            
            
            
            106
            
            
            
            (1,147
            )
            
            
            -
            
            
            
            692Total
      costs and expenses
            
            
            71,700
            
            
            
            -
            
            
            
            1,339,195
            
            
            
            493,601
            
            
            
            -
            
            
            
            1,904,496(Loss)
      income from operations
            
            
            (71,700
            )
            
            
            -
            
            
            
            74,092
            
            
            
            19,749
            
            
            
            -
            
            
            
            22,141Equity
      in earnings (losses) of subsidiaries
            
            
            51,546
            
            
            
            -
            
            
            
            (761
            )
            
            
            519
            
            
            
            (51,304
            )
            
            
            -Interest
      income
            
            
            3,691
            
            
            
            -
            
            
            
            980
            
            
            
            1,983
            
            
            
            (5,093
            )
            
            
            1,561Interest
      expense
            
            
            (3,750
            )
            
            
            -
            
            
            
            (4,237
            )
            
            
            (3,318
            )
            
            
            5,093
            
            
            
            (6,212
            )(Loss)
      income before (benefit) provisionfor
      income taxes and minority interestin
      consolidated entities' income
            
            
            (20,213
            )
            
            
            -
            
            
            
            70,074
            
            
            
            18,933
            
            
            
            (51,304
            )
            
            
            17,490(Benefit)
      provision for income taxes
            
            
            (37,674
            )
            
            
            -
            
            
            
            31,226
            
            
            
            4,792
            
            
            
            -
            
            
            
            (1,656
            )Income
      (loss) before minority interest inconsolidated
      entities' income
            
            
            17,461
            
            
            
            -
            
            
            
            38,848
            
            
            
            14,141
            
            
            
            (51,304
            )
            
            
            19,146Minority
      interest in consolidatedentities'
      income
            
            
            -
            
            
            
            -
            
            
            
            25
            
            
            
            1,660
            
            
            
            -
            
            
            
            1,685Net
      income (loss)
            
            $
            17,461
            
            
            $
            -
            
            
            $
            38,823
            
            
            $
            12,481
            
            
            $
            (51,304
            )
            
            $
            17,461


32
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)




CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWS (SUCCESSOR)NINE
      MONTHS ENDED SEPTEMBER 30, 2008OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net
      cash provided by (used in)operating
      activities
              
              $
              49,218
              
              
              $
              -
              
              
              $
              (72,339
              )
              
              $
              5,097
              
              
              $
              61,463
              
              
              $
              43,439Cash
      flows provided by (used in)investing
      activities:Purchase
      of Company-ownedlife
      insurance
              
              
              (879
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (879
              )Acquisitions
      of liquor licenses
              
              
              -
              
              
              
              -
              
              
              
              (1,054
              )
              
              
              (844
              )
              
              
              -
              
              
              
              (1,898
              )Proceeds
      from sale-leaseback transaction
              
              
              8,100
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,100Capital
      expenditures
              
              
              (2,146
              )
              
              
              -
              
              
              
              (43,344
              )
              
              
              (43,095
              )
              
              
              -
              
              
              
              (88,585
              )Proceeds
      from the sale of property,fixtures
      and equipment
              
              
              -
              
              
              
              -
              
              
              
              9,753
              
              
              
              -
              
              
              
              -
              
              
              
              9,753Restricted
      cash received for capitalexpenditures,
      property taxes andcertain
      deferred compensation plans
              
              
              116,428
              
              
              
              -
              
              
              
              2,953
              
              
              
              -
              
              
              
              -
              
              
              
              119,381Restricted
      cash used to fund capitalexpenditures,
      property taxes andcertain
      deferred compensation plans
              
              
              (90,623
              )
              
              
              -
              
              
              
              (3,882
              )
              
              
              -
              
              
              
              -
              
              
              
              (94,505
              )Payments
      from unconsolidated affiliates
              
              
              13
              
              
              
              -
              
              
              
              -
              
              
              
              298
              
              
              
              -
              
              
              
              311Investments
      in and advances tounconsolidated
      affiliates
              
              
              (1,067
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,067
              )Net
      cash provided by (used in)investing
      activities
              
              
              29,826
              
              
              
              -
              
              
              
              (35,574
              )
              
              
              (43,641
              )
              
              
              -
              
              
              
              (49,389
              )Cash
      flows provided by (used in)financing
      activities:Proceeds
      from issuance of long-term debt
              
              
              30,000
              
              
              
              -
              
              
              
              -
              
              
              
              34
              
              
              
              -
              
              
              
              30,034Repayments
      of long-term debt
              
              
              (9,825
              )
              
              
              -
              
              
              
              (2,051
              )
              
              
              (1,002
              )
              
              
              -
              
              
              
              (12,878
              )Proceeds
      from minority interestcontributions
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              786
              
              
              
              -
              
              
              
              786Distributions
      to minority interest
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5,974
              )
              
              
              -
              
              
              
              (5,974
              )Decrease
      in partner deposit andaccrued
      buyout liability
              
              
              (3,339
              )
              
              
              -
              
              
              
              (3,514
              )
              
              
              (1,355
              )
              
              
              -
              
              
              
              (8,208
              )Net
      cash provided by (used in)financing
      activities
              
              
              16,836
              
              
              
              -
              
              
              
              (5,565
              )
              
              
              (7,511
              )
              
              
              -
              
              
              
              3,760Net
      increase (decrease) in cashand
      cash equivalents
              
              
              95,880
              
              
              
              -
              
              
              
              (113,478
              )
              
              
              (46,055
              )
              
              
              61,463
              
              
              
              (2,190
              )Cash
      and cash equivalents at thebeginning
      of the period
              
              
              -
              
              
              
              -
              
              
              
              148,005
              
              
              
              84,562
              
              
              
              (61,463
              )
              
              
              171,104Cash
      and cash equivalents at theend
      of the period
              
              $
              95,880
              
              
              $
              -
              
              
              $
              34,527
              
              
              $
              38,507
              
              
              $
              -
              
              
              $
              168,914


33
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)




CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWS (SUCCESSOR)PERIOD
      FROM JUNE 15, 2007 TO SEPTEMBER 30, 2007OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net
      cash (used in) provided byoperating
      activities
              
              $
              (1,428,522
              )
              
              $
              -
              
              
              $
              876,722
              
              
              $
              655,408
              
              
              $
              (93,646
              )
              
              $
              9,962Cash
      flows used in investing activities:Maturities
      and sales ofinvestment
      securities
              
              
              839
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              839Purchase
      of Company-owned lifeinsurance
              
              
              (63,932
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (63,932
              )Acquisition
      of OSI
              
              
              (835,240
              )
              
              
              -
              
              
              
              (1,629,831
              )
              
              
              (627,203
              )
              
              
              -
              
              
              
              (3,092,274
              )Proceeds
      from sale-leasebacktransaction
              
              
              -
              
              
              
              -
              
              
              
              872,014
              
              
              
              53,076
              
              
              
              -
              
              
              
              925,090Capital
      expenditures
              
              
              (2,509
              )
              
              
              -
              
              
              
              (16,477
              )
              
              
              (37,600
              )
              
              
              -
              
              
              
              (56,586
              )Restricted
      cash received for capitalexpenditures,
      property taxes andcertain
      deferred compensation plans
              
              
              68,431
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              68,431Restricted
      cash used to fund capitalexpenditures,
      property taxes andcertain
      deferred compensation plans
              
              
              (77,934
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (77,934
              )Payments
      from unconsolidated affiliates
              
              
              1
              
              
              
              -
              
              
              
              8
              
              
              
              -
              
              
              
              -
              
              
              
              9Investments
      in and advances tounconsolidated
      affiliates
              
              
              (2,133
              )
              
              
              -
              
              
              
              -
              
              
              
              (2,784
              )
              
              
              -
              
              
              
              (4,917
              )Net
      cash used in investing activities
              
              
              (912,477
              )
              
              
              -
              
              
              
              (774,286
              )
              
              
              (614,511
              )
              
              
              -
              
              
              
              (2,301,274
              )Cash
      flows provided by (used in)financing
      activities:Proceeds
      from issuance oflong-term
      debt
              
              
              17,825
              
              
              
              -
              
              
              
              42
              
              
              
              33
              
              
              
              -
              
              
              
              17,900Proceeds
      from the issuance of seniorsecured
      term loan facility
              
              
              1,310,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,310,000Proceeds
      from the issuance ofrevolving
      lines of credit
              
              
              11,500
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,500Proceeds
      from the issuance ofsenior
      notes
              
              
              550,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              550,000Repayments
      of long-term debt
              
              
              (151,291
              )
              
              
              -
              
              
              
              (664
              )
              
              
              (63
              )
              
              
              -
              
              
              
              (152,018
              )Deferred
      financing fees
              
              
              (66,963
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (66,963
              )Contributions
      from KHI
              
              
              42,413
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              42,413Proceeds
      from minority interestcontributions
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              674
              
              
              
              -
              
              
              
              674Distributions
      to minority interest
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,905
              )
              
              
              -
              
              
              
              (2,905
              )Decrease
      in partner deposit andaccrued
      buyout liability
              
              
              -
              
              
              
              -
              
              
              
              (1,356
              )
              
              
              (26
              )
              
              
              -
              
              
              
              (1,382
              )Proceeds
      from the issuance ofcommon
      stock
              
              
              600,373
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              600,373Net
      cash provided by (used in)financing
      activities
              
              
              2,313,857
              
              
              
              -
              
              
              
              (1,978
              )
              
              
              (2,287
              )
              
              
              -
              
              
              
              2,309,592Net
      (decrease) increase in cashand
      cash equivalents
              
              
              (27,142
              )
              
              
              -
              
              
              
              100,458
              
              
              
              38,610
              
              
              
              (93,646
              )
              
              
              18,280Cash
      and cash equivalents at thebeginning
      of the period
              
              
              27,142
              
              
              
              -
              
              
              
              18,645
              
              
              
              21,681
              
              
              
              (24,638
              )
              
              
              42,830Cash
      and cash equivalents at theend
      of the period
              
              $
              -
              
              
              $
              -
              
              
              $
              119,103
              
              
              $
              60,291
              
              
              $
              (118,284
              )
              
              $
              61,110




34
 Table of Contents





OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





13.           Supplemental
Guarantor Condensed Unaudited Consolidating Financial Statements
(continued)




CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWS (PREDECESSOR)PERIOD
      FROM JANUARY 1, 2007 TO JUNE 14, 2007OSI
      Parent
              
              
              OSI
      Co-Issuer
              
              
              Guarantors
              
              
              Non-Guarantors
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net
      cash provided by (used in)operating
      activities
              
              $
              57,765
              
              
              $
              -
              
              
              $
              12,760
              
              
              $
              109,746
              
              
              $
              (24,638
              )
              
              $
              155,633Cash
      flows used in investing activities:Purchase
      of investment securities
              
              
              (2,455
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,455
              )Maturities
      and sales ofinvestment
      securities
              
              
              2,002
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,002Cash
      paid for acquisition of business,net
      of cash acquired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (250
              )
              
              
              -
              
              
              
              (250
              )Acquisitions
      of liquor licenses
              
              
              -
              
              
              
              -
              
              
              
              (601
              )
              
              
              (952
              )
              
              
              -
              
              
              
              (1,553
              )Capital
      expenditures
              
              
              (21,003
              )
              
              
              -
              
              
              
              (39,421
              )
              
              
              (58,935
              )
              
              
              -
              
              
              
              (119,359
              )Proceeds
      from the sale of property,fixtures
      and equipment
              
              
              1,948
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,948Investments
      in and advances tounconsolidated
      affiliates
              
              
              -
              
              
              
              -
              
              
              
              (86
              )
              
              
              -
              
              
              
              -
              
              
              
              (86
              )Net
      cash used in investing activities
              
              
              (19,508
              )
              
              
              -
              
              
              
              (40,108
              )
              
              
              (60,137
              )
              
              
              -
              
              
              
              (119,753
              )Cash
      flows used in financing activities:Proceeds
      from issuance of long-term debt
              
              
              123,516
              
              
              
              -
              
              
              
              -
              
              
              
              132
              
              
              
              -
              
              
              
              123,648Repayments
      of long-term debt
              
              
              (141,000
              )
              
              
              -
              
              
              
              (641
              )
              
              
              (69,193
              )
              
              
              -
              
              
              
              (210,834
              )Proceeds
      from minority interestcontributions
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,940
              
              
              
              -
              
              
              
              3,940Distributions
      to minority interest
              
              
              -
              
              
              
              -
              
              
              
              (70
              )
              
              
              (4,509
              )
              
              
              -
              
              
              
              (4,579
              )Decrease
      in partner deposit andaccrued
      buyout liability
              
              
              -
              
              
              
              -
              
              
              
              (5,741
              )
              
              
              (471
              )
              
              
              -
              
              
              
              (6,212
              )Excess
      income tax benefits fromstock-based
      compensation
              
              
              1,541
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,541Dividends
      paid
              
              
              (9,887
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (9,887
              )Proceeds
      from exercise of employeestock
      options
              
              
              14,477
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              14,477Net
      cash used in financing activities
              
              
              (11,353
              )
              
              
              -
              
              
              
              (6,452
              )
              
              
              (70,101
              )
              
              
              -
              
              
              
              (87,906
              )Net
      increase (decrease) in cashand
      cash equivalents
              
              
              26,904
              
              
              
              -
              
              
              
              (33,800
              )
              
              
              (20,492
              )
              
              
              (24,638
              )
              
              
              (52,026
              )Cash
      and cash equivalents at thebeginning
      of the period
              
              
              238
              
              
              
              -
              
              
              
              52,446
              
              
              
              42,172
              
              
              
              -
              
              
              
              94,856Cash
      and cash equivalents at theend
      of the period
              
              $
              27,142
              
              
              $
              -
              
              
              $
              18,646
              
              
              $
              21,680
              
              
              $
              (24,638
              )
              
              $
              42,830


35
 Table of Contents




OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





14.           Commitments
and Contingencies





The
Company’s consolidated financial statements include the accounts and operations
of its Roy’s consolidated joint venture in which the Company has a less
than majority ownership. The Company consolidates this venture because it
controls the executive committee (which functions as a board of directors)
through representation on the board by related parties, and it is able to direct
or cause the direction of management and operations on a day-to-day basis.
Additionally, the majority of capital contributions made by the Company’s
partner in the Roy’s consolidated venture have been funded by loans to the
partner from a third party which the Company is required to
guarantee.  The guarantee provides the Company control through its
collateral interest in the joint venture partner’s membership
interest.  As a result of the Company’s controlling financial interest
in this venture, it is included in the Company’s consolidated financial
statements. The portion of income or loss attributable to the minority
interests, not to exceed the minority interest’s equity in the subsidiary, is
eliminated in the line item in the consolidated statements of operations
entitled “Minority interest in consolidated entities’ income (loss).” All
material intercompany balances and transactions have been
eliminated.





Pursuant
to the Company’s joint venture agreement for the development of Roy’s
restaurants, RY-8, its joint venture partner, has the right to require the
Company to purchase up to 25% of RY-8’s interests in the joint venture at
any time after June 17, 2004 and up to another 25% (total 50%) of its
interests in the joint venture at any time after June 17,
2009.  The purchase price to be paid by the Company would be equal to
the fair market value of the joint venture as of the date that RY-8 exercised
its put option multiplied by the percentage purchased.





The
Company has made interest payments and paid line of credit renewal fees totaling
approximately $2,034,000 and has made capital expenditures for additional
restaurant development on behalf of RY-8 because the joint venture partner’s
$24,500,000 line of credit was fully extended. Additional payments on behalf of
RY-8 for these items may be required in the future.





In
January 2008, the Company entered into a premium financing agreement for its
2008 general liability and property insurance.  The agreement’s total
premium balance is $3,729,000, payable in eleven monthly installments of
$319,000 and one down payment of $319,000. The agreement includes interest at
the rate of 5.75% per year.





Certain
of the Company’s executive officers, in the event of a termination of employment
by the Company without cause or a termination by the executive for good reason,
will be entitled to receive as full and complete severance compensation an
amount equal to the sum of (i) the base salary then in effect plus, (ii)
the average of the three most recent annual bonuses paid to the executive, such
severance payable in 12 equal monthly installments from the effective date of
such termination, (iii) any accrued but unpaid bonus in respect of the fiscal
year preceding the year in which such termination of employment occurred,
(iv) continuation for one year of medical, dental and vision benefits
generally available to executive officers and (v) full vesting of life insurance
benefits and benefit continuation for one year following such
termination.





The
Company is subject to legal proceedings, claims and liabilities, such as liquor
liability, sexual harassment and slip and fall cases, etc., which arise in the
ordinary course of business and are generally covered by insurance.  In the
opinion of management, the amount of the ultimate liability with respect to
those actions will not have a materially adverse impact on the Company’s
financial position or results of operations and cash flows.  In addition,
the Company is subject to the following legal proceedings and actions, which
depending on the outcomes that are uncertain at this time, could have
a material adverse effect on the Company’s financial condition.


36
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





14.           Commitments
and Contingencies (continued)





Outback
Steakhouse of Florida, Inc. and OS Restaurant Services, Inc. are the
defendants in a class action lawsuit brought by the U.S. Equal Employment
Opportunity Commission (EEOC v. Outback Steakhouse of Florida, Inc. and OS
Restaurant Services, Inc., U.S. District Court, District of Colorado, Case
No. 06-cv-1935, filed September 28, 2006) alleging that they have
engaged in a pattern or practice of discrimination against women on the basis of
their gender with respect to hiring and promoting into management positions as
well as discrimination against women in terms and condition of their
employment. In addition to the EEOC, two former employees have successfully
intervened as party plaintiffs in the case. On November 3, 2007, the
EEOC’s nationwide claim of gender discrimination was dismissed and the scope of
the suit was limited to the states of Colorado, Wyoming and Montana. However,
the Company expects the EEOC to pursue claims of gender discrimination against
the Company on a nationwide basis through other proceedings. Litigation is, by
its nature, uncertain both as to time and expense involved and as to the final
outcome of such matters. While the Company intends to vigorously defend
itself in this lawsuit, protracted litigation or unfavorable resolution of this
lawsuit could have a material adverse effect on the Company’s business, results
of operations or financial condition and could damage the Company’s reputation
with its employees and its customers.





