**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
                  1934**For
                  the quarterly period ended**September
                  30, 2006**or[
                  ]
              **Transition
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934**For
                  the transition period from ______ to
                  ______
 
 Commission
        File Number: 1-15935
  **OSI
        RESTAURANT PARTNERS, INC.**
 (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 o NO x
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
        accelerated filer x  Accelerated
        filer o  Non-accelerated
        filer 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
        January 3, 2007, the registrant had outstanding 75,133,988 shares of Common
        Stock, $.01 par value. Table of
              Contents
 
 
 **OSI
        RESTAURANT PARTNERS, INC.**
 
 **INDEX
        TO QUARTERLY REPORT ON FORM 10-Q**
 **For
        the Quarterly Period Ended September 30, 2006**
 **(Unaudited)**
 
 **TABLE
        OF CONTENTS**
 
 **PART
                  I — FINANCIAL INFORMATION****Page
                  No****.**Item 1.
              Consolidated
                  Financial Statements (Unaudited):Consolidated
                  Balance Sheets — September 30, 2006 and
                  December 31, 2005
              3Consolidated
                  Statements of Income —
                For
                  the Three and Nine Months Ended September 30, 2006 and
                  2005
              5Consolidated
                  Statements of Cash Flows —
                For
                  the Nine Months Ended September 30, 2006 and
                  2005
              6Notes
                  to Consolidated Financial Statements
              8Item 2.
              Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              38Item 3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              65Item 4.
              Controls
                  and Procedures
              67**PART
                  II****—****OTHER INFORMATION**Item 1.
              Legal
                  Proceedings
              71Item
                  1A.
              Risk
                  Factors
              72Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              73Item 6.
              Exhibits
              74Signature
              76
 2
 Table
              of Contents
  **PART
        I: FINANCIAL INFORMATION**
 
 **Item
        1. CONSOLIDATED FINANCIAL STATEMENTS**
 
 **OSI
        Restaurant Partners, Inc.** ****
 **CONSOLIDATED
        BALANCE SHEETS (** **IN
        THOUSANDS, UNAUDITED)**
 
 **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****2006**
              
              **2005****(restated)**ASSETSCurrent
                  AssetsCash
                  and cash equivalents
              
              $
              44,804
              
              $
              84,876Short-term
                  investments
              
              
              1,866
              
              
              1,828Inventories
              
              
              80,234
              
              
              68,468Deferred
                  income tax assets
              
              
              44,811
              
              
              43,697Other
                  current assets
              
              
              67,313
              
              
              50,823Total
                  current assets
              
              
              239,028
              
              
              249,692Property,
                  fixtures and equipment, net
              
              
              1,502,309
              
              
              1,387,700Investments
                  in and advances to unconsolidated affiliates, net
              
              
              26,090
              
              
              21,397Deferred
                  income tax assets
              
              
              66,884
              
              
              36,180Goodwill
              
              
              116,640
              
              
              112,627Intangible
                  assets
              
              
              26,178
              
              
              11,562Other
                  assets
              
              
              105,552
              
              
              142,114Notes
                  receivable collateral for franchisee guarantee
              
              
              31,750
              
              
              31,150$
              2,114,431
              
              $
              1,992,422
  (CONTINUED...)
  3
 Table
              of Contents
 
 **OSI
        Restaurant Partners, Inc.** ****
 **CONSOLIDATED
        BALANCE SHEETS (** **IN
        THOUSANDS, UNAUDITED)**
 
 **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****2006**
              
              **2005****(restated)**LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  LiabilitiesAccounts
                  payable
              
              $
              90,857
              
              $
              98,020Sales
                  taxes payable
              
              
              16,079
              
              
              17,761Accrued
                  expenses
              
              
              141,693
              
              
              135,660Current
                  portion of partner deposit and accrued buyout liability
              
              
              17,193
              
              
              15,175Unearned
                  revenue
              
              
              92,960
              
              
              170,785Income
                  taxes payable
              
              
              -
              
              
              695Current
                  portion of long-term debt
              
              
              68,587
              
              
              63,442Total
                  current liabilities
              
              
              427,369
              
              
              501,538Partner
                  deposit and accrued buyout liability
              
              
              99,429
              
              
              72,900Deferred
                  rent
              
              
              70,439
              
              
              61,509Long-term
                  debt
              
              
              239,332
              
              
              90,623Guaranteed
                  debt
              
              
              34,378
              
              
              31,283Other
                  long-term liabilities
              
              
              21,161
              
              
              45,890Total
                  liabilities
              
              
              892,108
              
              
              803,743Commitments
                  and contingenciesMinority
                  interests in consolidated entities
              
              
              38,195
              
              
              44,259Stockholders'
                  EquityCommon
                  stock, $0.01 par value, 200,000 shares authorized; 78,750
                  and78,750
                  shares issued; 74,512 and 74,854 shares outstanding asof
                  September 30, 2006 and December 31, 2005, respectively
              