In 2007,
the Company was served with five separate putative class action complaints in
various United States District Courts alleging violations of the Fair and
Accurate Credit Transactions Act, or FACTA, on behalf of customers of certain
concepts. In 2008, four of the five complaints were deemed consolidated for all
pre-trial purposes after the Company’s motion to consolidate cases before a
single judge was granted. FACTA restricts, among other things, the credit and
debit card data that may be included on the electronically printed receipts
provided to retail customers at the point of sale. Each suit alleged that the
defendants violated a provision of FACTA by including more information on the
electronically printed credit and debit card receipts provided to customers than
is permitted under FACTA. These lawsuits were among a number of lawsuits with
similar allegations that were filed against large retailers and foodservice
operators, among others, as a result of the implementation of FACTA, which
became fully effective as of December 4, 2006.





On June
3, 2008, the Credit and Debit Card Receipt Clarification Act of 2007 (the “Act”)
was signed into law. The Act provides that entities that printed an expiration
date on credit and debit card receipts and truncated the credit or debit card
number were not in willful non-compliance with FACTA and therefore are not
liable for statutory damages. As a result of the Act, all of the above FACTA
cases were settled for nominal amounts in the fiscal quarter ending September
30, 2008.





On
February 21, 2008, a purported class action complaint captioned Ervin, et
al. v. OS Restaurant Services, Inc. was filed in the U.S. District Court,
Northern District of Illinois (Case No.: 08-C-1091). This lawsuit alleges
violations of state and federal wage and hour law in connection with tipped
employees and overtime compensation and seeks relief in the form of unspecified
back pay and attorney fees. It alleges a class action under state law and a
collective action under federal law. While the Company intends to vigorously
defend itself, it is not possible at this time to reasonably estimate the
possible loss or range of loss, if any.





One of
the Company’s subsidiaries received a notice of proposed assessment of
employment taxes in March 2008 from the Internal Revenue Service (“IRS”) for
calendar years 2004 through 2006. The IRS asserts that certain cash
distributions paid to the Company’s general manager partners, chef partners, and
area operating partners who hold partnership interests in limited
partnerships with Company affiliates should have been treated as wages and
subjected to employment taxes. The Company believes that it has complied
and continues to comply with the law pertaining to the proper federal tax
treatment of partner distributions.  In May 2008, the Company filed a
protest of the proposed employment tax assessment. Because the Company is
at a preliminary stage of the administrative process for resolving disputes with
the IRS, it cannot, at this time, reasonably estimate the amount, if any, of
additional employment taxes or other interest, penalties or additions to tax
that would ultimately be assessed at the conclusion of this process. If the
IRS examiner’s position were to be sustained, the additional employment taxes
and other amounts that would be assessed would be material.


37
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





15.           Related
Parties





Upon
completion of the Merger, the Company entered into a financial advisory
agreement with certain entities affiliated with Bain Capital and Catterton who
received aggregate fees of approximately $30,000,000 for providing services
related to the Merger.  The Company also entered into a management
agreement with Kangaroo Management Company I, LLC (the “Management Company”),
whose members are the Founders and entities affiliated with Bain Capital and
Catterton.  In accordance with the terms of the agreement, the
Management Company will provide management services to the Company until the
tenth anniversary of the consummation of the Merger, with one-year extensions
thereafter until terminated.  The Management Company will receive an
aggregate annual management fee equal to $9,100,000 and reimbursement for
out-of-pocket expenses incurred by it, its members, or their respective
affiliates in connection with the provision of services pursuant to the
agreement.  Management fees of $2,600,000 and $7,273,000 for the three
and nine months ended September 30, 2008, respectively, $2,445,000 for the three
months ended September 30, 2007 and $2,869,000 for the period from June 15 to
September 30, 2007 were included in general and administrative expenses in the
Company’s Consolidated Statements of Operations.  The management
agreement and the financial advisory agreement include customary exculpation and
indemnification provisions in favor of the Management Company, Bain Capital and
Catterton and their respective affiliates. The management agreement and the
financial advisory agreement may be terminated by the Company, Bain Capital and
Catterton at any time and will terminate automatically upon an initial public
offering or a change of control unless the Company and the counterparty(s)
determine otherwise.





In
October 2007, the Company entered into an agreement in principle to sell the
majority of its interest in its Lee Roy Selmon’s concept to an investor group
led by Lee Roy Selmon and Peter Barli, President of the concept. The agreement
in principle has expired, and the Company is no longer in discussions with this
investor group.





In
February 2008, the Company purchased ownership interests in eighteen Outback
Steakhouse restaurants and ownership interests in its Outback Steakhouse
catering operations from one of its area operating partners for $3,615,000. In
April 2008, KHI also purchased this partner’s common shares in KHI for $300,000.
The purchase of KHI shares was facilitated through a loan from the Company to
its direct owner, OSI HoldCo, Inc.  In July 2008, OSI HoldCo, Inc.
repaid the loan.





On June
14, 2008, 941,512 shares of KHI restricted stock issued to four of the Company’s
officers and other members of management vested. In accordance with the terms of
the Employee Rollover Agreement and the Restricted Stock Agreement, KHI loaned
approximately $2,067,000 to these individuals in July 2008 for their personal
income tax obligations that resulted from the vesting.  The loans are
full recourse and are collateralized by the shares of KHI restricted stock that
vested.





On July
1, 2008, the Company sold one of its aircraft for $8,100,000 to Billabong Air
II, Inc. (“Billabong”), which is owned by two of the Company’s Founders who are
also board members of the Company and of KHI.  In conjunction with the
sale of the aircraft, the Company entered into a lease agreement with Billabong
in which the Company may lease up to 200 hours of flight time per year at a rate
of $2,500 per hour.  In accordance with the terms of the agreement,
the Company must supply its own fuel, pilots and maintenance staff when using
the plane.  The resulting $1,400,000 gain from the sale of the
aircraft will be deferred and recognized ratably over a five-year
period.  As of September 30, 2008, the Company had paid $105,000 to
Billabong for use of the aircraft.





Prior to
the Merger, the Company was a party to a Stock Redemption Agreement with each of
its Founders, which provided that following a Founder’s death, the personal
representative of the Founder had the right to require the Company to
purchase the Company’s common stock beneficially owned by the Founder at the
date of death. The Company’s obligation to purchase common stock beneficially
owned by the Founders was funded by key-man life insurance policies on the life
of each of the Founders.  These policies were owned by the Company and
provided a death benefit of $30,000,000 per Founder. In connection with the
Merger, the Stock Redemption Agreements were terminated and on September 5,
2008, the Company surrendered the key-man insurance policies for approximately
$5,900,000, the cash value at that date.


38
 Table of Contents


OSI
Restaurant Partners, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





16.           Subsequent
Events





On
October 6, 2008, the Company paid $6,450,000 to PRP for the remaining two
restaurant properties included in the PRP Sale-Leaseback Transaction (see Note
2).




On
October 16, 2008, the Company executed an asset purchase agreement to sell
certain non-restaurant operations that were previously subject to a licensing
agreement. The Company sold tangible assets with no remaining book value and
relinquished the right to receive cumulative future license fees of $6,000,000
over the remaining term of the licensing agreement in exchange for a cash
payment of $2,900,000. In conjunction with this transaction, the previous
licensing agreement was terminated and a new three-year licensing agreement for
use of one Company trademark was signed. The Company recorded a gain of
approximately $800,000 from this sale in October 2008.


In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS No. 157 in a market that is not active and provides
guidance for determining the fair value of a financial asset when the market for
that financial asset is not active.  This FSP was effective upon
issuance, but it did not impact the Company’s consolidated financial
statements.





Subsequentto the end of the third quarter, the Company committed
$1,260,000 of its working capital revolving credit facility for the issuance of
two short-term letters of credit for two of its energy providers (see Note
10).


39
 Table of Contents


OSI RestaurantPartners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations





Management’s
discussion and analysis of financial condition and results of operations should
be read in conjunction with the Unaudited Consolidated Financial Statements and
the related Notes.





Overview





We are
one of the largest casual dining restaurant companies in the world, with eight
restaurant concepts, nearly 1,500 system-wide restaurants and revenues for
Company-owned restaurants exceeding $1.9 billion for the period from January 1
to June 14, 2007 and $2.2 billion for the period from June 15 to December 31,
2007. We operate in 49 states and in 20 countries internationally,
predominantly through Company-owned restaurants, but we also operate under a
variety of partnerships and franchises. Our primary concepts include Outback
Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime
Steakhouse and Wine Bar.  Our other non-core concepts include Roy’s,
Cheeseburger in Paradise, Lee Roy Selmon’s and Blue Coral Seafood and
Spirits.  Our long-range plan is to exit these non-core concepts, but
we do not have an established timeframe within which this will
occur.





Our
primary focus as a company of restaurants is to provide a quality product
together with quality service across all of our brands. This goal entails
offering consumers of different demographic backgrounds an array of dining
alternatives suited for differing needs. Our sales are primarily generated
through a diverse customer base, which includes people eating in our restaurants
as regular patrons who return for meals several times a week or on special
occasions such as birthday parties, private events and for business
entertainment. Secondarily, we generate revenues through sales of franchises and
ongoing royalties.





The
restaurant industry is a highly competitive and fragmented business, which is
subject to sensitivity from changes in the economy, trends in lifestyles,
seasonality (customer spending patterns at restaurants are generally highest in
the first quarter of the year and lowest in the third quarter of the year) and
fluctuating costs. Operating margins for restaurants are susceptible to
fluctuations in prices of commodities, which include among other things, beef,
chicken, seafood, butter, cheese, produce and other necessities to operate a
restaurant, such as natural gas or other energy supplies.  Additionally,
the restaurant industry is characterized by a high initial capital investment,
coupled with high labor costs. The combination of these factors underscores our
initiatives to drive increased sales at existing restaurants in order to raise
margins and profits, because the incremental sales contribution to profits from
every additional dollar of sales above the minimum costs required to open, staff
and operate a restaurant is very high. We are not a company focused on growth in
the number of restaurants just to generate additional sales. Our expansion and
operation strategies are to balance investment costs and the economic factors of
operation, in order to generate reasonable, sustainable margins and achieve
acceptable returns on investment from our restaurant concepts.





The
recent disruptions in the financial markets, including the subprime mortgage
crisis and the bankruptcy or restructuring of certain financial institutions,
pose challenges to our business as consumer confidence and spending,
availability of credit, interest rates, foreign currency exchanges rates and
other items are adversely impacted (see “Current Economic Challenges and Impacts
of Market Conditions” included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for further
discussion).


40
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Overview
(continued)





Promotion
of our Outback Steakhouse and Carrabba’s Italian Grill restaurants is assisted
by the use of national and spot television and radio media, which we have also
begun to use in certain markets for our Bonefish Grill brand. We advertise on
television in spot markets when our brands achieve sufficient penetration to
make a meaningful broadcast schedule affordable. We rely on word-of-mouth
customer experience, grassroots marketing in local venues, direct mail and
national print media to support broadcast media and as the primary campaigns for
our upscale casual and smaller brands. We now offer “off the menu” daily
specials at our Outback Steakhouses.  These specials reflect a range
of entrées and price points, and we believe they provide new reasons for
customers to come back to Outback Steakhouse more often.  We have
developed a multi-year plan to refresh and update our Outback Steakhouse
restaurants. The new look delivers an experience that we believe reaches beyond
the existing interpretation of Australia and the Outback in our restaurants, and
it is expressed in updated fabrics, textures, art, lighting, props and
murals. Our advertising spending is targeted to promote and maintain brand
image and develop consumer awareness. We strive to increase sales through
excellence in execution. Our marketing strategy of getting people to visit
frequently and also recommending our restaurants to others complements what we
believe are the fundamental elements of success: convenient sites,
service-oriented employees and flawless execution in a well-managed
restaurant.





Key
factors that can be used in evaluating and understanding our restaurants and
assessing our business include the following:




·
            Average
      unit volumes - a per restaurant calculated average sales amount, which
      helps us gauge the changes in consumer traffic, pricing and development of
      the brand;


·
            Operating
      margins - restaurant revenues after deduction of the main restaurant-level
      operating costs (including cost of sales, restaurant operating expenses,
      and labor and related costs);


·
            System-wide
      sales - a total sales volume for all company-owned, franchise and
      unconsolidated joint venture restaurants, regardless of ownership, to
      interpret the health of our brands;
and


·
            Same-store
      or comparable sales - a year-over-year comparison of sales volumes for
      restaurants that are open in both years in order to remove the impact of
      new openings in comparing the operations of existing
      restaurants.





Our
consolidated operating results are affected by the growth of our smaller
brands.  As we continue to develop and expand restaurant concepts at
different rates, our cost of sales, labor costs, restaurant operating expenses
and income from operations change from the mix of brands in our portfolio with
slightly different operating characteristics.  Labor and related
expenses as a percentage of restaurant sales are higher at our newer format
restaurants than have typically been experienced at Outback
Steakhouses.  However, cost of sales as a percentage of restaurant
sales at those restaurants is lower than those at Outback
Steakhouse.  These trends are expected to continue with our planned
development of restaurants.





Our
industry’s challenges and risks include, but are not limited to, economic
conditions, the impact of government regulation, the availability of qualified
employees, consumer perceptions regarding food safety and/or the health benefits
of certain types of food, including attitudes about alcohol consumption, and
commodity pricing. Additionally, our planned development schedule is subject to
risk because of significant real estate and construction costs and the
availability of capital, and our results are affected by consumer tolerance of
price increases. Changes in our operations in future periods may also result
from changes in beef prices and other commodity costs and continued pre-opening
expenses from the development of new restaurants and our expansion
strategy.





Our
substantial leverage could adversely affect our ability to raise additional
capital to fund our operations, limit our ability to make capital expenditures
to invest in new restaurants, limit our ability to react to changes in the
economy or our industry, expose us to interest rate risk to the extent of our
variable-rate debt and prevent us from meeting our obligations under the senior
notes.


41
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Items
Affecting Comparability




On
November 5, 2006, OSI Restaurant Partners, Inc. entered into a definitive
agreement to be acquired by KHI, which is controlled by an investor group
comprised of affiliates of Bain Capital and Catterton, our Founders and
certain members of management.  On May 21, 2007, this agreement was
amended to provide for increased merger consideration of $41.15 per share in
cash, payable to all shareholders except our Founders, who instead converted a
portion of their equity interest to equity in the Ultimate Parent and received
$40.00 per share for their remaining shares.  Immediately following
consummation of the Merger on June 14, 2007, we converted into a Delaware
limited liability company named OSI Restaurant Partners, LLC.
  The
accompanying consolidated financial statements are presented for two periods:
“Predecessor” and “Successor,” which relate to the period preceding the Merger
and the period succeeding the Merger, respectively.  The operations of
OSI Restaurant Partners, Inc. are referred to for the Predecessor period and the
operations of OSI Restaurant Partners, LLC are referred to for the Successor
period.  Unless the context otherwise indicates, as used in this
report, the term the “Company,” “we,” “us,” “our” and other similar terms
mean (a) prior to the Merger, OSI Restaurant Partners, Inc. and
(b) after the Merger, OSI Restaurant Partners, LLC.




Our
assets and liabilities were assigned values, part carryover basis pursuant to
EITF No. 88-16, and part fair value, similar to a step acquisition, pursuant to
EITF No. 90-12.  As a result, retained earnings and accumulated
depreciation were zero after the allocation was
completed.  Depreciation and amortization are higher in the Successor
period due to these fair value assessments resulting in increases to the
carrying value of property, plant and equipment and intangible
assets.
  Interest
expense has increased substantially in the Successor period in connection with
our new financing arrangements.  These arrangements include the
issuance of senior notes in an aggregate principal amount of $550,000,000 and
senior secured credit facilities with a syndicate of institutional lenders and
financial institutions. The senior secured credit facilities provide for senior
secured financing of up to $1,560,000,000, consisting of a $1,310,000,000 term
loan facility, a $150,000,000 working capital revolving credit facility,
including letter of credit and swing-line loan sub-facilities, and a
$100,000,000 pre-funded revolving credit facility that provides financing for
capital expenditures only.





Merger
expenses of approximately $1,778,000, $33,174,000 and $2,175,000 for the three
months ended September 30, 2007, the period from January 1 to June 14, 2007 and
the period from June 15 to September 30, 2007, respectively, management fees of
$2,600,000 and $7,273,000 for the three and nine months ended September 30,
2008, respectively, and management fees of $2,445,000 for the three months ended
September 30, 2007 and $2,869,000 for the period from June 15 to September 30,
2007 were included in General and administrative expenses in our Consolidated
Statements of Operations and reflect primarily the professional service costs
incurred in connection with the Merger and the management services provided by
our Management Company (see “Liquidity and Capital Resources” included in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”).


42
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Items
Affecting Comparability (continued)





In
connection with the Merger, we caused our wholly-owned subsidiaries to sell
substantially all of our domestic restaurant properties at fair market value to
our newly-formed sister company, PRP, for approximately
$987,700,000.  PRP then simultaneously leased the properties to
Private Restaurant Master Lessee, LLC (“Master Lessee”), our wholly-owned
subsidiary, under a market rate master lease.  In accordance with SFAS
No. 98, the sale at fair market value to PRP and subsequent leaseback by Master
Lessee qualified for sale-leaseback accounting treatment and no gain or loss was
recorded.  The market rate master lease is a triple net lease with a
15-year term.  The sale of substantially all of our domestic
wholly-owned restaurant properties to PRP and entry into the market rate master
lease and the underlying subleases resulted in operating leases for us and is
referred to as the “PRP Sale-Leaseback Transaction.”  Rent expense has
increased substantially in the Successor period in connection with the PRP
Sale-Leaseback Transaction since these properties were previously
owned.





We
identified six restaurant properties included in the PRP Sale-Leaseback
Transaction that failed to qualify for sale-leaseback accounting treatment in
accordance with SFAS No. 98, as we had an obligation to repurchase
such properties from PRP under certain circumstances. If within one year from
the PRP Sale-Leaseback Transaction all title defects and construction work at
such properties were not corrected, we were required to notify PRP of the intent
to repurchase such properties at the original purchase price.  We
included approximately $17,825,000 for the fair value of these properties in the
line items “Property, fixtures and equipment, net” and “Current portion of
long-term debt” in our Consolidated Balance Sheet at December 31, 2007. The
lease payments made pursuant to the lease agreement were treated as interest
expense until the requirements for sale-leaseback treatment were achieved or we
notified PRP of the intent to repurchase the properties.  Within the
one-year period, title transfer had occurred and sale-leaseback treatment was
achieved for four of the properties.  We notified PRP of the intent to
repurchase the remaining two properties for a total of $6,450,000 and had 150
days from the expiration of the one-year period in which to make this payment to
PRP in accordance with the terms of the agreement.  Since the payment
was not required to be made as of September 30, 2008, we included $6,450,000 for
the fair value of these properties in the line items “Property, fixtures and
equipment, net” and “Current portion of long-term debt” in our Consolidated
Balance Sheet at September 30, 2008.  On October 6, 2008, we paid
$6,450,000 to PRP for these remaining two restaurant
properties.


43
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Results
of Operations





The
following table sets forth our combined, consolidated results of operations for
the nine months ended September 30, 2007.  The nine months ended
September 30, 2007 includes the results of operations for the period from
January 1, 2007 to June 14, 2007 of the Predecessor and the results of
operations for the period from June 15, 2007 to September 30, 2007 of the
Successor on a combined basis.





Although
this presentation does not comply with generally accepted accounting principles
in the United States (“U.S. GAAP”), we believe it provides a meaningful method
of comparing the current period to the prior period that includes both
Predecessor and Successor results.  The combined information is the
result of adding the Successor and Predecessor columns and does not include any
pro forma assumptions or adjustments.





The
following table presents our consolidated results of operations for the periods
from January 1, 2007 to June 14, 2007 (Predecessor) and June 15, 2007 to
September 30, 2007 (Successor) and the combination of the results of these
periods (in thousands):





NON-GAAPCOMBINEDPREDECESSOR/PREDECESSOR
            
            
            SUCCESSOR
            
            
            SUCCESSORPERIOD
            
            
            PERIOD
            
            
            NINEFROM
            
            
            FROM
            
            
            MONTHSJANUARY
      1 to
            
            
            JUNE
      15 to
            
            
            ENDEDJUNE
      14,
            
            
            SEPTEMBER
      30,
            
            
            SEPTEMBER
      30,2007
            
            
            2007
            
            
            2007RevenuesRestaurant
      sales
            
            $
            1,916,689
            
            
            $
            1,200,114
            
            
            $
            3,116,803Other
      revenues
            
            
            9,948
            
            
            
            5,956
            
            
            
            15,904Total
      revenues
            
            
            1,926,637
            
            
            
            1,206,070
            
            
            
            3,132,707Costs
      and expensesCost
      of sales
            
            
            681,455
            
            
            
            429,061
            
            
            
            1,110,516Labor
      and other related
            
            
            540,281
            
            
            
            338,380
            
            
            
            878,661Other
      restaurant operating
            
            
            440,545
            
            
            
            297,156
            
            
            
            737,701Depreciation
      and amortization
            
            
            74,846
            
            
            
            53,063
            
            
            
            127,909General
      and administrative
            
            
            158,147
            
            
            
            70,613
            
            
            
            228,760Provision
      for impaired assets and restaurant closings
            
            
            8,530
            
            
            
            3,220
            
            
            
            11,750Loss
      (income) from operations of unconsolidated affiliates
            
            
            692
            
            
            
            (139
            )
            
            
            553Total
      costs and expenses
            
            
            1,904,496
            
            
            
            1,191,354
            
            
            
            3,095,850Income
      from operations
            
            
            22,141
            
            
            
            14,716
            
            
            
            36,857Interest
      income
            
            
            1,561
            
            
            
            3,271
            
            
            
            4,832Interest
      expense
            
            
            (6,212
            )
            
            
            (51,411
            )
            
            
            (57,623
            )Income
      (loss) before benefit from income taxes andminority
      interest in consolidated entities' income (loss)
            
            
            17,490
            
            
            
            (33,424
            )
            
            
            (15,934
            )Benefit
      from income taxes
            
            
            (1,656
            )
            
            
            (16,593
            )
            
            
            (18,249
            )Income
      (loss) before minority interest inconsolidated
      entities' income (loss)
            
            
            19,146
            
            
            
            (16,831
            )
            
            
            2,315Minority
      interest in consolidated entities' income (loss)
            
            
            1,685
            
            
            
            (287
            )
            
            
            1,398Net
      income (loss)
            
            $
            17,461
            
            
            $
            (16,544
            )
            
            $
            917


44
 Table of Contents




OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Results
of Operations (continued)





The
following tables set forth, for the periods indicated, (i) percentages that
items in our Consolidated Statements of Operations bear to total revenues
or restaurant sales, as indicated, and (ii) selected operating data:





NON-GAAPCOMBINEDPREDECESSOR/SUCCESSOR
            
            
            SUCCESSORTHREE
            
            
            THREE
            
            
            NINE
            
            
            NINEMONTHS
            
            
            MONTHS
            
            
            MONTHS
            
            
            MONTHSENDED
            
            
            ENDED
            
            
            ENDED
            
            
            ENDEDSEPTEMBER
      30,
            
            
            SEPTEMBER
      30,
            
            
            SEPTEMBER
      30,
            
            
            SEPTEMBER
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007RevenuesRestaurant
      sales
            
            
            99.3
            %
            
            
            99.5
            %
            
            
            99.4
            %
            
            
            99.5
            %Other
      revenues
            
            
            0.7
            
            
            
            0.5
            
            
            
            0.6
            
            
            
            0.5Total
      revenues
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0Costs
      and expensesCost
      of sales (1)
            
            
            36.2
            
            
            
            35.9
            
            
            
            35.4
            
            
            
            35.6Labor
      and other related (1)
            
            
            28.2
            
            
            
            28.3
            
            
            
            27.9
            
            
            
            28.2Other
      restaurant operating (1)
            
            
            27.2
            
            
            
            24.8
            
            
            
            25.8
            
            
            
            23.7Depreciation
      and amortization
            
            
            5.0
            
            
            
            4.5
            
            
            
            4.7
            
            
            
            4.1General
      and administrative
            
            
            6.6
            
            
            
            5.9
            
            
            
            6.2
            
            
            
            7.3Provision
      for impaired assets and restaurant closings
            
            
            1.6
            
            
            
            0.2
            
            
            
            6.7
            
            
            
            0.4Income
      (loss) from operations of unconsolidated affiliates
            
            
            0.1
            
            
            
            *
            
            
            
            (0.1
            )
            
            
            *Total
      costs and expenses
            
            
            104.3
            
            
            
            99.2
            
            
            
            106.2
            
            
            
            98.8(Loss)
      income from operations
            
            
            (4.3
            )
            
            
            0.8
            
            
            
            (6.2
            )
            
            
            1.2Other
      expense, net
            
            
            (0.7
            )
            
            
            -
            
            
            
            (0.3
            )
            
            
            -Interest
      income
            
            
            0.2
            
            
            
            0.2
            
            
            
            0.1
            
            
            
            0.1Interest
      expense
            
            
            (3.8
            )
            
            
            (4.3
            )
            
            
            (3.5
            )
            
            
            (1.8
            )Loss
      before benefit from income taxes andminority
      interest in consolidated entities' income (loss)
            
            
            (8.6
            )
            
            
            (3.3
            )
            
            
            (9.9
            )
            
            
            (0.5
            )Benefit
      from income taxes
            
            
            (3.7
            )
            
            
            (1.5
            )
            
            
            (2.2
            )
            
            
            (0.6
            )(Loss)
      income before minority interest inconsolidated
      entities' income (loss)
            
            
            (4.9
            )
            
            
            (1.8
            )
            
            
            (7.7
            )
            
            
            0.1Minority
      interest in consolidated entities' income (loss)
            
            
            *
            
            
            
            (0.1
            )
            
            
            *
            
            
            
            0.1Net
      (loss) income
            
            
            (4.9
            )%
            
            
            (1.7
            )%
            
            
            (7.7
            )%
            
            
            *
            %


__________________


(1)
            As a
      percentage of restaurant sales.


*
            Less
      than 1/10 of one percent of total
revenues.


45
 Table of Contents




OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Results
of Operations (continued)





System-wide
sales declined by 5.2% and 2.7% for the three and nine months ended September
30, 2008, respectively, compared with the corresponding periods in
2007.  System-wide sales is a non-GAAP financial measure that includes
sales of all restaurants operating under our brand names, whether we own them or
not.  There are two components of system-wide sales, sales of
Company-owned restaurants of OSI Restaurant Partners, LLC and sales of
franchised and development joint venture restaurants.  The table below
presents the first component of system-wide sales, sales of Company-owned
restaurants:





NON-GAAPCOMBINEDPREDECESSOR/SUCCESSOR
            
            
            SUCCESSORTHREE
            
            
            THREE
            
            
            NINE
            
            
            NINEMONTHS
            
            
            MONTHS
            
            
            MONTHS
            
            
            MONTHSENDED
            
            
            ENDED
            
            
            ENDED
            
            
            ENDEDSEPTEMBER
      30,
            
            
            SEPTEMBER
      30,
            
            
            SEPTEMBER
      30,
            
            
            SEPTEMBER
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007COMPANY-OWNED
      RESTAURANT SALES(in
      millions):Outback
      SteakhousesDomestic
            
            $
            512
            
            
            $
            554
            
            
            $
            1,648
            
            
            $
            1,728International
            
            
            77
            
            
            
            80
            
            
            
            233
            
            
            
            243Total
            
            
            589
            
            
            
            634
            
            
            
            1,881
            
            
            
            1,971Carrabba's
      Italian Grills
            
            
            159
            
            
            
            168
            
            
            
            519
            
            
            
            530Bonefish
      Grills
            
            
            94
            
            
            
            93
            
            
            
            295
            
            
            
            278Fleming's
      Prime Steakhouse and Wine Bars
            
            
            48
            
            
            
            48
            
            
            
            160
            
            
            
            158Other
      restaurants
            
            
            52
            
            
            
            59
            
            
            
            162
            
            
            
            180Total
      Company-owned restaurant sales
            
            $
            942
            
            
            $
            1,002
            
            
            $
            3,017
            
            
            $
            3,117


46
 Table of Contents




OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Results
of Operations (continued)





The
following information presents the second component of system-wide sales,
sales of franchised and unconsolidated development joint venture
restaurants.  These are restaurants that are not owned by us and from
which we only receive a franchise royalty or a portion of their total
income.  Management believes that franchise and unconsolidated
development joint venture sales information is useful in analyzing our revenues
because franchisees and affiliates pay service fees and/or royalties that
generally are based on a percentage of sales.  Management also uses
this information to make decisions about future plans for the development of
additional restaurants and new concepts as well as evaluation of current
operations.





These
sales do not represent sales of OSI Restaurant Partners, LLC, and are presented
only as an indicator of changes in the restaurant system, which management
believes is important information regarding the health of our restaurant
brands.





NON-GAAPCOMBINEDPREDECESSOR/SUCCESSOR
            
            
            SUCCESSORTHREE
            
            
            THREE
            
            
            NINE
            
            
            NINEMONTHS
            
            
            MONTHS
            
            
            MONTHS
            
            
            MONTHSENDED
            
            
            ENDED
            
            
            ENDED
            
            
            ENDEDSEPTEMBER
      30,
            
            
            SEPTEMBER
      30,
            
            
            SEPTEMBER
      30,
            
            
            SEPTEMBER
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007FRANCHISE
      AND DEVELOPMENT JOINT VENTURE SALES(in
      millions) (1):Outback
      SteakhousesDomestic
            
            $
            78
            
            
            $
            86
            
            
            $
            251
            
            
            $
            269International
            
            
            43
            
            
            
            34
            
            
            
            119
            
            
            
            94Total
            
            
            121
            
            
            
            120
            
            
            
            370
            
            
            
            363Bonefish
      Grills
            
            
            4
            
            
            
            4
            
            
            
            12
            
            
            
            13Total
      franchise and development joint venture sales (1)
            
            $
            125
            
            
            $
            124
            
            
            $
            382
            
            
            $
            376Income
      from franchise and development joint ventures (2)
            
            $
            6
            
            
            $
            6
            
            
            $
            19
            
            
            $
            16


__________________


(1)
            Franchise
      and development joint venture sales are not included in revenues as
      reported in the Consolidated Statements of
  Operations.


(2)
            Represents
      the franchise royalty and portion of total income related to restaurant
      operations included in the Consolidated Statements of Operations in the
      line items “Other revenues” or “Loss (income) from operations of
      unconsolidated affiliates.”


47
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Results
of Operations (continued)





The
following table reflects the number of full-service restaurants by concept and
ownership structures as of September 30, 2008 and 2007:




SUCCESSORSEPTEMBER
      30,2008
              
              
              2007Number
      of restaurants (at end of the period):Outback
      SteakhousesCompany-owned
      - domestic
              
              
              688
              
              
              
              687Company-owned
      - international
              
              
              131
              
              
              
              127Franchised
      and development joint venture - domestic
              
              
              107
              
              
              
              108Franchised
      and development joint venture - international
              
              
              53
              
              
              
              47Total
              
              
              979
              
              
              
              969Carrabba's
      Italian GrillsCompany-owned
              
              
              237
              
              
              
              237Bonefish
      GrillsCompany-owned
              
              
              145
              
              
              
              131Franchised
      and development joint venture
              
              
              7
              
              
              
              7Total
              
              
              152
              
              
              
              138Fleming’s
      Prime Steakhouse and Wine BarsCompany-owned
              
              
              58
              
              
              
              52OtherCompany-owned
              
              
              73
              
              
              
              76System-wide
      total
              
              
              1,499
              
              
              
              1,472




None of
our individual brands are considered separate reportable segments for purposes
of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information” (“SFAS No. 131”) as the brands have similar economic
characteristics, nature of products and services, class of customer and
distribution methods.


48
 Table of Contents




OSI
Restaurant Partners, LLC
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Three
months ended September 30, 2008 (Successor) compared to three months ended
September 30, 2007 (Successor)





REVENUES





Restaurant sales.Restaurant
sales decreased by 6.0% or $59,704,000 during the three months ended September
30, 2008 as compared with the same period in 2007.  This decrease was
primarily attributable to decreases in sales volume at existing restaurants and
was partially offset by additional revenues of approximately $27,710,000 from
the opening of 42 new restaurants after September 30, 2007.  The
following table includes additional information about changes in restaurant
sales at domestic Company-owned restaurants for the three months ended September
30, 2008 and 2007:





SUCCESSORTHREE
      MONTHS ENDEDSEPTEMBER
      30,2008
            
            
            2007Average
      restaurant unit volumes (weekly):Outback
      Steakhouses
            
            $
            56,782
            
            
            $
            61,523Carrabba's
      Italian Grills
            
            $
            51,052
            
            
            $
            53,847Bonefish
      Grills
            
            $
            49,295
            
            
            $
            54,975Fleming's
      Prime Steakhouse and Wine Bars
            
            $
            64,237
            
            
            $
            71,963Operating
      weeks:Outback
      Steakhouses
            
            
            9,036
            
            
            
            9,010Carrabba's
      Italian Grills
            
            
            3,115
            
            
            
            3,115Bonefish
      Grills
            
            
            1,897
            
            
            
            1,690Fleming's
      Prime Steakhouse and Wine Bars
            
            
            749
            
            
            
            672Year
      to year percentage change:Menu
      price increases:Outback
      Steakhouses
            
            
            3.9
            %
            
            
            0.7
            %Carrabba's
      Italian Grills
            
            
            1.6
            %
            
            
            2.6
            %Bonefish
      Grills
            
            
            1.8
            %
            
            
            1.7
            %Fleming's
      Prime Steakhouse and Wine Bars
            
            
            4.1
            %
            
            
            4.5
            %Same-store
      sales (stores open 18 months or more):Outback
      Steakhouses
            
            
            -7.9
            %
            
            
            1.3
            %Carrabba's
      Italian Grills
            
            
            -5.7
            %
            
            
            -1.6
            %Bonefish
      Grills
            
            
            -10.2
            %
            
            
            -2.7
            %Fleming's
      Prime Steakhouse and Wine Bars
            
            
            -9.7
            %
            
            
            -2.5
            %





COSTS AND
EXPENSES





Cost of sales.Cost of sales,
consisting of food and beverage costs, increased by 0.3% of restaurant sales to
36.2% in the third quarter of 2008 as compared with 35.9% in the same period in
2007.  Of the increase as a percentage of restaurant sales, 2.0% was
due to increases in produce, seafood, beef, dairy and cooking oil costs and 0.1%
resulted from certain promotions at Bonefish Grill and Fleming’s Prime
Steakhouse and Wine Bar.  This increase as a percentage of restaurant
sales was partially offset by general menu price increases that positively
impacted cost of sales by 1.1% as a percentage of restaurant sales and certain
Outback Steakhouse and Carrabba’s Italian Grill cost savings initiatives that
positively impacted cost of sales by 0.7% as a percentage of restaurant
sales.




49
 Table of Contents





OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Three
months ended September 30, 2008 (Successor) compared to three months ended
September 30, 2007 (Successor) (continued)





COSTS AND EXPENSES
(continued)





Labor and other related
expenses. Labor and other related expenses include all direct and
indirect labor costs incurred in operations, including distribution expense to
managing partners, costs related to the Partner Equity Plan (the “PEP”) and
other stock-based and incentive compensation expenses.  Labor and
other related expenses decreased 0.1% as a percentage of restaurant sales to
28.2% in the third quarter of 2008 as compared with 28.3% in the same period in
2007.  Of the decrease as a percentage of restaurant sales,
approximately 0.7% was attributable to Outback Steakhouse cost savings
initiatives, 0.4% was a result of decreases in PEP expense, 0.2% was due to
reduced deferred compensation expenses and 0.2% was from a decrease in worker’s
compensation insurance expense and a reduction in distribution expense to
managing partners.  The decrease was partially offset by increases as
a percentage of restaurant sales of 0.7% as a result of declines in average unit
volumes, 0.3% for an increase in health insurance costs and 0.3% from higher
kitchen and service labor costs.  Additionally, increases in the
proportion of new restaurant formats, which have higher average labor costs than
domestic Outback Steakhouses and Carrabba’s Italian Grills, increased labor
and other related expenses by 0.1% as a percentage of restaurant sales compared
to the third quarter of 2007.