              
              788
              
              
              788Additional
                  paid-in capital
              
              
              266,795
              
              
              293,368Retained
                  earnings
              
              
              1,088,736
              
              
              1,057,944Accumulated
                  other comprehensive income
              
              
              4,749
              
              
              384Unearned
                  compensation related to outstanding restricted stock
              
              
              -
              
              
              (40,858
              )1,361,068
              
              
              1,311,626Less
                  treasury stock, 4,238 and 3,896 shares at September 30,
                  2006and
                  December 31, 2005, respectively, at cost
              
              
              (176,940
              )
              
              (167,206
              )Total
                  stockholders’ equity
              
              
              1,184,128
              
              
              1,144,420$
              2,114,431
              
              $
              1,992,422
 
 See
        notes
        to unaudited consolidated financial statements.
  4
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 **(IN
        THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)**
 
 **THREE
                  MONTHS ENDED**
              
              **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,**
              
              **SEPTEMBER
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(restated)**
              
              
              
              **(restated)**RevenuesRestaurant
                  sales
              
              $
              945,779
              
              $
              867,851
              
              $
              2,919,110
              
              $
              2,674,657Other
                  revenues
              
              
              4,857
              
              
              5,020
              
              
              15,911
              
              
              15,770Total
                  revenues
              
              
              950,636
              
              
              872,871
              
              
              2,935,021
              
              
              2,690,427Costs
                  and expensesCost
                  of sales
              
              
              343,243
              
              
              318,523
              
              
              1,059,341
              
              
              981,309Labor
                  and other related
              
              
              266,568
              
              
              228,028
              
              
              812,639
              
              
              691,292Other
                  restaurant operating
              
              
              210,241
              
              
              196,528
              
              
              652,031
              
              
              569,971Depreciation
                  and amortization
              
              
              38,484
              
              
              32,539
              
              
              110,936
              
              
              93,166General
                  and administrative
              
              
              54,945
              
              
              46,470
              
              
              167,804
              
              
              147,620Hurricane
                  property and inventory losses
              
              
              -
              
              
              1,412
              
              
              -
              
              
              1,412Provision
                  for impaired assets and restaurant closings
              
              
              10,513
              
              
              1,396
              
              
              13,547
              
              
              10,026Contribution
                  for "Dine Out for Hurricane Relief"
              
              
              -
              
              
              1,000
              
              
              -
              
              
              1,000(Income)
                  loss from operations of unconsolidated affiliates
              
              
              270
              
              
              (766
              )
              
              145
              
              
              (665
              )Total
                  costs and expenses
              
              
              924,264
              
              
              825,130
              
              
              2,816,443
              
              
              2,495,131Income
                  from operations
              
              
              26,372
              
              
              47,741
              
              
              118,578
              
              
              195,296Other
                  income (expense), net
              
              
              -
              
              
              (75
              )
              
              5,165
              
              
              (1,098
              )Interest
                  income
              
              
              761
              
              
              658
              
              
              2,122
              
              
              1,476Interest
                  expense
              
              
              (3,870
              )
              
              (1,848
              )
              
              (9,452
              )
              
              (4,519
              )Income
                  before provision for income taxes andelimination
                  of minority interest
              
              
              23,263
              
              
              46,476
              
              
              116,413
              
              
              191,155Provision
                  for income taxes
              
              
              6,219
              
              
              15,874
              
              
              32,881
              
              
              64,328Income
                  before elimination of minority interest
              
              
              17,044
              
              
              30,602
              
              
              83,532
              
              
              126,827Elimination
                  of minority interest
              
              
              (224
              )
              
              1,130
              
              
              5,201
              
              
              7,470Net
                  income
              
              $
              17,268
              
              $
              29,472
              
              $
              78,331
              
              $
              119,357Basic
                  earnings per common shareNet
                  income
              
              $
              0.23
              
              $
              0.40
              
              $
              1.06
              
              $
              1.61Basic
                  weighted average number of shares outstanding
              
              
              73,554
              
              
              74,167
              
              
              73,903
              
              
              73,991Diluted
                  earnings per common shareNet
                  income
              
              $
              0.23
              
              $
              0.38
              
              $
              1.02
              
              $
              1.55Diluted
                  weighted average number of shares outstanding
              
              
              75,179
              
              
              76,832
              
              
              76,424
              
              
              76,794Cash
                  dividends per common share
              
              $
              0.13
              
              $
              0.13
              
              $
              0.39
              
              $
              0.39
 
 See
        notes
        to unaudited consolidated financial statements.
 5
 Table
              of Contents
  **OSI
        Restaurant Partners, Inc.** ****
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(IN
        THOUSANDS, UNAUDITED)**
 
 **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,****2006**
              
              **2005****(restated)**Cash
                  flows from operating activities:Net
                  income
              
              $
              78,331
              
              $
              119,357Adjustments
                  to reconcile net income to cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              110,936
              
              
              93,166Provision
                  for impaired assets and restaurant closings
              
              
              13,547
              
              
              11,438Stock-based
                  compensation expense
              
              
              55,743
              
              
              7,143Income
                  tax benefits credited to equity
              
              
              5,993
              
              
              15,142Excess
                  income tax benefits from stock-based compensation
              
              
              (3,398
              )
              
              -Minority
                  interest in consolidated entities’ income
              
              
              5,201
              
              
              7,470Loss
                  (income) from operations of unconsolidated affiliates
              
              
              63
              
              
              (665
              )Change
                  in deferred income taxes
              
              
              (31,440
              )
              
              (30,604
              )Increase
                  in deferred rent
              
              
              8,930
              
              
              7,090(Gain)
                  Loss on disposal of property, fixtures and equipment and lease
                  termination
              
              
              (3,085
              )
              
              2,530Change
                  in assets and liabilities, net of effects of acquisitions:(Increase)
                  decrease in inventories
              
              
              (11,555
              )
              
              5,617(Increase)
                  decrease in other current assets
              
              
              (16,376
              )
              
              6,090Decrease
                  (increase) in other assets
              
              
              2,140
              
              
              (9,309
              )(Decrease)
                  increase in accounts payable, sales taxes payable and accrued expenses
              
              
              (2,914
              )
              
              12,625(Decrease)
                  increase in partner deposit and accrued buyout liability
              
              
              (8,745
              )
              
              6,724Decrease
                  in unearned revenue
              
              
              (77,825
              )
              
              (72,937
              )(Decrease)
                  increase in income taxes payable
              
              
              (695
              )
              
              8,352Increase
                  (decrease) in other long-term liabilities
              
              
              13,044
              
              
              (1,920
              )Net
                  cash provided by operating activities
              
              
              137,895
              
              
              187,309Cash
                  flows used in investing activities:Purchase
                  of investment securities
              
              
              (4,393
              )
              
              (2,605
              )Maturities
                  of investment securities
              
              
              4,355
              
              
              2,459Cash
                  paid for acquisitions of businesses, net of cash acquired
              
              
              (35,956
              )
              
              (5,200
              )Capital
                  expenditures
              
              
              (225,751
              )
              
              (215,236
              )Proceeds
                  from the sale of property, fixtures and equipment and lease
                  termination
              
              
              11,958
              
              
              4,337Payments
                  from unconsolidated affiliates
              
              
              264
              
              
              131Investments
                  in and advances to unconsolidated affiliates
              
              
              (2,339
              )
              
              (2,194
              )Net
                  cash used in investing activities
              
              $
              (251,862
              )
              $
              (218,308
              )
 
 (CONTINUED...)
  6
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(IN
        THOUSANDS, UNAUDITED)**
 
 **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,****2006**
              
              **2005****(restated)**Cash
                  flows provided by (used in) financing activities:Proceeds
                  from issuance of long-term debt
              
              $
              256,021
              
              $
              94,954Proceeds
                  from minority interest contributions
              
              
              3,751
              
              
              4,122Distributions
                  to minority interest
              
              
              (13,727
              )
              
              (13,165
              )Repayments
                  of long-term debt
              
              
              (102,167
              )
              
              (50,886
              )Proceeds
                  from sale-leaseback transactions
              
              
              -
              
              
              5,000Contributions
                  to partner deferred compensation plans
              
              
              (6,310
              )
              
              -Dividends
                  paid
              
              
              (29,169
              )
              
              (28,919
              )Excess
                  income tax benefits from stock-based compensation
              
              
              3,398
              
              
              -Payments
                  for purchase of treasury stock
              
              
              (59,435
              )
              
              (71,966
              )Proceeds
                  from exercise of employee stock options
              
              
              21,533
              
              
              44,153Net
                  cash provided by (used in) financing activities
              
              
              73,895
              
              
              (16,707
              )Net
                  decrease in cash and cash equivalents
              
              
              (40,072
              )
              
              (47,706
              )Cash
                  and cash equivalents at the beginning of the period
              
              
              84,876
              
              
              87,977Cash
                  and cash equivalents at the end of the period
              
              $
              44,804
              
              $
              40,271Supplemental
                  disclosures of cash flow information:Cash
                  paid for interest
              
              $
              9,521
              
              $
              4,379Cash
                  paid for income taxes, net of refunds
              
              
              66,657
              
              
              73,142Supplemental
                  disclosures of non-cash items:Purchase
                  of employee partners' interests in cash flows of their
                  restaurants
              
              $
              5,532
              
              $
              3,128Litigation
                  liability and insurance receivable
              
              
              (39,000
              )
              
              39,000Increase
                  in guaranteed debt and investment in unconsolidated
                  affiliate
              
              
              2,495
              
              
              -
 
 See
        notes
        to unaudited consolidated financial statements.
  7
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis
        of
        Presentation and Restatement of Previously Issued Consolidated Financial
        Statements
 
 On
        April
        25, 2006, the shareholders of Outback Steakhouse, Inc. approved changing
        the
        name of the corporation to OSI Restaurant Partners, Inc. (the “Company”). This
        Note should be read in conjunction with Note 1, “Summary of Significant
        Accounting Policies” under Notes to Consolidated Financial Statements included
        in Item 8, “Financial Statements and Supplementary Data” of the Company’s
        Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December
        31,
        2005 (“2005 10-K/A”).
 