Other restaurant operating
expenses.  Other restaurant operating expenses include certain
unit-level operating costs such as operating supplies, rent, repair and
maintenance, advertising expenses, utilities, pre-opening costs and other
occupancy costs. A substantial portion of these expenses is fixed or indirectly
variable.  These costs increased 2.4% to 27.2% as a percentage of
restaurant sales in the third quarter of 2008 as compared with 24.8% in the same
period in 2007.  Of the increase as a percentage of restaurant sales,
approximately 1.0% was from declines in average unit volumes, 0.6% was due to
increases in advertising expenses, 0.3% resulted from higher utility costs, 0.3%
was attributable to an increase in general liability insurance expense, 0.2%
resulted from greater repair and maintenance and supply costs and 0.1% was due
to higher occupancy costs.  The increase was partially offset by a
decrease as a percentage of restaurant sales of 0.1% from a reduction in
pre-opening costs.





Depreciation and
amortization. Depreciation and amortization costs increased 0.5% as a
percentage of total revenues to 5.0% in the third quarter of 2008 as compared
with 4.5% in the same period in 2007.  This increase occurred as a
result of declines in average unit volumes, additional expense from the opening
of new restaurants and higher depreciation costs for certain of our newer
restaurant formats, which have higher average construction costs than Outback
Steakhouses.





General and administrative.
General and administrative costs increased by $3,498,000 to $62,823,000 in the
third quarter of 2008 as compared with $59,325,000 in the same period in
2007.  This increase primarily resulted from a loss of $6,500,000 on
the cash surrender value of life insurance and an increase of $4,600,000 in
legal and bonus expenses.  The increase was partially offset by a
reduction of $1,500,000 in distribution expense to area operating partners and
savings realized from the non-recurrence of certain expenses from the third
quarter of 2007 such as $2,200,000 of consulting and professional fees and
$1,400,000 of deferred compensation expense for corporate
employees.


50
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Three
months ended September 30, 2008 (Successor) compared to three months ended
September 30, 2007 (Successor) (continued)





COSTS AND EXPENSES
(continued)





Provision for impaired assets and
restaurant closings.  During the third quarter of 2008 and
2007, we recorded a provision for impaired assets and restaurant closings of
$15,277,000 and $2,456,000, respectively, for impairment charges for certain of
our restaurants.  These fixed asset impairment charges occurred as a
result of the book value of an asset group exceeding its estimated fair
value.  Each of our restaurants is evaluated individually for impairment
since that is the lowest level at which identifiable cash flows can be measured
independently of other asset groups.  Restaurant fair value is
determined based on estimates of future cash flows.





Loss (income) from operations of
unconsolidated affiliates.Loss (income) from operations of
unconsolidated affiliates represents our portion of net loss (income) from
restaurants operated as development joint ventures. Loss from development joint
ventures increased by $1,142,000 in the third quarter of 2008 compared to the
same period in 2007 primarily as a result of a decrease in income from our joint
venture in Brazil.





Other expense,
net.Other expense, net, for the three months ended September
30, 2008, included foreign currency transaction losses of $6,391,000 on
international investments.





Interest expense. Interest
expense was $36,564,000 in the third quarter of 2008 as compared with
$43,747,000 in the same period in 2007. The decrease in interest expense
resulted from lower interest rates in the third quarter of 2008 compared with
the third quarter of 2007.  Interest expense for the quarters ended
September 30, 2008 and 2007 included approximately $317,000 and $487,000,
respectively, of expense from outstanding borrowings on the line of credit held
by a limited liability company owned by our California franchisee.





Benefit from income taxes.
 The benefit from income taxes reflects expected income taxes due at
federal statutory and state income tax rates, net of the federal
benefit.  The effective income tax rate for the third quarter of 2008
was 43.1% compared to 47.6% for the third quarter of 2007.  The
decrease in the effective income tax rate is primarily due to a decrease in the
expected FICA tax credit for employee-reported tips as a percentage of projected
pretax loss.


51
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Nine
months ended September 30, 2008 (Successor) compared to nine months ended
September 30, 2007 (Combined)





REVENUES





Restaurant
sales.  Restaurant sales decreased by 3.2% or $99,974,000
during the first nine months of 2008 as compared with the same period in
2007.  This decrease was primarily attributable to decreases in sales
volume at existing restaurants and was partially offset by additional revenues
of approximately $65,177,000 from the opening of 42 new restaurants after
September 30, 2007.  The following table includes additional
information about changes in restaurant sales at domestic Company-owned
restaurants for the nine months ended September 30, 2008 and 2007:





NON-GAAPCOMBINEDPREDECESSOR/SUCCESSOR
            
            
            SUCCESSORNINE
            
            
            NINEMONTHS
            
            
            MONTHSENDED
            
            
            ENDEDSEPTEMBER
      30,
            
            
            SEPTEMBER
      30,2008
            
            
            2007Average
      restaurant unit volumes (weekly):Outback
      Steakhouses
            
            $
            61,252
            
            
            $
            64,791Carrabba's
      Italian Grills
            
            $
            55,930
            
            
            $
            57,877Bonefish
      Grills
            
            $
            53,807
            
            
            $
            58,165Fleming's
      Prime Steakhouse and Wine Bars
            
            $
            73,136
            
            
            $
            81,815Operating
      weeks:Outback
      Steakhouses
            
            
            26,930
            
            
            
            26,683Carrabba's
      Italian Grills
            
            
            9,283
            
            
            
            9,158Bonefish
      Grills
            
            
            5,479
            
            
            
            4,782Fleming's
      Prime Steakhouse and Wine Bars
            
            
            2,181
            
            
            
            1,932Year
      to year percentage change:Menu
      price increases:Outback
      Steakhouses
            
            
            3.6
            %
            
            
            0.5
            %Carrabba's
      Italian Grills
            
            
            1.6
            %
            
            
            2.9
            %Bonefish
      Grills
            
            
            1.5
            %
            
            
            1.7
            %Fleming's
      Prime Steakhouse and Wine Bars
            
            
            4.1
            %
            
            
            5.6
            %Same-store
      sales (stores open 18 months or more):Outback
      Steakhouses
            
            
            -5.2
            %
            
            
            0.3
            %Carrabba's
      Italian Grills
            
            
            -3.2
            %
            
            
            -1.3
            %Bonefish
      Grills
            
            
            -7.3
            %
            
            
            -1.4
            %Fleming's
      Prime Steakhouse and Wine Bars
            
            
            -8.1
            %
            
            
            1.1
            %





COSTS AND
EXPENSES





Cost of sales.Cost
of sales, consisting of food and beverage costs, decreased by 0.2% of restaurant
sales to 35.4% in the first nine months of 2008 as compared with 35.6% in the
same period in 2007.  Of the decrease as a percentage of restaurant
sales, 1.0% was a result of general menu price increases and 0.5% was due to the
impact of certain Outback Steakhouse and Carrabba’s Italian Grill cost savings
initiatives.  This decrease as a percentage of restaurant sales was
partially offset by increases in seafood, beef, dairy, produce and cooking oil
costs that negatively impacted cost of sales by 1.3% as a percentage of
restaurant sales.


52
 Table of Contents




OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Nine
months ended September 30, 2008 (Successor) compared to nine months ended
September 30, 2007 (Combined) (continued)





COSTS AND EXPENSES
(continued)





Labor and other related
expenses. Labor and other related expenses include all direct and
indirect labor costs incurred in operations, including distribution expense to
managing partners, costs related to the PEP and other stock-based and incentive
compensation expenses.  Labor and other related expenses decreased
0.3% as a percentage of restaurant sales to 27.9% in the first nine months of
2008 as compared with 28.2% in the same period in 2007.  Of the
decrease as a percentage of restaurant sales, approximately 0.5% was
attributable to Outback Steakhouse cost savings initiatives, 0.4% was due to
reduced deferred compensation expenses, 0.3% was a result of decreases in PEP
expense and 0.2% was from a reduction in distribution expense to managing
partners.  The decrease was partially offset by increases as a
percentage of restaurant sales of approximately 0.4% from higher kitchen and
service labor costs, 0.4% as a result of declines in average unit volumes and
0.2% for an increase in health insurance
costs.  Additionally, increases in the proportion of new
restaurant formats, which have higher average labor costs than domestic Outback
Steakhouses and Carrabba’s Italian Grills, increased labor and other
related expenses by 0.1% as a percentage of restaurant sales compared to the
third quarter of 2007.





Other restaurant operating
expenses.  Other restaurant operating expenses include certain
unit-level operating costs such as operating supplies, rent, repair and
maintenance, advertising expenses, utilities, pre-opening costs and other
occupancy costs. A substantial portion of these expenses is fixed or indirectly
variable.  These costs increased 2.1% to 25.8% as a percentage of
restaurant sales in the first nine months of 2008 as compared with 23.7% in the
same period in 2007.  Of the increase as a percentage of restaurant
sales, approximately 1.4% was attributable to increased cash and non-cash rent
charges from PRP and increases in other occupancy costs, 0.6% was from declines
in average unit volumes, 0.2% was due to higher utilities costs, 0.1% was
attributable to increases in advertising expenses and 0.1% resulted from
amortization of net favorable leases and an increase in the proportion of new
format restaurants and international Outback Steakhouses in operation, which
have higher average restaurant operating expenses as a percentage of restaurant
sales than domestic Outback Steakhouses and Carrabba's Italian
Grills.  The increase was partially offset by decreases as a
percentage of restaurant sales of 0.2% from a reduction in pre-opening costs and
0.1% for lower supply and repair and maintenance costs.





Depreciation and
amortization. Depreciation and amortization costs increased 0.6% as a
percentage of total revenues to 4.7% in the first nine months of 2008 as
compared with 4.1% in the same period in 2007.  As a result of the
Merger, our assets and liabilities were assigned new values which are part
carryover basis and part fair value basis as of the closing date, June 14,
2007.  Depreciation and amortization costs as a percentage of total
revenues increased as a result of these fair value assessments that caused
increases to the carrying value of our property, plant and equipment and
intangible assets.  Additionally, increased depreciation expense as a
percentage of total revenues resulted from declines in average unit volumes, the
opening of new restaurants and higher depreciation costs for certain of our
newer restaurant formats, which have higher average construction costs than
Outback Steakhouses.





General and administrative.
General and administrative costs decreased by $39,457,000 to $189,303,000 in the
first nine months of 2008 as compared with $228,760,000 in the same period in
2007.  This decrease primarily was attributable to savings realized
from the non-recurrence of certain expenses from the first nine months of 2007
such as $35,349,000 of Merger expenses, $6,500,000 of deferred compensation
expense for corporate employees and $9,900,000 of consulting and professional
fees.  Other general and administrative costs decreases resulted from
a $6,662,000 offsetting gain from the sale of land in Las Vegas, Nevada in the
first nine months of 2008 and a reduction of $3,000,000 in distribution expense
to area operating partners.  These decreases were partially offset by
a loss of $11,200,000 on the cash surrender value of life insurance, $4,400,000
of additional corporate payroll in the first nine months of 2008 and $4,400,000
of additional management fees incurred in the first nine months of 2008 as a
result of the Merger.


53
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Nine
months ended September 30, 2008 (Successor) compared to nine months ended
September 30, 2007 (Combined) (continued)





COSTS AND EXPENSES
(continued)





Provision for impaired assets and
restaurant closings.  During the nine months ended September
30, 2008, we recorded a provision for impaired assets and restaurant closings of
$204,458,000 which included $161,589,000 of goodwill impairment charges for the
international Outback Steakhouse, Bonefish Grill and Fleming’s Prime Steakhouse
and Wine Bar concepts, $3,037,000 of impairment charges for the Carrabba’s
Italian Grill trade name, $3,462,000 of impairment charges for the Blue Coral
Seafood and Spirits trademark and $36,370,000 of impairment charges for certain
of our restaurants.  A provision of $11,750,000 was recorded during
the first nine months of 2007 which included $10,745,000 of impairment charges
for certain of our restaurants and an impairment charge of $1,005,000 related to
one of our corporate aircraft.





Our
review of the recoverability of goodwill was based primarily upon an analysis of
the discounted cash flows of the related reporting units as compared to the
carrying values.  We also used the discounted cash flow method to
determine the fair value of our intangible assets.  The goodwill and
trade name impairment charges occurred due to poor overall economic conditions,
declining sales at our restaurants and a challenging environment for the
restaurant industry.  The fixed asset impairment charges occurred as a
result of the book value of an asset group exceeding its estimated fair
value.  Each of our restaurants is evaluated individually for impairment
since that is the lowest level at which identifiable cash flows can be measured
independently of other asset groups.  Restaurant fair value is
determined based on estimates of future cash flows.





Loss (income) from operations of
unconsolidated affiliates. Loss (income) from operations of
unconsolidated affiliates represents our portion of net loss (income) from
restaurants operated as development joint ventures. Income from development
joint ventures increased by $2,432,000 in the first nine months of 2008 compared
to the same period in 2007 primarily as a result of an increase in income from
our joint venture in Brazil.





Other expense,
net.Other expense, net, for the nine months ended September
30, 2008, included foreign currency transaction losses of $10,196,000 on
international investments.





Interest
expense.  Interest expense was $106,351,000 in the first nine
months of 2008 as compared with $57,623,000 in the same period in 2007. The
increase in interest expense resulted from a significant increase in outstanding
debt as a result of the Merger.  Interest expense for the nine months
ended September 30, 2008 and 2007 included approximately $846,000 and
$1,453,000, respectively, of expense from outstanding borrowings on the line of
credit held by a limited liability company owned by our California
franchisee.





Benefit from income
taxes.  The benefit from income taxes reflects expected income taxes
due at federal statutory and state income tax rates, net of the federal
benefit.  The effective income tax rate for the first nine months of
2008 was 22.3% compared to (9.5)% and 49.6% for the periods from January 1 to
June 14, 2007 and from June 15 to September 30, 2007,
respectively.  The increase in the effective income tax rate for the
nine months ended September 30, 2008 as compared to the period from January 1 to
June 14, 2007 is primarily due to a change from pretax income in the prior
period to pretax loss in the current period.  Additionally, the
$161,589,000 goodwill impairment charge, which is not deductible for income tax
purposes as the goodwill is related to KHI’s acquisition of our stock, partially
offset the increase in the effective income tax rate.  The decrease in
the effective income tax rate for the nine months ended September 30, 2008 as
compared to the period from June 15 to September 30, 2007 was due to the
non-deductible goodwill impairment charge and to the expected FICA tax credit
for employee-reported tips being such a large percentage of projected pretax
income (loss) in the prior period.





Minority interest in consolidated
entities’ income (loss).The
allocation of minority owners’ income included in this line item represents the
portion of income or loss from operations included in consolidated operating
results attributable to the minority ownership interests in certain restaurants
in which we have a controlling interest. As a percentage of total revenues, the
income allocations were less than 0.1% for the first nine months of 2008
compared with 0.1% for the first nine months of 2007.  This decrease is
primarily due to declining operating results at Fleming’s Prime Steakhouse and
Wine Bar, Roy’s and Blue Coral Seafood and Spirits.


54
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Financial
Condition




The
non-current portion of restricted cash was $6,975,000 at September 30, 2008 as
compared with $32,237,000 at December 31, 2007 with the decrease due primarily
to the use of cash restricted for capital expenditures. Goodwill was
$902,282,000 at September 30, 2008 as compared with $1,060,529,000 at December
31, 2007.  This decrease was due to an aggregate goodwill impairment
loss of $161,589,000 recorded during the second quarter of 2008 for the
international Outback Steakhouse, Bonefish Grill and Fleming’s Prime Steakhouse
and Wine Bar concepts.
 
 Current
liabilities totaled $587,432,000 at September 30, 2008 as compared with
$589,341,000 at December 31, 2007.  This decrease primarily resulted
from a $79,461,000 decline in unearned revenue which represents our liability
for gift cards and certificates that have been sold but not yet redeemed and are
recorded at the redemption value.  Our unearned revenue is lower at
September 30, 2008 as compared to December 31, 2007 due to the seasonality of
gift card sales.    The decline in current liabilities is
partially offset by a $27,194,000 increase in accrued expenses due primarily to
increases in accrued interest and accrued payroll and other compensation at
September 30, 2008 as compared to December 31, 2007 and by a $52,168,000
increase in the current portion of long-term debt (see below).  The
decline in long-term debt to $1,766,654,000 at September 30, 2008 from
$1,808,475,000 at December 31, 2007 was primarily a result of classifying
$75,000,000 of our term loans as current at September 30, 2008 due to our
prepayment requirements.  This decline was partially offset by
borrowing $30,000,000 from our working capital revolving credit facility as of
September 30, 2008.  Other long-term liabilities, net totaled
$255,621,000 at September 30, 2008 as compared with $233,031,000 at December 31,
2007.  This increase was primarily due to an increase in our accrued
insurance liability.


Liq uidity
and Capital Resources





CURRENT
ECONOMIC CHALLENGES AND POTENTIAL IMPACTS OF MARKET CONDITIONS




We
require capital primarily for principal and interest payments on our debt,
prepayment requirements under our term loan facility (see “Credit Facilities and
Other Indebtedness” included in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”), obligations related to our
deferred compensation plans, the development of new restaurants, remodeling
older restaurants, investments in technology and acquisitions of franchisees and
joint venture partners.
 
 The
recent disruptions in the financial markets and the state of the economy may
limit our access to liquidity as a result of adverse changes in the economy,
including but not limited to: consumer confidence and spending patterns; the
availability of credit presently arranged from our revolving credit facilities;
the future cost and availability of credit; interest rates; foreign currency
exchange rates; and the liquidity or operations of our third-party vendors and
other service providers.
 
 Declines
in consumer confidence and spending patterns have reduced and may continue to
reduce our revenues and resulting cash flow from operations.  We have
attempted to mitigate the impact of these declines by implementing various
cost-saving initiatives, including food cost decreases via waste reduction and
supply chain efficiency, labor efficiency initiatives and reductions to general
and administrative expenses.  We have also developed new menu items to
appeal to value-conscious consumers and have used marketing campaigns to promote
these items.
  Continued
deterioration in the financial markets could adversely affect our ability to
borrow under our revolving credit facilities.  At this time, none of
our institutional lenders on our senior secured credit facilities have
failed.  In consideration of current economic conditions, we borrowed
$30,000,000 from our working capital revolving credit facility in the third
quarter of 2008 and an additional $20,000,000 in October 2008 to ensure the
availability of these funds.  We have invested the entire $50,000,000
in short-term investments.


55
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





CURRENT
ECONOMIC CHALLENGES AND POTENTIAL IMPACTS OF MARKET CONDITIONS
(continued)




At
September 30, 2008 and December 31, 2007, our Moody’s Applicable Corporate
Rating was B2.  In October 2008, Standard & Poor's Ratings
Services lowered our corporate credit rating to B- from B, and in November 2008,
our Moody’s Applicable Corporate Rating was downgraded to Caa1.  Our
credit agreement does not penalize us for a downgrade in our credit
ratings.  We have not experienced a material change and do not
anticipate experiencing a material change in vendor pricing or supply as a
result of the downgrades in our credit ratings from Standard and Poor’s and
Moody’s Investors Service.
 