 **Basis
        of Presentation**
 
 The
        accompanying unaudited 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 (consisting
        only of normal recurring entries) necessary for the fair presentation of
        the
        Company's 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 the Company's 2005 10-K/A.
 
 The
        results of operations for interim periods are not necessarily indicative
        of the
        results to be expected for the full year.
 
 **Restatement
        of Previously Issued Consolidated Financial Statements**
 
 In
        October 2006, the Company identified errors in its accounting for unearned
        revenue for unredeemed gift cards and certificates. Upon completion of the
        review of accounting policies for gift cards and certificates as well as
        a
        review of certain other balance sheet accounts, the Company has restated
        its
        consolidated financial statements for certain prior periods to correct these
        and
        other errors, as described in this note.
  *Unearned
        revenue and revenue recognition*
 Unearned
        revenue represents the Company’s liability for gift cards and certificates that
        have been sold but not yet redeemed. Historically, the Company recognized
        revenue for estimates of gift cards and certificates that will not be redeemed
        (“breakage”) at the time of the sale of the gift cards and certificates. The
        Company has determined that the methodology used to arrive at breakage was
        inappropriate and resulted in understatement of the liability for gift cards
        and
        certificates. The Company has also determined that revenue should not be
        recognized at the time of sale of the gift cards and certificates. Accordingly,
        the Company has adopted a policy to recognize breakage for those gift cards
        and
        certificates that will never be redeemed at the time at which their redemption
        becomes remote. Furthermore, certain expenses associated with gift card and
        certificate promotions were incorrectly netted against breakage income rather
        than reflected as expenses in the Company’s financial statements. Correction of
        these errors in the consolidated financial statements resulted in an increase
        in
        unearned revenue of $60,337,000 as of December 31, 2005 and decreases in
        net
        income of $323,000 and $1,045,000 for the three and nine months ended September
        30, 2005, respectively. It also resulted in a $37,548,000 decrease in retained
        earnings as of December 31, 2004.
  8
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis
        of
        Presentation and Restatement of Previously Issued Consolidated Financial
        Statements (continued)
 
 **Restatement
        of Previously Issued Consolidated Financial Statements
        (continued)**
 
 *Minority
        interests in consolidated entities*
 The
        Company has identified errors in the recorded amount of minority interests
        in
        certain of its Carrabba’s Italian Grill subsidiaries, which were understated as
        a result of the Company incorrectly recording the entries relating to the
        correction in accounting for managing partners’ interests in their stores from
        investment accounting to compensation accounting in 2003. Additionally, the
        Company determined that in connection with the Company’s 2002 purchase of the
        20% interest in Outback Steakhouse International, LP, the value of 28,570
        shares
        that were payable upon meeting certain conditions should have been recorded
        at
        the acquisition date in 2002 rather than upon their issuance in 2006. Correction
        of these errors in the Company’s consolidated financial statements resulted in
        an increase in goodwill of $1,309,000 as of December 31, 2005, a decrease
        in
        minority interests in consolidated entities of $1,314,000 as of December
        31,
        2005 and decreases in elimination of minority interest of $38,000 and $88,000
        for the three and nine months ended September 30, 2005, respectively. It
        also
        resulted in an $119,000 increase in retained earnings as of December 31,
        2004.
 
 *Deferred
        rent and property, fixtures and equipment*
 The
        Company identified errors in its straight-line lease calculations for certain properties
        where the
        Company received
        tenant improvement contributions from a landlord or where it determined that
        it
        was depreciating certain assets over lives different than the associated
        lease
        term. Correction of these errors in the Company’s consolidated financial
        statements resulted in an increase to deferred rent of $6,303,000 and a decrease
        to property, fixtures and equipment of $1,905,000 as of December 31, 2005
        and
        decreases to net income of $337,000 and $1,093,000 for the three and nine
        months
        ended September 30, 2005, respectively. It also
        resulted in a $3,862,000 decrease in retained earnings as of December 31,
        2004.
 
 *Other
        adjustments*
 The
        Company has
        increased additional paid-in capital and decreased retained earnings as of
        December 31, 2002 by $2,333,000 to correct an error in equity classification
        that arose prior to 2000, relating to acquisitions recorded as
        pooling-of-interest transactions.
 
 The
        Company’s Korean subsidiary receives payments from certain consumer product and
        service companies in connection with promotions under which the Company has
        agreed to provide discounts to their customers. The Company has historically
        netted such monies received against cost of sales and other restaurant operating
        expenses. The Company has determined that these amounts should be recorded as
        revenue with an equal offsetting amount in cost of sales and other restaurant
        operating expenses. Correction of these errors in the Company’s consolidated
        financial statements increased restaurant sales by $852,000 and $8,515,000
        for
        the three and nine months ended September 30, 2005, respectively, and were
        offset by changes in cost of sales and other restaurant operating expense
        with
        no effect on income from operations or net income.
 
 The
        Company restated its Consolidated Balance Sheets as of December 31, 2005
        and
        2004, and the Consolidated Statements of Income, Stockholders’ Equity and Cash
        Flows for the years ended December 31, 2005, 2004 and 2003, all quarters
        in 2005
        and 2004 and the first two quarters of 2006 to correct errors related to
        the
        matters discussed above. The impact of the restatement on periods prior to
        2003
        has been reflected as an adjustment to retained earnings of $36,128,000 as
        of
        December 31, 2002 in the Consolidated Statements of Stockholders’ Equity
        included in the Company’s 2005 10-K/A.
  9
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis
        of
        Presentation and Restatement of Previously Issued Consolidated Financial
        Statements (continued)
 
 **Restatement
        of Previously Issued Consolidated Financial Statements
        (continued)**
 
 The
        Consolidated Financial Statements for the three and nine months ended September
        30, 2005 included in this Form 10-Q have been restated to reflect the
        adjustments described above. The effects of the Company’s restatement on
        previously reported Consolidated Financial Statements for the three and nine
        months ended September 30, 2005 and as of December 31, 2005 are summarized
        below:
 
 The
        following table reflects the effect of the restatement on the Consolidated
        Balance Sheet (in thousands):
 
 **DECEMBER
                  31,****2005**
              
              **2005****As
                  previously reported**
              
              **As
                  restated**Selected
                  Balance Sheet Data:Deferred
                  income tax asset
              
              $
              17,719
              
              $
              43,697Other
                  current assets
              
              
              51,746
              
              
              50,823Total
                  current assets
              
              
              224,637
              
              
              249,692Property,
                  fixtures and equipment, net
              
              
              1,389,605
              
              
              1,387,700Deferred
                  income tax asset
              
              
              33,073
              
              
              36,180Goodwill
              
              
              111,318
              
              
              112,627Total
                  assets
              
              
              1,964,856
              
              
              1,992,422Accrued
                  expenses
              
              
              130,583
              
              
              135,660Unearned
                  revenue
              
              
              110,448
              
              
              170,785Total
                  current liabilities
              
              
              436,124
              
              
              501,538Partner
                  deposit and accrued buyout liability
              
              
              71,591
              
              
              72,900Deferred
                  rent
              
              
              55,206
              
              
              61,509Total
                  liabilities
              
              
              730,717
              
              
              803,743Minority
                  interests in consolidated entities
              
              
              45,573
              
              
              44,259Additional
                  paid-in capital
              
              
              291,035
              
              
              293,368Retained
                  earnings
              
              
              1,104,423
              
              
              1,057,944Total
                  stockholders' equity
              
              
              1,188,566
              
              
              1,144,420Total
                  liabilities and stockholders' equity
              
              
              1,964,856
              
              
              1,992,422
  10
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis
        of
        Presentation and Restatement of Previously Issued Consolidated Financial
        Statements (continued)
 
 **Restatement
        of Previously Issued Consolidated Financial Statements
        (continued)**
 
 The
        following table reflects the effect of the restatement on the Consolidated
        Statements of Income (in thousands, except per share data):
 
 **THREE
                  MONTHS ENDED**
              
              **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,**
              
              **SEPTEMBER
                  30,****2005**
              
              **2005**
              
              **2005**
              
              **2005****As
                  previously reported**
              
              **As
                  restated**
              
              **As
                  previously reported**
              
              **As
                  restated**Selected
                  Statement of Income Data:Restaurant
                  sales
              
              $
              867,424
              
              $
              867,851
              
              $
              2,667,585
              
              $
              2,674,657Total
                  revenues
              
              
              872,444
              
              
              872,871
              
              
              2,683,355
              
              
              2,690,427Cost
                  of sales
              
              
              317,977
              
              
              318,523
              
              
              975,083
              
              
              981,309Other
                  restaurant operating
              
              
              195,672
              
              
              196,528
              
              
              566,125
              
              
              569,971Depreciation
                  and amortization
              
              
              32,393
              
              
              32,539
              
              
              92,735
              
              
              93,166Provision
                  for impaired assets and restaurant closings
              
              
              1,396
              
              
              1,396
              
              
              9,851
              
              
              10,026Total
                  costs and expenses
              
              
              823,582
              
              
              825,130
              
              
              2,484,453
              
              
              2,495,131Income
                  from operations
              
              
              48,862
              
              
              47,741
              
              
              198,902
              
              
              195,296Income
                  before provision for income taxes and elimination ofminority
                  interest
              