 Downgrades
in our credit ratings and further disruptions in the financial markets could
affect our ability to obtain future credit and the cost of that
credit.  Within the next twelve months, three of our debt guarantees
will be renegotiated or potentially terminated, as either the lines of credit
that we guarantee expire or the debt for which we are a partial guarantor is
assumed by a third party through an asset purchase agreement (see “Debt
Guarantees” included in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”).  Depending on the outcome of
the renegotiations and the asset purchase agreement, we may have to perform
under our guarantees or consolidate additional debt on our Consolidated Balance
Sheet.  At this time, we believe we have sufficient liquidity from our
cash, short-term investments, restricted cash and available borrowing capacity
on our revolving credit facilities to allow us to perform under the guarantees,
if necessary.
 
 Variable
interest rates on the senior secured term loan facility fluctuated during the
nine months ended September 30, 2008 (between 7.13% at December 31, 2007 and
6.00% at September 30, 2008).  Although the rates experienced an
overall decline in 2008, they were higher at September 30, 2008 as compared with
June 30, 2008 (5.13%).  The amount of required interest payments on
our debt will change as interest rates fluctuate.
 
 Current
market conditions have impacted our foreign currency exchange
rates.  We anticipate declines in our international operating results
in the fourth quarter of 2008 and in 2009, partially due to the depreciation of
foreign currency exchange rates for several countries in which we
operate.
 
 The
challenging economy may adversely affect our suppliers and other third-party
service providers.  At this time, however, we do not anticipate an
interruption in supplies from our most significant vendors.  In
October 2008, we committed $1,260,000 of our working capital revolving credit
facility for the issuance of two short-term letters of credit for two of our
energy providers.  We may have to extend additional letters of credit
to our suppliers, and we currently have $20,700,000 remaining on our working
capital revolving credit facility for the issuance of letters of credit. Our
insurance reserves have not been affected by the disruptions in the financial
markets, and we anticipate being able to renew our policies.  Any
changes in our counterparty credit risk for our interest rate collar have been
accounted for in the fair value measurement of the derivative (see “Fair Value
Measurements” included in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”).
 
 We
believe that expected cash flow from operations, planned borrowing capacity,
short-term investments and restricted cash balances are adequate to fund debt
service requirements, operating lease obligations, capital expenditures and
working capital obligations for the foreseeable future.  However, our
ability to continue to meet these requirements will depend partially on our
ability to achieve anticipated levels of revenue and cash flow and to manage
costs.  If our cash flow and capital resources are insufficient to
fund our debt service obligations and operating lease obligations, we may be
forced to reduce or delay capital expenditures, or to sell assets, seek
additional capital or restructure or refinance our indebtedness, including the
senior notes.  These alternative measures may not be successful and
may not permit us to meet our scheduled debt service obligations. In the absence
of sufficient operating results and resources, we could face a substantial
liquidity shortfall and might be required to dispose of material assets or
operations to meet our debt service and other obligations. Our senior secured
credit facilities and the indenture governing the senior notes restrict our
ability to dispose of assets and use the proceeds from the disposition. We may
not be able to consummate those dispositions or to obtain the proceeds that we
could otherwise realize from such dispositions and any such proceeds that are
realized may not be adequate to meet any debt service obligations then
due.  The failure to meet our debt service obligations or the failure
to remain in compliance with the financial covenants under our senior secured
credit facilities, as described below, would constitute an event of default
under those facilities and the lenders could elect to declare all amounts
outstanding under the senior secured credit facilities to be immediately due and
payable and terminate all commitments to extend further credit.  See
“Risk Factors.”




56
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





CURRENT
ECONOMIC CHALLENGES AND POTENTIAL IMPACTS OF MARKET CONDITIONS
(continued)




Our
senior secured credit facilities require us to comply with certain financial
covenants, including a quarterly maximum total leverage ratio test, and, subject
to our exceeding a minimum rent-adjusted leverage level, an annual minimum free
cash flow test.  At September 30, 2008, we were in compliance with
these covenants.  However, our continued compliance with these
covenants will depend on our future levels of cash flow, which will be affected
by our ability to successfully reduce our costs, implement efficiency programs
and improve our working capital management.  If, as a result of the
economic challenges described above or otherwise, our revenue and resulting cash
flow decline to levels that cannot be offset by reductions in costs, efficiency
programs and improvements in working capital management, we may not remain in
compliance with the leverage ratio and free cash flow covenants in our senior
secured credit facilities agreement.  In the event of this occurrence,
we intend to take such actions available to us as we determine to be appropriate
at such time, which may include, but are not limited to, engaging in a permitted
equity issuance, seeking a waiver from our lenders, amending the terms of such
facilities, including the covenants described above, or refinancing all or a
portion of our senior secured credit facilities under modified
terms.  There can be no assurance that we will be able to effect any
such actions or terms acceptable to us or at all or that such actions will be
successful in maintaining our covenant compliance.




CAPITAL
EXPENDITURES
 Capital
expenditures totaled approximately $88,585,000, $119,359,000 and $56,586,000 for
the nine months ended September 30, 2008 and the periods from January 1 to June
14, 2007 and June 15 to September 30, 2007, respectively.  We estimate that
our capital expenditures will be approximately $220,000,000 or less in total for
2008 and 2009. However, the amount of actual capital expenditures may be
affected by general economic, financial, competitive, legislative and regulatory
factors, among other things, including restrictions imposed by our borrowing
arrangements. We expect to continue to review the level of capital expenditures
throughout the remainder of 2008 and 2009.


57
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)




SUMMARY
OF CASH FLOWS
 
 The
following table presents a summary of our cash flows from operating, investing
and financing activities for the periods indicated (in thousands):
 
 SUCCESSOR
              
              
              PREDECESSORNINE
              
              
              PERIOD
              
              
              PERIODMONTHS
              
              
              FROM
              
              
              FROMENDED
              
              
              JUNE
      15 to
              
              
              JANUARY
      1 toSEPTEMBER
      30,
              
              
              SEPTEMBER
      30,
              
              
              JUNE
      14,2008
              
              
              2007
              
              
              2007Net
      cash provided by operating activities
              
              $
              43,439
              
              
              $
              9,962
              
              
              $
              155,633Net
      cash used in investing activities
              
              
              (49,389
              )
              
              
              (2,301,274
              )
              
              
              (119,753
              )Net
      cash provided by (used in) financing activities
              
              
              3,760
              
              
              
              2,309,592
              
              
              
              (87,906
              )Net
      (decrease) increase in cash and cash equivalents
              
              $
              (2,190
              )
              
              $
              18,280
              
              
              $
              (52,026
              )
 
 Operating
activities.
  Net cash
provided by operating activities for the nine months ended September 30, 2008
was $43,439,000 compared to $155,633,000 and $9,962,000 for the periods from
January 1 to June 14, 2007 and June 15 to September 30, 2007, respectively. The
decrease is primarily attributable to (1) an increase in cash paid for interest,
which was $85,676,000 for the nine months ended September 30, 2008 compared to
$6,443,000 and $30,994,000 for the periods from January 1 to June 14, 2007 and
June 15 to September 30, 2007, respectively, (2) an increase in cash paid for
rent, which was $138,510,000 for the nine months ended September 30, 2008
compared to $50,809,000 and $48,932,000 for the periods from January 1 to June
14, 2007 and June 15 to September 30, 2007, respectively and (3) lower
restaurant income from operations.
 Investing
activities.
 
 Net cash
used in investing activities for the nine months ended September 30, 2008 was
($49,389,000) compared to ($119,753,000) and ($2,301,274,000) for the periods
from January 1 to June 14, 2007 and June 15 to September 30, 2007, respectively.
Net cash used in investing activities for the nine months ended September 30,
2008 primarily includes capital expenditures of $88,585,000.  Net cash
used in investing activities for the period from January 1 to June 14, 2007
primarily includes capital expenditures of $119,359,000. Net cash used in
investing activities for the period from June 15 to September 30, 2007 primarily
includes the acquisition of OSI for $3,092,274,000 and was partially offset by
$925,090,000 in proceeds from sale-leaseback transactions.
 
 Financing
activities.
 
 Net cash
provided by (used in) financing activities for the nine months ended September
30, 2008 was $3,760,000 compared to ($87,906,000) and $2,309,592,000 for the
periods from January 1 to June 14, 2007 and June 15 to September 30, 2007. Net
cash provided by financing activities during the nine months ended September 30,
2008 was primarily from $30,034,000 of proceeds from issuance of long-term debt
partially offset by repayments of long-term debt of $12,878,000.  Net
cash used in financing activities for the period from January 1 to June 14, 2007
primarily includes repayments of long-term debt of $210,834,000 and payment of
dividends of $9,887,000 and was partially offset by proceeds from issuance of
long-term debt of $123,648,000 and proceeds from exercise of employee stock
options of $14,477,000.  Net cash provided by financing activities for
the period from June 15 to September 30, 2007 primarily includes proceeds from
the issuances of long-term debt, the senior secured term loan facility,
revolving lines of credit, and senior notes totaling $1,889,400,000,
contributions from KHI of $42,413,000 and proceeds from the issuance of common
stock of $600,373,000 and was partially offset by repayments of long-term debt
of $152,018,000.




58
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





RECENT
TRANSACTIONS





In
connection with the Merger, we caused our wholly-owned subsidiaries to sell
substantially all of our domestic restaurant properties at fair market value to
our newly-formed sister company, PRP, for approximately
$987,700,000.  PRP then simultaneously leased the properties to Master
Lessee, our wholly-owned subsidiary, under a market rate master
lease.  In accordance with SFAS No. 98, the sale at fair market value
to PRP and subsequent leaseback by Master Lessee qualified for sale-leaseback
accounting treatment and no gain or loss was recorded.  The market
rate master lease is a triple net lease with a 15-year term.  We
account for leases under the PRP Sale-Leaseback Transaction as operating
leases.  Rent expense has increased substantially in the Successor
period in connection with the PRP Sale-Leaseback Transaction.





We
identified six restaurant properties included in the PRP Sale-Leaseback
Transaction that failed to qualify for sale-leaseback accounting treatment in
accordance with SFAS No. 98, as we had an obligation to repurchase
such properties from PRP under certain circumstances. If within one year from
the PRP Sale-Leaseback Transaction all title defects and construction work at
such properties were not corrected, we were required to notify PRP of the intent
to repurchase such properties at the original purchase price.  Within
the one-year period, title transfer had occurred and sale-leaseback treatment
was achieved for four of the properties.  We notified PRP of the
intent to repurchase the remaining two properties for a total of $6,450,000 and
had 150 days from the expiration of the one-year period in which to make this
payment to PRP in accordance with the terms of the agreement.  On
October 6, 2008, we paid $6,450,000 to PRP for these remaining two restaurant
properties.





In
accordance with FIN 46R, we determined that PRP is a variable interest entity;
however we are not its primary beneficiary.  As a result, PRP has not been
consolidated into our financial statements.  If the market rate master
lease were to be terminated in connection with any default by us or if the
lenders under PRP’s real estate credit facility were to foreclose on the
restaurant properties as a result of a PRP default under its real estate credit
facility, we could, subject to the terms of a subordination and nondisturbance
agreement, lose the use of some or all of the properties that we lease under the
market rate master lease.





Upon
completion of the Merger, we entered into a financial advisory agreement with
certain entities affiliated with Bain Capital and Catterton who received
aggregate fees of approximately $30,000,000 for providing services related to
the Merger.  We also entered into a management agreement with Kangaroo
Management Company I, LLC (the “Management Company”), whose members are our
Founders and entities affiliated with Bain Capital and Catterton.  In
accordance with the terms of the agreement, the Management Company will provide
management services to us until the tenth anniversary of the consummation of the
Merger, with one-year extensions thereafter until terminated.  The
Management Company will receive an aggregate annual management fee equal to
$9,100,000 and reimbursement for out-of-pocket expenses incurred by it, its
members, or their respective affiliates in connection with the provision of
services pursuant to the agreement (see “Items Affecting Comparability” included
in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”).





Our
non-core concepts include Roy’s, Cheeseburger in Paradise, Lee Roy Selmon’s and
Blue Coral Seafood and Spirits.  Our long-range plan is to exit these
non-core concepts, but we do not have an established timeframe within which this
will occur.





In
October 2007, we entered into an agreement in principle to sell the majority of
our interest in our Lee Roy Selmon’s concept to an investor group led by Lee Roy
Selmon and Peter Barli, President of the concept. The agreement in principle has
expired, and we are no longer in discussions with this investor
group.


59
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





RECENT
TRANSACTIONS (continued)





In the
fourth quarter of 2007, we began marketing the Roy’s concept for sale. In May
2008, we determined that the Roy’s concept would not be marketed for sale at
this time due to poor overall market conditions.  We are, however,
marketing the sale of our Cheeseburger in Paradise concept.  As of
September 30, 2008, we determined that our Cheeseburger in Paradise concept does
not meet the assets held for sale criteria defined in SFAS No.
144.  However, if these criteria are met in the future, we may need to
record an impairment loss in the line item “Provision for impaired assets and
restaurant closings” in our Consolidated Statement of Operations, and this
impairment loss may be material to our consolidated financial
statements.





In
February 2008, we purchased ownership interests in eighteen Outback Steakhouse
restaurants and ownership interests in our Outback Steakhouse catering
operations from one of our area operating partners for $3,615,000. In April, KHI
also purchased this partner’s common shares in KHI for $300,000. The purchase of
KHI shares was facilitated through a loan from us to our direct owner, OSI
HoldCo, Inc.  In July 2008, OSI HoldCo, Inc. repaid the
loan.





On April
4, 2008, we sold a parcel of land in Las Vegas, Nevada for $9,800,000.  As
additional consideration, the purchaser is obligated to transfer and convey
title for an approximately 6,800 square foot condominium unit in the not yet
constructed condominium tower for us to utilize as a future full-service
restaurant.  Conveyance of title must be no later than September 9,
2012, subject to extensions, and both parties must agree to the plans and
specifications of the restaurant unit by September 9, 2010. If title does not
transfer or both parties do not agree to the plans and specifications per the
terms of the contract, then we will receive an additional $4,000,000 from the
purchaser.  We recorded a gain of $6,662,000 for this sale in the line
item “General and administrative” expense in our Consolidated Statements of
Operations for the nine months ended September 30, 2008 and recorded a
receivable of $1,200,000, which is included in the line item “Other Assets” in
our Consolidated Balance Sheet at September 30, 2008, for the estimated fair
market value of the condominium unit.





On July
1, 2008, we sold one of our aircraft for $8,100,000 to Billabong Air II, Inc.
(“Billabong”), which is owned by two of our Founders who are also our board
members and board members of KHI.  The proceeds from this sale will be
used for our working capital needs.  In conjunction with the sale of
the aircraft, we entered into a lease agreement with Billabong in which we may
lease up to 200 hours of flight time per year at a rate of $2,500 per
hour.  In accordance with the terms of the agreement, we must supply
our own fuel, pilots and maintenance staff when using the plane.  The
resulting $1,400,000 gain from the sale of the aircraft will be deferred and
recognized ratably over a five-year period.  As of September 30, 2008,
we had paid $105,000 to Billabong for use of the aircraft.





Prior to
the Merger, we were a party to a Stock Redemption Agreement with each of our
Founders, which provided that following a Founder’s death, the personal
representative of the Founder had the right to require us to purchase our
common stock beneficially owned by the Founder at the date of death. Our
obligation to purchase common stock beneficially owned by the Founders was
funded by key-man life insurance policies on the life of each of the
Founders.  These policies were owned by us and provided a death
benefit of $30,000,000 per Founder. In connection with the Merger, the Stock
Redemption Agreements were terminated and on September 5, 2008, we surrendered
the key-man insurance policies for approximately $5,900,000, the cash value at
that date.




On
October 16, 2008, we executed an asset purchase agreement to sell certain
non-restaurant operations that were previously subject to a licensing agreement.
We sold tangible assets with no remaining book value and relinquished the right
to receive cumulative future license fees of $6,000,000 over the remaining term
of the licensing agreement in exchange for a cash payment of $2,900,000. In
conjunction with this transaction, the previous licensing agreement was
terminated and a new three-year licensing agreement for use of one of our
trademarks was signed. We recorded a gain of approximately $800,000 from this
sale in October 2008.


60
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





CREDIT
FACILITIES AND OTHER INDEBTEDNESS





On June
14, 2007, in connection with the Merger, we entered into senior secured credit
facilities with a syndicate of institutional lenders and financial
institutions.  These senior secured credit facilities provide for
senior secured financing of up to $1,560,000,000, consisting of a $1,310,000,000
term loan facility, a $150,000,000 working capital revolving credit facility,
including letter of credit and swing-line loan sub-facilities, and a
$100,000,000 pre-funded revolving credit facility that provides financing for
capital expenditures only.





The
$1,310,000,000 term loan facility matures June 14, 2014, and its proceeds were
used to finance the Merger.  At each rate adjustment, we have the
option to select a Base Rate plus 125 basis points or a Eurocurrency Rate plus
225 basis points for the borrowings under this facility.  The Base
Rate option is the higher of the prime rate of Deutsche Bank AG New York Branch
and the federal funds effective rate plus 1⁄2 of 1% (5.00% at September 30, 2008
and 7.25% at December 31, 2007) (“Base Rate”).  The Eurocurrency Rate
option is the 30, 60, 90 or 180-day Eurocurrency Rate (ranging from 5.04% to
5.37% at September 30, 2008 and from 4.60% to 4.70% at December 31, 2007)
(“Eurocurrency Rate”).  The Eurocurrency Rate may have a nine- or
twelve-month interest period if agreed upon by the applicable
lenders.  With either the Base Rate or the Eurocurrency Rate, the
interest rate is reduced by 25 basis points if our Moody’s Applicable Corporate
Rating then most recently published is B1 or higher (B2 at September 30, 2008
and December 31, 2007). In
November 2008, our Moody’s Applicable Corporate Rating was downgraded to
Caa1.