              
              47,597
              
              
              46,476
              
              
              194,761
              
              
              191,155Provision
                  for income taxes
              
              
              16,297
              
              
              15,874
              
              
              65,708
              
              
              64,328Income
                  before elimination of minority interest
              
              
              31,300
              
              
              30,602
              
              
              129,053
              
              
              126,827Elimination
                  of minority interest
              
              
              1,168
              
              
              1,130
              
              
              7,558
              
              
              7,470Net
                  income
              
              
              30,132
              
              
              29,472
              
              
              121,495
              
              
              119,357Basic
                  earnings per common share
              
              $
              0.41
              
              $
              0.40
              
              $
              1.64
              
              $
              1.61Diluted
                  earnings per common share
              
              $
              0.39
              
              $
              0.38
              
              $
              1.58
              
              $
              1.55
 11
 Table
              of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis
        of
        Presentation and Restatement of Previously Issued Consolidated Financial
        Statements (continued)
 
 **Restatement
        of Previously Issued Consolidated Financial Statements
        (continued)**
 
 The
        following table reflects the effect of the restatement on the Consolidated
        Statement of Cash Flows (in thousands):
 
 **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,****2005**
              
              **2005****As
                  previously reported**
              
              **As
                  restated**Selected
                  Cash Flow Data:Net
                  income
              
              $
              121,495
              
              $
              119,357Depreciation
                  and amortization
              
              
              92,735
              
              
              93,166Provision
                  for impaired assets and restaurant closings
              
              
              11,263
              
              
              11,438Minority
                  interest in consolidated entities’ income
              
              
              7,558
              
              
              7,470Change
                  in deferred income taxes
              
              
              (29,223
              )
              
              (30,604
              )Increase
                  in deferred rent
              
              
              5,802
              
              
              7,090Decrease
                  in other current assets
              
              
              4,679
              
              
              6,090Increase
                  in other assets
              
              
              (8,173
              )
              
              (9,309
              )Increase
                  in accounts payable, sales taxes payable and accrued expenses
              
              
              17,853
              
              
              12,625Increase
                  in partner deposit and accrued buyout liability
              
              
              6,821
              
              
              6,724Decrease
                  in unearned revenue
              
              
              (79,565
              )
              
              (72,937
              )Net
                  cash provided by operating activities
              
              
              187,444
              
              
              187,309Distributions
                  to minority interest
              
              
              (13,300
              )
              
              (13,165
              )Net
                  cash used in financing activities
              
              
              (16,842
              )
              
              (16,707
              )
 12
 Table
              of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 1.  Basis
        of
        Presentation and Restatement of Previously Issued Consolidated Financial
        Statements (continued)
 
 **Reclassification**
 
 Certain
        prior year amounts shown in the accompanying unaudited consolidated financial
        statements have been reclassified to conform to the 2006 presentation.
        Distribution expense to employee partners has been included in the line item
        “Labor and other related” expenses for managing partner distributions and in
“General and administrative” expenses for area operating partner distributions
        in the Unaudited Consolidated Statements of Income. Employee partner stock
        buyout expense has been included in “General and administrative” expenses in the
        Unaudited Consolidated Statements of Income. “Excess income tax benefits
        credited to equity” was presented separately in the 2006 presentation of cash
        flows from operating activities and had previously been included in the change
        in income taxes payable in the Unaudited Statement of Cash Flows. These
        reclassifications had no effect on total assets, total liabilities,
        stockholders’ equity, net cash provided by operating activities or net
        income.
 
 2 .  Stock-Based
        Compensation
 
 **Adoption
        of New Accounting Pronouncement**
 
 Effective
        January 1, 2006, the Company adopted the fair value based method of accounting
        for stock-based employee compensation as required by SFAS No. 123R, “Share-Based
        Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”
The fair value based method requires the Company to expense all stock-based
        employee compensation. SFAS No. 123R also requires the benefits of tax
        deductions in excess of recognized compensation
        cost to be reported as a financing cash flow, rather than as an operating
        cash
        flow as previously required. The Company has adopted SFAS No. 123R using
        the
        modified prospective method. Accordingly, the Company has expensed all unvested
        and newly granted stock-based employee compensation beginning January 1,
        2006,
        but prior period amounts have not been restated.
 
 The
        incremental pre-tax stock-based compensation expense recognized for stock
        options due to the adoption of SFAS No. 123R for the three and nine months
        ended
        September 30, 2006 was approximately $2,451,000 and $7,303,000, respectively.
        Total stock-based compensation expense, including the incremental pre-tax
        stock-based compensation expense above, grants of other equity awards and
        employee partner stock buyout expense, was approximately $17,197,000 and
        $56,596,000, with an associated tax benefit of approximately $6,316,000 and
        $20,900,000 for the three and nine months ended September 30, 2006,
        respectively. The Company did not capitalize any stock-based compensation
        costs
        during the nine months ended September 30, 2006.
  13
 Table
            of Contents
 **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 2.  Stock-Based
        Compensation (continued)
 
 **Adoption
        of New Accounting Pronouncement (continued)**
 
 Prior
        to
        January 1, 2006, the Company accounted for its
        stock-based employee compensation under the intrinsic value method. No
        stock-based employee compensation cost was reflected in net income to the
        extent
        options granted had an exercise price equal to or exceeding the fair market
        value of the underlying common stock on the date of grant. The following
        table
        provides pro forma net income and earnings per share amounts using the fair
        value based method of SFAS No. 123, “Accounting for Stock-Based Compensation”
(in thousands, except per share data):
 **THREE
                  MONTHS**
              
              **NINE
                  MONTHS****ENDED**
              
              **ENDED****SEPTEMBER
                  30,**
              
              **SEPTEMBER
                  30,****2005**
              
              **2005****(restated)**
              
              **(restated)**Net
                  income
              
              $
              29,472
              
              $
              119,357Stock-based
                  employee compensation expense included in net income, net of related
                  taxes
              
              
              1,386
              
              
              4,883Total
                  stock-based employee compensation expense determinedunder
                  fair value based method, net of related taxes
              
              
              (5,705
              )
              
              (17,232
              )Pro
                  forma net income
              
              $
              25,153
              
              $
              107,008Earnings
                  per common share:Basic
              
              $
              0.40
              
              $
              1.61Basic
                  - pro forma
              
              $
              0.34
              
              $
              1.45Diluted
              
              $
              0.38
              
              $
              1.55Diluted
                  - pro forma
              
              $
              0.33
              
              $
              1.40
 
 The
        preceding pro forma results were calculated with the use of the Black-Scholes
        option pricing model. The following assumptions were used for options granted
        during the nine months ended September 30, 2005: (1) risk-free interest rate
        of
        4.2%; (2) dividend yield of 1.24%; (3) expected life of 6.3 years; and (4)
        volatility of 28.9%. Expected volatilities are based on historical volatility
        of
        the Company’s stock. The Company uses historical data to estimate option
        exercise and employee termination within the valuation model; separate groups
        of
        employees that have similar historical exercise behavior are considered
        separately for valuation purposes under SFAS No. 123R. The expected term
        of
        options granted represents the period of time that options granted are expected
        to be outstanding. The risk-free rate for periods within the contractual
        life of
        the option is based on the U.S. Treasury yield curve in effect at the time
        of
        grant. Results may vary depending on the assumptions applied within the model.
        In 2005, the Company identified certain assumptions surrounding the forfeiture
        of stock options used in the Black-Scholes model calculation and attribution
        of
        expense that were not correctly reflected in its pro forma expense. For the
        three and nine months ended September 30, 2005, the Company presents pro
        forma
        compensation expense amounts that reflect actual attribution and forfeitures
        that occurred in that period.
  **Stock-Based
        Compensation Plans**
 
 The
        Company’s Amended and Restated Stock Option Plan was approved by the
        shareholders of the Company in April 1999, and has subsequently been amended
        as
        deemed appropriate by the Company’s Board of Directors or shareholders. In 2004,
        this plan was amended to allow the issuance of restricted stock and was renamed
        the Amended and Restated Stock Plan (the “Stock Plan”). There are currently
        23,500,000 shares of the Company’s common stock which may be issued and sold
        upon exercise of options or grants of restricted common stock under the Stock
        Plan. The term of options and restricted stock granted is determined by the
        Board of Directors and grantees generally vest in the options or shares over
        a
        one to ten year period.
 14
 Table
              of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 2.  Stock-Based
        Compensation (continued)
 
 **Stock-Based
        Compensation Plans (continued)**
 
 The
        purpose of the Stock Plan is to attract competent personnel, to provide
        long-term incentives to Directors and key employees, and to discourage employees
        from competing with the Company.
 
 In
        2002,
        the Company adopted the 2002 Managing Partner Stock Option Plan to provide
        for
        the issuance of options to managing partners and other key employees of the
        Company, including upon commencement of employment and to managing partners
        upon
        completion of the term of their employment agreements. In 2005, this plan
        was
        amended to allow the issuance of restricted stock and was renamed the 2005
        Amended and Restated Managing Partner Stock Plan (the “MP Stock Plan”). No
        options or restricted stock may be granted under the MP Stock Plan to Directors
        or Officers of the Company or any of its subsidiaries or affiliated
        partnerships. The MP Stock Plan is administered by the Board of Directors.
        There
        are currently 7,500,000 shares of the Company’s common stock which may be
        issued or sold upon exercise of options or grants of restricted common stock
        under the MP Stock Plan. The term of options and restricted stock granted
        under
        the MP Stock Plan is determined by the Board of Directors and generally ranges
        from five to fifteen years.
 
 Options
        under the Stock Plan and the MP Stock Plan may be options that qualify under
        Section 422 of the Internal Revenue Code (“Incentive Stock Options”) or options
        that do not qualify under Section 422 (“Nonqualified Options”). To date, the
        Company has only issued Nonqualified Options.
 