We will
be required to prepay outstanding term loans, subject to certain exceptions,
with:





§
            50%
      of our “annual excess cash flow” (with step-downs to 25% and 0% based upon
      our rent-adjusted leverage ratio), as defined in the credit agreement and
      subject to certain exceptions;


§
            100%
      of our “annual minimum free cash flow,” as defined in the credit
      agreement, not to exceed $50,000,000 for the fiscal year ended December
      31, 2007 or $75,000,000 for each subsequent fiscal year, if our
      rent-adjusted leverage ratio exceeds a certain minimum
      threshold;


§
            100%
      of the net proceeds of certain assets sales and insurance and condemnation
      events, subject to reinvestment rights and certain other exceptions;
      and


§
            100%
      of the net proceeds of any debt incurred, excluding permitted debt
      issuances.





Additionally,
we will, on an annual basis, be required to (1) first, repay outstanding loans
under the pre-funded revolving credit facility and (2) second, fund a capital
expenditure account established on the closing date of the Merger to the extent
amounts on deposit are less than $100,000,000, in both cases with 100% of our
“annual true cash flow,” as defined in the credit agreement.  Since
there were no loans outstanding under the pre-funded revolving credit facility
at December 31, 2007, we were not required to make any repayments under the
pre-funded revolving credit facility in 2008.  In April 2008, we
funded our capital expenditure account with $90,018,000 for the year ended
December 31, 2007 using our “annual true cash flow.”  This funding
allows us to maintain our required deposit amount, as specified in the credit
agreement.





Our
senior secured credit facilities require scheduled quarterly payments on the
term loans equal to 0.25% of the original principal amount of the term loans for
the first six years and three quarters following the closing of the
Merger.  These payments will be reduced by the application of any
prepayments, and any remaining balance will be paid at maturity.  The
outstanding balance on the term loans was $1,250,175,000 and $1,260,000,000 at
September 30, 2008 and December 31, 2007, respectively.  We have
classified $75,000,000 of our term loans as current at September 30, 2008 due to
our prepayment requirements.


61
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





CREDIT
FACILITIES AND OTHER INDEBTEDNESS (continued)





Proceeds
of loans and letters of credit under the $150,000,000 working capital revolving
credit facility provide financing for working capital and general corporate
purposes and, subject to a rent-adjusted leverage condition, for capital
expenditures for new restaurant growth.  This revolving credit
facility matures June 14, 2013 and bears interest at rates ranging from 100 to
150 basis points over the Base Rate or 200 to 250 basis points over the
Eurocurrency Rate.  At September 30, 2008, the outstanding balance was
$30,000,000.  There were no loans outstanding under the revolving
credit facility at December 31, 2007.  In addition to outstanding
borrowings, if any, at September 30, 2008 and December 31, 2007, $53,040,000 and
$49,540,000, respectively, of the credit facility was not available for
borrowing as (i) $28,540,000 and $25,040,000, respectively, of the credit
facility was committed for the issuance of letters of credit as required by
insurance companies that underwrite our workers’ compensation insurance and
also, where required, for construction of new restaurants and (ii) $24,500,000
of the credit facility was committed for the issuance of a letter of credit for
our guarantee of an uncollateralized line of credit for our joint venture
partner, RY-8, Inc. (“RY-8”), in the development of Roy's
restaurants.  Subsequent to the end of the third quarter, we committed
$1,260,000 of our working capital revolving credit facility for the issuance of
two short-term letters of credit for two of our energy
providers.  Fees for the letters of credit range from 2.00% to 2.50%
and the commitment fees for unused working capital revolving credit commitments
range from 0.38% to 0.50%.  In October 2008, we borrowed an additional
$20,000,000 from our working capital revolving credit facility.





Proceeds
of loans under the $100,000,000 pre-funded revolving credit facility are
available to provide financing for capital expenditures once we fully utilize
$100,000,000 of restricted cash that was funded on the closing date of the
Merger.  At September 30, 2008 and December 31, 2007, $6,055,000 and
$29,002,000, respectively, of restricted cash remains available for capital
expenditures, and no draws are outstanding on the pre-funded revolving credit
facility.  This facility matures June 14, 2013.  At each
rate adjustment, we have the option to select the Base Rate plus 125 basis
points or a Eurocurrency Rate plus 225 basis points for the borrowings under
this facility.  In either case, the interest rate is reduced by 25
basis points if our Moody’s Applicable Corporate Rating then most recently
published is B1 or higher.




Our
senior secured credit facilities require us to comply with certain financial
covenants, including a quarterly maximum total leverage ratio test, and, subject
to our exceeding a minimum rent-adjusted leverage level, an annual minimum free
cash flow test.  Our senior secured credit facilities agreement also
includes negative covenants that, subject to significant exceptions, limit our
ability and the ability of our restricted subsidiaries to: incur liens, make
investments and loans, make capital expenditures (as described below), incur
indebtedness or guarantees, engage in mergers, acquisitions and assets sales,
declare dividends, make payments or redeem or repurchase equity interests, alter
our business, engage in certain transactions with affiliates, enter into
agreements limiting subsidiary distributions and prepay, redeem or purchase
certain indebtedness.  Our senior secured credit facilities contain
customary representations and warranties, affirmative covenants and events of
default.  At September 30, 2008, we were in compliance with these debt
covenants (see “Current Economic Challenges and Potential Impacts of Market
Conditions” included in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”).


Our
capital expenditures are limited by the credit agreement.  Our annual
capital expenditure limits range from $200,000,000 to $250,000,000 with various
carry-forward and carry-back allowances.  Our annual expenditure
limits may increase after an acquisition.  However, if (i) the rent
adjusted leverage ratio at the end of a fiscal year is greater than 5.25 to
1.00, (ii) the “annual true cash flows” are insufficient to repay fully our
pre-funded revolving credit facility and (iii) the capital expenditure account
has a zero balance, our capital expenditures will be limited to $100,000,000 for
the succeeding fiscal year.  This limitation will remain until there
are no pre-funded revolving credit facility loans outstanding and the amount on
deposit in the capital expenditures account is greater than zero or until the
rent adjusted leverage ratio is less than 5.25 to 1.00.


62
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





CREDIT
FACILITIES AND OTHER INDEBTEDNESS (continued)




The
obligations under our senior secured credit facilities are guaranteed by each of
our current and future domestic 100% owned restricted subsidiaries in our
Outback Steakhouse, Carrabba’s Italian Grill and Cheeseburger in Paradise
concepts and certain non-restaurant subsidiaries (the “Guarantors”) and by OSI
HoldCo, Inc. (our direct owner and a wholly-owned subsidiary of our Ultimate
Parent) and, subject to the conditions described below, are secured by a
perfected security interest in substantially all of our assets and assets of the
Guarantors and OSI HoldCo, Inc., in each case, now owned or later acquired,
including a pledge of all of our capital stock, the capital stock of
substantially all of our domestic wholly-owned subsidiaries and 65% of the
capital stock of certain of our material foreign subsidiaries that are directly
owned by us, OSI HoldCo, Inc., or a Guarantor.  Also, we are required
to provide additional guarantees of the senior secured credit facilities in the
future from other domestic wholly-owned restricted subsidiaries if the
consolidated EBITDA (earnings before interest, taxes, depreciation and
amortization as defined in the senior secured credit facilities) attributable to
our non-guarantor domestic wholly-owned restricted subsidiaries as a group
exceeds 10% of our consolidated EBITDA as determined on a Company-wide
basis.  If this occurs, guarantees would be required from additional
domestic wholly-owned restricted subsidiaries in such number that would be
sufficient to lower the aggregate consolidated EBITDA of the non-guarantor
domestic wholly-owned restricted subsidiaries as a group to an amount not in
excess of 10% of our Company-wide consolidated EBITDA.


On June
14, 2007, we issued senior notes in an aggregate principal amount of
$550,000,000 under an indenture among us, as issuer, OSI Co-Issuer, Inc.,
Co-Issuer, Wells Fargo Bank, National Association, as trustee, and the
Guarantors.  Proceeds from the issuance of the notes were used to
finance the Merger, and the notes mature on June 15, 2015.  Interest
is payable semiannually in arrears, at 10% per annum, in cash on each June 15
and December 15, commencing on December 15, 2007.  Interest payments
to the holders of record of the notes occur on the immediately preceding June 1
and December 1.  Interest is computed on the basis of a 360-day year
consisting of twelve 30-day months.





The notes
are initially guaranteed on a senior unsecured basis by each restricted
subsidiary that guarantees the senior secured credit facility.  As of
September 30, 2008 and December 31, 2007, all of our consolidated subsidiaries
were restricted subsidiaries.  The notes are general, unsecured senior
obligations of us, Co-Issuer and the Guarantors and are equal in right of
payment to all existing and future senior indebtedness, including the senior
secured credit facility.  The notes are effectively subordinated to
all of our, Co-Issuer’s and the Guarantors’ secured indebtedness, including the
senior secured credit facility, to the extent of the value of the assets
securing such indebtedness.  The notes are senior in right of payment
to all of our, Co-Issuer’s and the Guarantors’ existing and future subordinated
indebtedness.





The
indenture governing the notes limits, under certain circumstances, our ability
and the ability of Co-Issuer and our restricted subsidiaries to: incur liens,
make investments and loans, incur indebtedness or guarantees, engage in mergers,
acquisitions and assets sales, declare dividends, make payments or redeem or
repurchase equity interests, alter our business, engage in certain transactions
with affiliates, enter into agreements limiting subsidiary distributions and
prepay, redeem or purchase certain indebtedness.





In
accordance with the terms of the senior notes and the senior secured credit
facility, our restricted subsidiaries are also subject to restrictive
covenants.  Under certain circumstances, we are permitted to designate
subsidiaries as unrestricted subsidiaries, which would cause them not to be
subject to the restrictive covenants of the indenture or the credit
agreement.


63
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





CREDIT
FACILITIES AND OTHER INDEBTEDNESS (continued)





Additional
notes may be issued under the indenture from time to time, subject to certain
limitations.  Initial and additional notes issued under the indenture
will be treated as a single class for all purposes under the indenture,
including waivers, amendments, redemptions and offers to purchase.





The notes
are initially guaranteed on a senior unsecured basis by each restricted
subsidiary that guarantees the senior secured credit facility.  The
notes are general, unsecured senior obligations of us, Co-Issuer and the
Guarantors and are equal in right of payment to all existing and future senior
indebtedness, including the senior secured credit facility.  The notes
are effectively subordinated to all of our, Co-Issuer’s and the Guarantors’
secured indebtedness, including the senior secured credit facility, to the
extent of the value of the assets securing such indebtedness.  The
notes are senior in right of payment to all of our, Co-Issuer’s and the
Guarantors’ existing and future subordinated indebtedness.





We filed
a Registration Statement on Form S-4 (which became effective June 2, 2008) for
an exchange offer relating to our senior notes.  As a result, we are
required to file reports under Section 15(d) of the Securities Exchange Act of
1934, as amended.





We may
redeem some or all of the notes on and after June 15, 2011 at the redemption
prices (expressed as percentages of principal amount of the notes to be
redeemed) listed below, plus accrued and unpaid interest thereon and additional
interest, if any, to the applicable redemption date.





Year
            
            Percentage2011
            
            105.0%2012
            
            102.5%2013
      and thereafter
            
            100.0%





We also
may redeem all or part of the notes at any time prior to June 15, 2011, at a
redemption price equal to 100% of the principal amount of the notes redeemed
plus the applicable premium as of, and accrued and unpaid interest and
additional interest, if any, to the date of redemption.





We also
may redeem up to 35% of the aggregate principal amount of the notes until June
15, 2010, at a redemption price equal to 110% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon and additional interest, if
any, to the applicable redemption date with the net cash proceeds of one or more
equity offerings; provided that at least 50% of the sum of the aggregate
principal amount of notes originally issued under the indenture and any
additional notes issued under the indenture remains outstanding immediately
after the occurrence of each such redemption; provided further that each such
redemption occurs within 90 days of the closing date of each such equity
offering.





Upon a
change in control as defined in the indenture, we will be required to make an
offer to purchase all of the notes at a price in cash equal to 101% of the
aggregate principal amount thereof plus accrued interest and unpaid interest and
additional interest, if any, to the date of purchase.  If we were
required to make this offer, we may not have sufficient financial resources to
purchase all of the notes tendered and may be limited by our senior secured
facilities from doing so.  See Item 1A. Risk Factors in this Form 10-Q
for additional information.


64
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





CREDIT
FACILITIES AND OTHER INDEBTEDNESS (continued)





On June
13, 2008, we renewed a one-year line of credit with a maximum borrowing amount
of 12,000,000,000 Korean won ($10,103,000 at September 30, 2008 and $12,790,000
at December 31, 2007) to finance development of our restaurants in South
Korea.  The line bears interest at 1.50% and 0.80% over the Korean
Stock Exchange three-month certificate of deposit rate (7.29% and 6.48% at
September 30, 2008 and December 31, 2007, respectively).  The line
matures June 13, 2009.  There were no draws outstanding on this line
of credit as of September 30, 2008 and December 31, 2007.





On June
13, 2008, we renewed a one-year overdraft line of credit with a maximum
borrowing amount of 5,000,000,000 Korean won ($4,210,000 at September 30, 2008
and $5,329,000 at December 31, 2007).  The line bears interest at
1.15% over the Korean Stock Exchange three-month certificate of deposit rate
(6.94% at September 30, 2008 and 6.83% at December 31, 2007) and matures June
12, 2009.  There were no draws outstanding on this line of credit as
of September 30, 2008 and December 31, 2007.





Prior to
the Merger, we had notes payable that were used to finance the development of
our restaurants in South Korea.  Certain of these notes payable were
collateralized by lease and other deposits.  At September 30, 2008 and
December 31, 2007, these lease and other deposits totaled approximately
$36,213,000 and $45,254,000, respectively, but were no longer used as collateral
on any of our Korean debt.





As of
September 30, 2008 and December 31, 2007, we had approximately $12,247,000 and
$10,700,000, respectively, of notes payable at interest rates ranging from 2.28%
to 7.30% and from 2.07% to 7.30%, respectively. These notes have been primarily
issued for buyouts of general manager and area operating partner interests in
the cash flows of their restaurants and generally are payable over five
years.





We may
from time to time seek to retire or purchase our outstanding debt through cash
purchases in open market purchases, privately negotiated transactions or
otherwise.  Such repurchases or exchanges, if any, will depend on
prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be
material.





DEBT
GUARANTEES





We are
the guarantor of an uncollateralized line of credit that permits borrowing of up
to $35,000,000 for a limited liability company, T-Bird Nevada, LLC (“T-Bird”),
owned by a California franchisee. This line of credit matures in December
2008.  The line of credit bears interest at rates ranging from 50 to
90 basis points over LIBOR.  We were required to consolidate T-Bird
effective January 1, 2004 upon adoption of FIN 46R.  At September 30,
2008 and December 31, 2007, the outstanding balance on the line of credit was
approximately $33,283,000 and $32,583,000, respectively, and is included in our
Consolidated Balance Sheets.T-Bird uses
proceeds from the line of credit for the purchase of real estate and
construction of buildings to be opened as Outback Steakhouse restaurants and
leased to our franchisees. According to the terms of the line of credit, T-Bird
may borrow, repay, re-borrow or prepay advances at any time before the
termination date of the agreement.




If a
default under the line of credit were to occur or if the line of credit is not
renewed at the December 31, 2008 maturity date and T-Bird is unable to pay the
outstanding balance, we would be required to perform under our guarantee
obligation.  If this occurs, we have the right to call into default
all of our franchise agreements in California and exercise any rights and
remedies under those agreements as well as the right to recourse under loans
T-Bird has made to individual corporations in California which own the land
and/or building that is leased to those franchise locations. Events of default
are defined in the line of credit agreement.  We are not the primary
obligor on the line of credit and we are not aware of any non-compliance with
the underlying terms of the line of credit agreement that would result in us
having to perform in accordance with the terms of the
guarantee.


65
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





DEBT
GUARANTEES (continued)





The
consolidated financial statements include the accounts and operations of our
Roy’s consolidated venture in which we have a less than majority ownership. We
consolidate this venture because we control the executive committee (which
functions as a board of directors) through representation on the board by
related parties, and we are able to direct or cause the direction of management
and operations on a day-to-day basis. Additionally, the majority of capital
contributions made by our partner in the Roy’s consolidated venture have been
funded by loans to the partner from a third party which we are required to
guarantee.  The guarantee provides us control through our collateral
interest in the joint venture partner’s membership interest. As a result of our
controlling financial interest in this venture, it is included in our
consolidated financial statements. The portion of income or loss attributable to
the minority interests, not to exceed the minority interest’s equity in the
subsidiary, is eliminated in the line item in our Consolidated Statements of
Operations entitled “Minority interest in consolidated entities’ income (loss).”
All material intercompany balances and transactions have been
eliminated.





We are
the guarantor of an uncollateralized line of credit that permits borrowing of up
to a maximum of $24,500,000 for our joint venture partner, RY-8, in the
development of Roy's restaurants. The line of credit originally expired in
December 2004 and was renewed three times with a revised termination date in
April 2009. According to the terms of the credit agreement, RY-8 may borrow,
repay, re-borrow or prepay advances at any time before the termination date of
the agreement. On the termination date of the agreement, the entire outstanding
principal amount of the loan then outstanding and any accrued interest is due.
At September 30, 2008 and December 31, 2007, the outstanding balance on the line
of credit was approximately $24,500,000.





RY-8’s
obligations under the line of credit are unconditionally guaranteed by us and
Roy’s Holdings, Inc. (“RHI”). If an event of default occurs, as defined in the
agreement, then the total outstanding balance, including any accrued interest,
is immediately due from the guarantors.  At September 30, 2008 and
December 31, 2007, $24,500,000 of our $150,000,000 working capital revolving
credit facility was committed for the issuance of a letter of credit for this
guarantee.





If an
event of default occurs or the line of credit is not renewed at the April 2009
termination date and RY-8 is unable to pay the outstanding balance owed, we
would, as guarantor, be liable for this balance. However, in conjunction with
the credit agreement, RY-8 and RHI have entered into an Indemnity Agreement and
a Pledge of Interest and Security Agreement in our favor. These agreements
provide that if we are required to perform our obligation as guarantor pursuant
to the credit agreement, then RY-8 and RHI will indemnify us against all losses,
claims, damages or liabilities which arise out of or are based upon our
guarantee of the credit agreement. RY-8’s and RHI’s obligations under these
agreements are collateralized by a first priority lien upon and a continuing
security interest in any and all of RY-8’s interests in the joint
venture.





We are a
partial guarantor of $68,000,000 in bonds issued by Kentucky Speedway, LLC
(“Speedway”).  Speedway is an unconsolidated affiliate in which we
have a 22.5% equity interest and for which we operate catering and concession
facilities.  Payments on the bonds began in December 2003 and will
continue according to a redemption schedule with final maturity in December
2022.  The bonds have a put feature that allows the lenders to require
full payment of the debt on or after June 2011.  At September 30, 2008
and December 31, 2007, the outstanding balance on the bonds was approximately
$63,300,000, and our guarantee was $17,585,000.  Our guarantee will
proportionally decrease as payments are made on the bonds.


66
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





DEBT
GUARANTEES (continued)





As part
of the guarantee, we and other Speedway equity owners are obligated to
contribute, either as equity or subordinated debt, any amounts necessary to
maintain Speedway’s defined fixed charge coverage ratio.  We are
obligated to contribute 27.78% of such amounts.  Speedway has not yet
reached its operating break-even point.  Since the initial investment,
we have increased our investment by making additional working capital
contributions and subordinated loans to this affiliate in payments totaling
$8,703,000 as of September 30, 2008.  Of this amount, we made
subordinated loans of $1,067,000 and $2,133,000 during the nine months ended
September 30, 2008 and 2007, respectively.  We did not make any
working capital contributions during the nine months ended September 30, 2008.
In October 2008, we made an additional subordinated loan of $533,000, and we do
not anticipate making any further contributions in 2008.





Each
guarantor has unconditionally guaranteed Speedway’s obligations under the bonds
not to exceed its maximum guaranteed amount.  Our maximum guaranteed
amount is $17,585,000.  If an event of default occurs as defined by
the amended guarantee, or if the lenders exercise the put feature, the total
outstanding amount on the bonds, plus any accrued interest, is immediately due
from Speedway and each guarantor would be obligated to make payment under its
guaranty up to its maximum guaranteed amount.





In June
2006, in accordance with FIN 45, we recognized a liability of $2,495,000,
representing the estimated fair value of the guarantee and a corresponding
increase to the investment in Speedway, which is included in the line item
entitled “Investments In and Advances to Unconsolidated Affiliates, Net” in our
Unaudited Consolidated Balance Sheets.  Prior to the June 2006
modifications, the guarantee was not subject to the recognition or measurement
requirements of FIN 45 and no liability related to the guarantee was recorded at
December 31, 2005 or any prior period.





In May
2008, Speedway entered into an asset purchase agreement with Speedway
Motorsports, Inc. (“Motorsports”), a Delaware corporation.  In
accordance with the terms of the agreement, Speedway’s assets and liabilities
will be sold to Motorsports for a purchase price equal to a $10,000
non-refundable deposit, the assumption of Speedway’s debt and a $7,500,000 note
payable in 60 equal $125,000 monthly installments.  Additionally,
Speedway will receive a contingent payment of $7,500,000 (also payable in 60
equal monthly installments) if the existing sales tax rebate program is extended
by the legislature for an additional 20 years and a Sprint Cup Race is scheduled
at the Kentucky Speedway.  The sale of Speedway is expected to close
in the fourth quarter of 2008.





Our
Korean subsidiary is the guarantor of debt owed by landlords of two of our
Outback Steakhouse restaurants in Korea.  We are obligated to purchase
the building units occupied by our two restaurants in the event of default by
the landlords on their debt obligations, which were approximately $1,400,000 and
$1,500,000 as each of September 30, 2008 and December 31, 2007.  Under
the terms of the guarantees, our monthly rent payments are deposited with the
lender to pay the landlords’ interest payments on the outstanding
balances.  The guarantees are in effect until the earlier of the date
the principal is repaid or the entire lease term of ten years for both
restaurants, which expire in 2014 and 2016.  The guarantees specify
that upon default the purchase price would be a maximum of 130% of the
landlord’s outstanding debt for one restaurant and the estimated legal auction
price for the other restaurant, approximately $1,900,000 and $2,300,000,
respectively, as each of September 30, 2008 and December 31, 2007.  If
we were required to perform under either guarantee, we would obtain full title
to the corresponding building unit and could liquidate the property, each having
an estimated fair value of approximately $3,000,000 and $2,800,000,
respectively.  We have considered these guarantees and accounted for
them in accordance with FIN 45.  We have various depository and
banking relationships with the lender.





We are
not aware of any non-compliance with the underlying terms of the borrowing
agreements for which we provide a guarantee that would result in us having to
perform in accordance with the terms of the guarantee.


67
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





FAIR
VALUE MEASUREMENTS





SFAS No.
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement.  As defined in SFAS No. 157, fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price). To measure fair value, we incorporate assumptions
that market participants would use in pricing the asset or liability, and
utilizes market data to the maximum extent possible. In accordance with SFAS
No. 157, measurement of fair value incorporates nonperformance risk (i.e.,
the risk that an obligation will not be fulfilled). In measuring fair value, we
reflect the impact of our own credit risk on our liabilities, as well as any
collateral. We also consider the credit standing of our counterparties in
measuring the fair value of our assets.





We are
highly leveraged and exposed to interest rate risk to the extent of our
variable-rate debt.  In September 2007, we entered into an interest
rate collar with a notional amount of $1,000,000,000 as a method to limit the
variability of our $1,310,000,000 variable-rate term loan.   The
collar consists of a LIBOR cap of 5.75% and a LIBOR floor of 2.99%.  The
collar’s first variable-rate set date was December 31, 2007, and the option
pairs expire at the end of each calendar quarter beginning March 31, 2008 and
ending September 30, 2010.   The quarterly expiration dates correspond
to the scheduled amortization payments of our term loan.  We paid and
recorded $490,000 and $1,239,000 of interest expense for the three and nine
months ended September 30, 2008, respectively, as a result of the quarterly
expiration of the collar’s option pairs.  We record marked-to-market
changes in the fair value of the derivative instrument in earnings in the period
of change in accordance with SFAS No. 133.  We included $5,230,000 and
$5,357,000 in the line item “Accrued expenses” in our Consolidated Balance
Sheets as of September 30, 2008 and December 31, 2007, respectively, and
included $1,484,000 of interest expense for the three months ended September 30,
2008 and $12,459,000 of interest income and $12,332,000 of interest expense for
the nine months ended September 30, 2008 in the line item “Interest expense” in
our Consolidated Statement of Operations for the effects of this derivative
instrument.  A SFAS No. 157 credit valuation adjustment of $758,000
decreased the liability recorded as of September 30, 2008.





The valuation of our
interest rate collar is based on a discountedcash flow analysis on the
expected cash flows of the derivative.  This analysis reflects the
contractual terms of the collar, including the period to maturity, and uses
observable market-based inputs, including interest rate curves and implied
volatilities.





Although
we have determined that the majority of the inputs used to value
our interest rate collar fall within Level 2 of the fair value hierarchy,
the credit valuation adjustments associated with this derivative utilize Level 3
inputs, such as estimates of current credit spreads to evaluate the likelihood
of default by us and our counterparties.  However, as of September 30,
2008, we have assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of our interest rate collar derivative
positions and have determined that the credit valuation adjustments are not
significant to the overall valuation of this derivative.  As a result,
we have determined that our interest rate collar derivative valuations in their
entirety are classified in Level 2 of the fair value hierarchy.





Additionally,
our restaurants are dependent upon energy to operate and are affected by changes
in energy prices, including natural gas.  We use derivative
instruments to mitigate our exposure to material increases in natural gas
prices.  The valuation of our natural gas derivatives is based on
quoted exchange prices.


68
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





STOCK-BASED
AND DEFERRED COMPENSATION PLANS





Under our
general manager partner program, upon completion of each five-year term of
employment, our general manager and chef partners are eligible to participate in
a deferred compensation program (the Partner Equity Plan or “PEP”). We will
require the use of capital to fund the PEP as each general manager and chef
partner earns a contribution and currently estimate funding requirements ranging
from $15,000,000 to $20,000,000 in each of the next two years of the plan.
Future funding requirements may vary significantly depending on timing of
partner contracts, forfeiture rates and numbers of partner participants and may
differ materially from estimates.





Upon the
closing of the Merger, certain stock options that had been granted to managing
partners and chef partners under a pre-merger managing partner stock plan (the
“MP Stock Plan”) upon completion of a previous employment contract and at the
beginning of an employment agreement were converted into the right to receive
cash in the form of a “Supplemental PEP” contribution and a “Supplemental Cash”
payment, respectively.





Upon the
closing of the Merger, all outstanding, unvested partner employment grants of
restricted stock under the MP Stock Plan were converted into the right to
receive cash on a deferred basis. Additionally, certain members of management
were given the option to either convert some or all of their restricted stock
granted under the pre-merger stock plan in the same manner as managing partners
or convert some or all of it into restricted stock of KHI.  Grants of
restricted stock under the pre-merger stock plan that converted into the right
to receive cash are referred to as “Restricted Stock
Contributions.”





As of
September 30, 2008, our total liability with respect to obligations under the
PEP, Supplemental PEP, Supplemental Cash and Restricted Stock Contributions is
approximately $86,024,000, of which approximately $9,630,000 and $76,394,000 is
included in the line items “Accrued expenses” and “Other long-term liabilities,”
respectively, in our Consolidated Balance Sheet.   As of December
31, 2007, our total liability with respect to obligations under the PEP,
Supplemental PEP, Supplemental Cash and Restricted Stock Contributions is
approximately $82,143,000, of which approximately $3,666,000 and $78,477,000 is
included in the line items “Accrued expenses” and “Other long-term liabilities,”
respectively, in our Consolidated Balance Sheet.  Partners and
management may allocate the contributions into benchmark investment funds, and
these amounts due to participants will fluctuate according to the performance of
their allocated investments and may differ materially from the initial
contribution and current obligation.




As of
September 30, 2008 and December 31, 2007, we invested approximately $66,304,000
and $72,239,000, respectively, in various corporate owned life insurance
policies and another $920,000 and $2,968,000, respectively, of restricted cash,
both of which are held within an irrevocable grantor or “rabbi” trust account
for settlement of our obligations under the PEP, Supplemental PEP and Restricted
Stock Contributions. We are the sole owner of any assets within the rabbi trust
and participants are considered our general creditors with respect to assets
within the rabbi trust.





Certain
partners participating in the PEP were to receive common stock (“Partner
Shares”) upon completion of their employment contract.  Upon closing
of the Merger, these partners now will receive a deferred payment of cash
instead of common stock upon completion of their current employment
term.  Partners will not receive the deferred cash payment if they
resign or are terminated for cause prior to completing their current employment
terms.  There will not be any future earnings or losses on these
amounts prior to payment to the partners.  The amount accrued for the
Partner Shares obligation is $4,278,000 and $3,164,000 as of September 30, 2008
and December 31, 2007, respectively, and is included in the line item “Other
long-term liabilities” in our Consolidated Balance Sheets.





As of
September 30, 2008 and December 31, 2007, there is approximately $23,905,000 and
$11,023,000, respectively, of unfunded obligations related to the aforementioned
contribution liabilities that may require the use of future cash
resources.


69
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Liquidity
and Capital Resources (continued)





STOCK-BASED
AND DEFERRED COMPENSATION PLANS (continued)





Area
operating partners historically have been required, as a condition of
employment, to purchase a 4% to 9% interest in the restaurants they develop for
an initial investment of $50,000. In connection with the Merger, each area
operating partner sold his or her interest in the restaurants and became a
partner in a new management partnership that provides services to the
restaurants.  The restaurants pay a management fee to the management
partnerships based on a percentage of the cash flow of the restaurants. The area
operating partner receives distributions from the management partnership based
on a percentage of the restaurant’s annual cash flows for the duration of the
agreement.  We retained the option to purchase the partners’ interests
in the management partnerships after the restaurant has been open for a
five-year period on the terms specified in the agreements.  For
restaurants opened on or after January 1, 2007, the area operating partner’s
percentage of cash distributions and percentage for buyout will be adjusted
based on the associated restaurant’s return on investment compared to our
targeted return on investment.  The area operating partner percentage
may range from 3.0% to 12.0%.  This adjustment to the area operating
partner’s percentage will be made beginning after the first five full calendar
quarters from the date of the associated restaurant’s opening and will be made
each quarter thereafter based on a trailing 12-month restaurant return on
investment.  The percentage for buyout will be the distribution
percentage for the 24 months preceding the buyout.  Area operating
partner distributions will continue to be paid monthly and buyouts will be paid
in cash over a two-year period.





Effective
January 1, 2007, area operating partners who provide supervisory services for a
restaurant in which they do not have an associated ownership interest in a
management partnership have the opportunity to earn a bonus
payment.  This payment is based on growth in the associated restaurant
cash flows according to terms specified in the program and will be paid in a
lump sum within 90 days of the end of the five-year period provided for in the
program.




DIVIDENDS
 
 Payment
of dividends is prohibited under our credit agreements, except for certain
limited circumstances.


70
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Recently
Issued Financial Accounting Standards





On
January 1, 2008, we adopted EITF Issue No. 06-4, which requires the application
of the provisions of SFAS No. 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions” to endorsement split dollar life insurance
arrangements.  EITF No. 06-4 requires recognition of a liability for
the discounted future benefit obligation owed to an insured employee by the
insurance carrier. We have endorsement split dollar insurance policies for our
Founders and four of our executive officers that provide benefit to the
respective Founders and executive officers that extends into postretirement
periods.  Upon adoption, we recorded a cumulative effect
adjustment that increased our Accumulated deficit and Other long-term
liabilities by $9,476,000 in our Consolidated Balance Sheet.





In
September 2006, the FASB issued SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value and expands the related
disclosure requirements.  The provisions of SFAS No. 157 are effective
for fiscal years beginning after November 15, 2007 for financial assets and
liabilities or for nonfinancial assets and liabilities that are re-measured at
least annually.  In February 2008, the FASB issued FSP SFAS No. 157-2,
“Effective Date of FASB Statement No. 157” to defer the effective date for
nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis until fiscal years
beginning after November 15, 2008.  In February 2008, the FASB also
issued FSP SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements that Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13,” which excludes SFAS No. 13 as well as other accounting pronouncements that
address fair value measurements on lease classification or measurement under
SFAS No. 13, from SFAS No. 157’s scope.  We elected to apply the
provisions of FSP SFAS No. 157-2, and therefore, will defer the requirements of
SFAS No. 157 as it relates to nonfinancial assets or liabilities that are
recognized or disclosed at fair value on a nonrecurring basis until January 1,
2009.  In October 2008, the FASB issued FSP SFAS No. 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active,” which clarifies the application of SFAS No. 157 in a market that
is not active and provides guidance for determining the fair value of a
financial asset when the market for that financial asset is not
active.  This FSP was effective upon issuance, but it did not impact
our consolidated financial statements.





In
February 2007, the FASB issued SFAS
No. 159.  SFAS No. 159 permits entities to choose to
measure eligible items at fair value at specified election dates and report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date.  The adoption
of SFAS No. 159 on January 1, 2008 did not have an effect on our consolidated
financial statements as we did not elect the fair value
option.




In
December 2007, the FASB issued SFAS No. 141R, a revision of SFAS No.
141.  SFAS No. 141R retains the fundamental requirements of SFAS No.
141 but revises certain elements including: the recognition and fair value
measurement as of the acquisition date of assets acquired and liabilities
assumed, the accounting for goodwill and financial statement
disclosures.  SFAS No. 141R is effective for fiscal years beginning on
or after December 15, 2008 and is applicable to business combinations with an
acquisition date on or after this date.  We are currently evaluating
the impact that SFAS No. 141R will have on our financial
statements.
 In
December 2007, the FASB issued SFAS No. 160.  SFAS No. 160 modifies
the presentation of noncontrolling interests in the consolidated balance sheet
and the consolidated statement of operations.  It requires
noncontrolling interests to be clearly identified, labeled and included
separately from the parent’s equity and consolidated net (loss)
income.  The provisions of SFAS No. 160 are effective for fiscal years
beginning after December 15, 2008.  We are currently evaluating the
impact that SFAS No. 160 will have on our financial
statements.


71
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Recently
Issued Financial Accounting Standards (continued)




In March
2008, the FASB issued SFAS No. 161, an amendment of SFAS No.
133.  SFAS No. 161 is intended to enable investors to better
understand how derivative instruments and hedging activities affect the entity’s
financial position, financial performance and cash flows by enhancing
disclosures.  SFAS No. 161 requires disclosure of fair values of
derivative instruments and their gains and losses in a tabular format,
disclosure of derivative features that are credit-risk-related to provide
information about the entity’s liquidity and cross-referencing within the
footnotes to help financial statement users locate important information about
derivative instruments.  SFAS No. 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged.  We are currently evaluating the impact that SFAS No. 161
will have on our financial statements.





In April
2008, the FASB issued FSP SFAS No. 142-3.  FSP SFAS No. 142-3 amends
the factors an entity should consider when developing renewal or extension
assumptions for determining the useful life of recognized intangible assets
under SFAS No. 142, “Goodwill and Other Intangible Assets.”  FSP SFAS
No. 142-3 is intended to improve the consistency between the useful life of
recognized intangible assets under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of assets under SFAS No. 141R and other
U.S. GAAP.   FSP SFAS No. 142-3 is effective for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal
years.  Early adoption is prohibited.  We are currently
evaluating the impact that FSP SFAS No. 142-3 will have on our financial
statements.





In May
2008, the FASB issued SFAS No. 162.  SFAS No. 162 is intended to
provide guidance to nongovernmental entities on accounting principles and the
framework for selecting principles to be used in the preparation of financial
statements presented in conformity with U.S. GAAP.  The provisions of
SFAS No. 162 are effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles.”  We do not expect SFAS No. 162 to materially affect our
financial statements.




In
September 2008, the FASB issued FSP SFAS No. 133-1 and Interpretation No. 45-4,
“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of
FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161” (“FSP SFAS No. 133-1 and FIN 45-4”).
FSP SFAS No. 133-1 and FIN 45-4 amends SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” to require disclosures by sellers of credit
derivatives, including credit derivatives embedded in a hybrid instrument, for
each statement of financial position presented.  FSP SFAS No. 133-1
and FIN 45-4 amends Interpretation No. 45, “Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” to  require the guarantor to provide an
additional disclosure about the current status of the payment/performance risk
of a guarantee.  FSP SFAS No. 133-1 and FIN 45-4 also provides
clarification of the effective date of SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS
No. 161 is effective for quarterly interim periods beginning after November 15,
2008, and fiscal years that include those quarterly interim periods, with early
application encouraged.  The provisions of FSP SFAS No. 133-1 and FIN
45-4 that amend SFAS No. 133 and FIN 45 are effective for interim and annual
reporting periods ending after November 15, 2008, and we do not expect these
provisions to materially affect our financial statements upon adoption at the
end of the year.


72
 Table of Contents


OSI
Restaurant Partners, LLC


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Cautionary
Statement





This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent OSI Restaurant Partners, LLC’s expectations or beliefs
concerning future events, including the following: any statements regarding
future sales, costs and expenses and gross profit percentages, any statements
regarding the continuation of historical trends, any statements regarding the
expected number of future restaurant openings and expected capital expenditures
and any statements regarding the sufficiency of our cash balances and cash
generated from operating and financing activities for future liquidity and
capital resource needs. Without limiting the foregoing, the words “believes,”
“anticipates,” “plans,” “expects,” “should,” “estimates” and similar expressions
are intended to identify forward-looking statements.




Our
actual results could differ materially from those stated or implied in the
forward-looking statements included elsewhere in this report and as a result,
among other things, of the following:
 
 (i)
              
              Our
      substantial leverage and significant restrictive covenants in our various
      credit facilities could adversely affect our ability to raise additional
      capital to fund our operations, limit our ability to make capital
      expenditures to invest in new restaurants, limit our ability to react to
      changes in the economy or our industry, expose us to interest rate risk to
      the extent of our variable-rate debt and prevent us from meeting our
      obligations under the senior notes;(ii)
              
              The
      recent disruptions in the financial markets and the state of the economy
      may affect our liquidity by adversely impacting numerous items that
      include, but are not limited to: consumer confidence and spending
      patterns; the availability of credit presently arranged from our revolving
      credit facilities; the future cost and availability of credit; interest
      rates; foreign currency exchange rates; and the liquidity or operations of
      our third-party vendors and other service providers;(iii)
              
              The
      restaurant industry is a highly competitive industry with many
      well-established competitors;(iv)
              
              Our
      results can be impacted by changes in consumer tastes and the level of
      consumer acceptance of our restaurant concepts (including consumer
      tolerance of price increases); local, regional, national and international
      economic conditions; the seasonality of our business; demographic trends;
      traffic patterns; change in consumer dietary habits; employee
      availability; the cost of advertising and media; government actions and
      policies; inflation; interest rates; exchange rates; and increases in
      various costs, including construction and real estate
    costs;(v)
              
              Our
      results can be affected by consumer perception of food
    safety;(vi)
              
              Our
      ability to expand is dependent upon various factors such as the
      availability of attractive sites for new restaurants; ability to obtain
      appropriate real estate sites at acceptable prices; ability to obtain all
      required governmental permits including zoning approvals and liquor
      licenses on a timely basis; impact of government moratoriums or approval
      processes, which could result in significant delays; ability to obtain all
      necessary contractors and subcontractors; union activities such as
      picketing and hand billing that could delay construction; the ability to
      generate or borrow funds; the ability to negotiate suitable lease terms;
      the ability to recruit and train skilled management and restaurant
      employees; and the ability to receive the premises from the landlord’s
      developer without any delays;(vii)
              
              Weather
      and acts of God could result in construction delays and also adversely
      affect the results of one or more restaurants for an indeterminate amount
      of time;(viii)
              
              Price
      and availability of commodities, including but not limited to, such items
      as beef, chicken, shrimp, pork, seafood, dairy, potatoes, onions and
      energy supplies, which are subject to fluctuation and could increase or
      decrease more than we expect;(ix)
              
              Minimum
      wage increases could cause a significant increase in our labor costs;
      and/or(x)
              
              Our
      results can be impacted by tax and other legislation and regulation in the
      jurisdictions in which we operate and by accounting standards or
      pronouncements.




73
 Table of Contents


OSI RestaurantPartners, LLC


QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





We are
exposed to market risk from changes in interest rates on debt, changes in
foreign currency exchange rates and changes in commodity prices.  We
have not experienced a material change in market risk from changes in commodity
prices since December 31, 2007.  See “Quantitative and Qualitative
Disclosures About Market Risk” in Amendment No. 3 to our Registration Statement
on Form S-4 filed with the SEC on May 29, 2008 for further information about
market risk.





Interest
Rate Risk





Our
exposure to interest rate fluctuations includes our borrowings under our senior
secured credit facilities that bear interest at floating rates based on the
Eurocurrency Rate or the Base Rate, in each case plus an applicable borrowing
margin.  We manage our interest rate risk by offsetting some of our
variable-rate debt with fixed-rate debt, through normal operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments.  We do not enter into financial instruments for trading
or speculative purposes.





For
fixed-rate debt, interest rate changes do not affect our earnings or cash
flows.  However, for variable-rate debt, interest rate changes
generally impact our earnings and cash flows, assuming other factors are held
constant.  In September 2007, we entered into an interest rate collar
with a notional amount of $1,000,000,000 as a method to limit the variability of
our $1,310,000,000 variable-rate term loan.   The collar consists of a
LIBOR cap of 5.75% and a LIBOR floor of 2.99%.  The collar’s first
variable-rate set date was December 31, 2007, and the option pairs expire at the
end of each calendar quarter beginning March 31, 2008 and ending September 30,
2010.   The quarterly expiration dates correspond to the scheduled
amortization payments of our term loan.  We paid and recorded $490,000
and $1,239,000 of interest expense for the three and nine months ended September
30, 2008, respectively, as a result of the quarterly expiration of the collar’s
option pairs. We record marked-to-market changes in the fair value of the
derivative instrument in earnings in the period of change in accordance with
SFAS No. 133.  We included $5,230,000 and $5,357,000 in the line item
“Accrued expenses” in our Consolidated Balance Sheets as of September 30, 2008
and December 31, 2007, respectively, and included $1,484,000 of interest expense
for the three months ended September 30, 2008 and $12,459,000 of interest income
and $12,332,000 of interest expense for the nine months ended September 30, 2008
in the line item “Interest expense” in our Consolidated Statement of Operations
for the effects of this derivative instrument.  A SFAS No. 157
credit valuation adjustment of $758,000 decreased the liability recorded as of
September 30, 2008.





At
September 30, 2008 and December 31, 2007, we had $550,000,000 of fixed-rate debt
outstanding through our senior notes and $1,280,175,000 and $1,260,000,000,
respectively, of variable-rate debt outstanding on our senior secured credit
facilities.  We also had $96,960,000 and $100,460,000, respectively,
in available unused borrowing capacity under our working capital revolving
credit facility (after giving effect to undrawn letters of credit of
approximately $53,040,000 and $49,540,000, respectively), and $100,000,000 in
available unused borrowing capacity under our pre-funded revolving credit
facility that provides financing for capital expenditures only.  Based
on $1,280,175,000 of outstanding variable-rate debt, an immediate increase of
one percentage point would cause an increase to cash interest expense of
approximately $12,802,000 per year.





If a one
percentage point increase in interest rates were to occur over the next four
quarters, such an increase would result in the following additional interest
expense, assuming the current borrowing level remains constant:




PrincipalOutstanding
      at
              
              
              Additional
      Interest ExpenseSeptember
      30,
              
              
              
              Q4
              
              
              
              Q1
              
              
              
              Q2
              
              
              
              Q3Variable-Rate
      Debt
              
              2008
              
              
              2008
              
              
              2009
              
              
              2009
              
              
              2009Senior
      secured term loan facility
              
              $
              1,250,175,000
              
              
              $
              3,125,000
              
              
              $
              3,125,000
              
              
              $
              3,125,000
              
              
              $
              3,125,000Senior
      secured working capital revolving credit facility
              
              
              30,000,000
              
              
              
              75,000
              
              
              
              75,000
              
              
              
              75,000
              
              
              
              75,000Total
              
              $
              1,280,175,000
              
              
              $
              3,200,000
              
              
              $
              3,200,000
              
              
              $
              3,200,000
              
              
              $
              3,200,000
  74
 Table of Contents




OSI
Restaurant Partners, LLC


QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Item
3.  Quantitative and Qualitative Disclosures about Market Risk
(continued)





Interest
Rate Risk (continued)





At
September 30, 2008 and December 31, 2007, the interest rate on our term loan
facility was 6.00% and 7.13%, respectively.  At September 30, 2008,
the interest rate on our working capital revolving credit facility was
5.75%.





In June
2008, we renewed a one-year line of credit with a maximum borrowing amount of
12,000,000,000 Korean won ($10,103,000 at September 30, 2008 and $12,790,000 at
December 31, 2007) and a one-year overdraft line of credit with a maximum
borrowing amount of 5,000,000,000 Korean won ($4,210,000 at September 30, 2008
and $5,329,000 at December 31, 2007) to finance development of our restaurants
in South Korea.  The renewed lines bear interest at 1.15% to 1.50%
over the Korean Stock Exchange three-month certificate of deposit
rate.  There were no draws outstanding on these lines of credit as of
September 30, 2008 and December 31, 2007.





At
September 30, 2008 and December 31, 2007, our total debt, excluding consolidated
guaranteed debt, was approximately $1,853,797,000 and $1,843,450,000,
respectively.





A change
in interest rates generally does not have an impact upon our future earnings and
cash flow for fixed-rate debt instruments.  As fixed-rate debt
matures, however, and if additional debt is acquired to fund the debt repayment,
future earnings and cash flow may be affected by changes in interest
rates.  This effect would be realized in the periods subsequent to the
periods when the debt matures.





Foreign
Currency Exchange Rate Risk





Our
exposure to foreign currency exchange fluctuations relates primarily to our
direct investment in restaurants in South Korea, Hong Kong, Japan, the
Philippines and Brazil, to any outstanding debt to South Korean banks and to our
royalties from international franchisees.  Current market conditions
have impacted our foreign currency exchange rates.  We anticipate
declines in our international operating results in the fourth quarter of 2008
and in 2009,
partially due to the depreciation of foreign currency exchange rates for several
countries in which we operate.  We currently do not use financial
instruments to hedge foreign currency exchange rate changes.





This
market risk discussion contains forward-looking statements. Actual results may
differ materially from the discussion based upon general market conditions and
changes in domestic and global financial markets.


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OSI RestaurantPartners, LLC


CONTROLS
AND PROCEDURES





Item
4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





We have
established and maintain disclosure controls and procedures that are designed to
ensure that information relating to the Company and our subsidiaries required to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. We carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2008.





Changes
in Internal Control over Financial Reporting





There
have been no changes in our internal control over financial reporting during our
most recent quarter ended September 30, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.


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OSI RestaurantPartners, LLC


PART
II:  OTHER INFORMATION





Item
1. Legal Proceedings





We are
subject to legal proceedings, claims and liabilities, such as liquor liability,
sexual harassment and slip and fall cases, etc., which arise in the ordinary
course of business and are generally covered by insurance. In the opinion of
management, the amount of the ultimate liability with respect to those actions
will not have a materially adverse impact on our financial position or results
of operations and cash flows. In addition, we are subject to the following legal
proceedings and actions, which depending on the outcomes that are
uncertain at this time, could have a material adverse effect on our financial
condition.





Outback
Steakhouse of Florida, Inc. and OS Restaurant Services, Inc. are the defendants
in a class action lawsuit brought by the U.S. Equal Employment Opportunity
Commission (EEOC v. Outback Steakhouse of Florida, Inc. and OS Restaurant
Services, Inc., U.S. District Court, District of Colorado, Case No. 06-cv-1935,
filed September 28, 2006) alleging that they have engaged in a pattern or
practice of discrimination against women on the basis of their gender with
respect to hiring and promoting into management positions as well as
discrimination against women in terms and condition of their employment. In
addition to the EEOC, two former employees have successfully intervened as party
plaintiffs in the case. On November 3, 2007, the EEOC’s nationwide claim of
gender discrimination was dismissed and the scope of the suit was limited to the
states of Colorado, Wyoming and Montana. However, we expect the EEOC to pursue
claims of gender discrimination against us on a nationwide basis through other
proceedings. Litigation is, by its nature, uncertain both as to time and expense
involved and as to the final outcome of such matters. While we intend to
vigorously defend ourselves in this lawsuit, protracted litigation or
unfavorable resolution of this lawsuit could have a material adverse effect on
our business, results of operations or financial condition and could damage our
reputation with our employees and our customers.





In 2007,
we were served with five separate putative class action complaints in various
United States District Courts alleging violations of the Fair and Accurate
Credit Transactions Act, or FACTA, on behalf of customers of certain concepts.
In 2008, four of the five complaints were deemed consolidated for all pre-trial
purposes after our motion to consolidate cases before a single judge was
granted. FACTA restricts, among other things, the credit and debit card data
that may be included on the electronically printed receipts provided to retail
customers at the point of sale. Each suit alleged that the defendants violated a
provision of FACTA by including more information on the electronically printed
credit and debit card receipts provided to customers than is permitted under
FACTA. These lawsuits were among a number of lawsuits with similar allegations
that were filed against large retailers and foodservice operators, among others,
as a result of the implementation of FACTA, which became fully effective as of
December 4, 2006.





On June
3, 2008, the Credit and Debit Card Receipt Clarification Act of 2007 (the “Act”)
was signed into law. The Act provides that entities that printed an expiration
date on credit and debit card receipts and truncated the credit or debit card
number were not in willful non-compliance with FACTA and therefore are not
liable for statutory damages. As a result of the Act, all of the above FACTA
cases were settled for nominal amounts in the fiscal quarter ending September
30, 2008.





On
February 21, 2008, a purported class action complaint captioned Ervin, et al. v.
OS Restaurant Services, Inc. was filed in the U.S. District Court, Northern
District of Illinois (Case No.: 08-C-1091). This lawsuit alleges violations of
state and federal wage and hour law in connection with tipped employees and
overtime compensation and seeks relief in the form of unspecified back pay and
attorney fees. It alleges a class action under state law and a collective action
under federal law. While we intend to vigorously defend ourselves, it is not
possible at this time to reasonably estimate the possible loss or range of loss,
if any.


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OSI
Restaurant Partners, LLC


PART
II:  OTHER INFORMATION





Item
1. Legal Proceedings (continued)





One of
our subsidiaries received a notice of proposed assessment of employment taxes in
March 2008 from the Internal Revenue Service (“IRS”) for calendar years 2004
through 2006. The IRS asserts that certain cash distributions paid to our
general manager partners, chef partners, and area operating partners who hold
partnership interests in limited partnerships with our affiliates should have
been treated as wages and subjected to employment taxes. We believe that we have
complied and continue to comply with the law pertaining to the proper federal
tax treatment of partner distributions. In May 2008, we filed a protest of the
proposed employment tax assessment. Because we are at a preliminary stage of the
administrative process for resolving disputes with the IRS, we cannot, at this
time, reasonably estimate the amount, if any, of additional employment taxes or
other interest, penalties or additions to tax that would ultimately be assessed
at the conclusion of this process. If the IRS examiner’s position were to be
sustained, the additional employment taxes and other amounts that would be
assessed would be material.





Item1A. RiskFactors





In
addition to the other information discussed in this report, please consider the
factors described in “Risk Factors” in Amendment No. 3 to our Registration
Statement on Form S-4 filed with the SEC on May 29, 2008 which could materially
affect our business, financial condition or future results.  The risks
described in Amendment No. 3 to our Registration Statement on Form S-4 have not
materially changed, except that we have identified two additional risk factors,
described below, as a result of the disruptions in the financial
markets.  These are not the only risks facing our
Company.  Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may adversely affect our
business, financial condition or operating results.





Disruptions
in the financial markets may affect our business by adversely impacting consumer
confidence and spending, availability and cost of credit, foreign currency
exchange rates and other items.





As noted
in our other risk factors, our high degree of leverage could increase our
vulnerability to general economic and industry conditions and require that a
substantial portion of cash flow from operations be dedicated to the payment of
principal and interest on our indebtedness.   Our cash flow from
operations is dependent on consumer spending.  The recent disruptions
in the financial markets may negatively impact consumer confidence and thus
cause a decline in our cash flow from operations.  Further, the
availability of credit already arranged for under our revolving credit
facilities and the cost and availability of future credit may be adversely
impacted by the economic challenges.  Foreign currency exchange rates
for the countries in which we operate may depreciate, and we may experience
interruptions in supplies and other services from our third-party vendors as a
result of the market conditions.    These disruptions in the
financial markets are beyond our control, and there is no guarantee that
government response will restore consumer confidence, stabilize the markets or
increase the availability of credit.





If
our revenue and resulting cash flow decline to levels that cannot be offset by
reductions in costs, efficiency programs and improvements in working capital
management, we may not remain in compliance with certain covenants in our senior
secured credit facilities agreement.




If, as a
result of the economic challenges described in “Current Economic Challenges and
Potential Impacts of Market Conditions”  included in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” our
revenue and resulting cash flow decline to levels that cannot be offset by
reductions in costs, efficiency programs and improvements in working capital
management, we may not remain in compliance with the leverage ratio and free
cash flow covenants in our senior secured credit facilities
agreement.  In the event of this occurrence, we intend to take such
actions available to us as we determine to be appropriate at such time, which
may include, but are not limited to, engaging in a permitted equity issuance,
seeking a waiver from our lenders, amending the terms of such facilities,
including the covenants described above, or refinancing all or a portion of our
senior secured credit facilities under modified terms.  There can be
no assurance that we will be able to effect any such actions or terms acceptable
to us or at all or that such actions will be successful in maintaining our
covenant compliance. The failure to meet our debt service obligations or the
failure to remain in compliance with the financial covenants under our senior
secured credit facilities would constitute an event of default under those
facilities and the lenders could elect to declare all amounts outstanding under
the senior secured credit facilities to be immediately due and payable and
terminate all commitments to extend further credit.


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PART
II:  OTHER INFORMATION





Item
6.  Exhibits





Number
            
            Description31.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
            
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002132.2
            
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 20021





1 These
certifications are not deemed to be “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liability of that section. These
certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act or the Exchange Act, except to the extent that
the registrant specifically incorporates them by reference.





The
registrant hereby undertakes to furnish supplementally a copy of any omitted
schedule or other attachment to the Securities and Exchange Commission upon
request.




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SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.











Date:
      November 14, 2008
            
            OSI
      RESTAURANT PARTNERS, LLCBy:  /s/ Dirk A.
      MontgomeryDirk
      A. Montgomery
              Senior
      Vice President and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)












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