 The
        exercise price for options granted under the Stock
        Plan and the MP Stock Plan generally cannot be less than fair market value
        at
        the date of grant of the shares covered by the option. The exercise price
        of
        options granted under the MP Stock Plan was historically determined by using
        a
        three-month weighted-average stock price to eliminate the daily trading
        increases and decreases in the stock price. This averaging method resulted
        in
        certain option grants under the MP Stock Plan that were above or below the
        closing price as of the exact grant date. Compensation expense resulted if
        the
        exercise price of these options was less than the market price on the date
        of
        grant. The Company discontinued use of the average stock price in November
        2005.
 
 In
        2006,
        the Company adopted the OSI Restaurant Partners, Inc. Partner Equity Plan
        (the
“PEP”) for managing partners and chef partners in domestic restaurants. The PEP,
        as approved by the Board and the Company’s shareholders, includes the Partner
        Equity Deferred Compensation Diversified Plan (the “Diversified Plan”) and
        the Partner Equity Deferred Compensation Stock Plan (the “PEP Stock Plan”).
 
 When
        a
        managing partner or chef partner of a domestic restaurant executes a five-year
        employment agreement, he or she makes a capital contribution in exchange
        for a
        partnership interest in the restaurant. Upon completion of each five-year
        term
        of employment, the participating partners will receive a deferred compensation
        benefit. The Diversified Plan will permit partners to direct the investment
        of
        their deferred compensation accounts into a variety of benchmark investment
        funds. Specified portions of partners’ accounts will be required to be invested
        in the PEP Stock Plan (a minimum of 75%, 50% and 25% based on completion
        of the
        first, second and third or subsequent employment terms, respectively). 
Only shares of the Company’s common stock purchased on the open market will be
        utilized in the PEP Stock Plan.
 
 The
        PEP
        is effective for all new partner employment agreements signed after
        March 1, 2006 and will replace the issuance of stock options to partners
        upon completion of their terms of employment. In addition, during the first
        quarter of 2006, all partners with existing employment agreements were given
        an
        opportunity to elect to participate in the PEP in lieu of the receipt of
        stock
        options upon completion of their terms of employment. As a result, the only
        partners who will receive stock option grants under the MP Stock Plan in
        the
        future are those partners who executed an employment agreement prior to March
        1,
        2006 and who did not elect to participate in the PEP.  15
 Table
              of Contents
 **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 2.  Stock-Based
        Compensation (continued)
 
 **Stock-Based
        Compensation Plans (continued)**
 
 The PEP
        Stock Plan is intended to be an unfunded, unsecured promise to
        pay the participant in the Company’s common stock, subject to the
        terms and conditions of the PEP Stock Plan. The Diversified Plan also is
        intended to be an unfunded, unsecured promise to pay the participant in cash,
        subject to the terms and conditions of the Diversified Plan.
 
 The
        Company currently intends to fund its PEP obligation by making a cash
        contribution to an irrevocable grantor or “rabbi” trust upon each partner’s
        completion of a term of employment (the Company is the sole owner of any
        assets
        in the trust and participants are general creditors of the Company with respect
        to their benefits under the PEP). A specified percentage of these funds will
        be
        required to be used by the trustee to purchase shares of the Company’s common
        stock on the open market. No shares will be issued by the Company to the
        PEP.
 
 All
        distributions from PEP
        Stock
        Plan accounts will be made in whole shares of common stock. Distributions
        from
        Diversified Plan accounts will be made in cash. The maximum number of shares
        that may be distributed pursuant to the PEP Stock Plan is 5,000,000, subject
        to
        adjustment for stock dividends, stock splits and certain other changes in
        the
        Company's capitalization.
 
 Participants’
        PEP Stock Plan accounts will be credited with phantom shares of the Company’s
        common stock at the time of a contribution based on the amount of the cash
        contribution to the PEP Stock Plan and the closing trading price of the
        Company’s common stock on the NYSE on the day of the contribution (or, if there
        is no trading of the shares on that day, on the next date on which trading
        occurs). Accounts will be credited with notional gains or losses from the
        date
        the contribution is credited based on actual increases and decreases in the
        value of the Company’s common stock. A participant will have no voting rights or
        other rights as a shareholder based on phantom shares of the Company’s common
        stock credited to his or her account, and the Company will have no obligation
        to
        set aside or reserve the Company’s common stock for the purpose of meeting its
        obligations under the PEP Stock Plan. Notwithstanding the foregoing, a
        participant will be entitled to receive credits to his or her account under
        the
        Diversified Plan equal to the amount of any dividends that are payable on
        the
        Company’s common stock based on the number of phantom shares of the Company’s
        common stock credited to the participant’s account at the time such dividend is
        declared. Although participants’ accounts in the PEP Stock Plan will not
        actually hold the Company’s common stock, the Company expects to cause the trust
        to purchase the Company’s common stock in the open market in amounts equal to
        the number of phantom shares credited to the PEP Stock Plan accounts. The
        Company will not issue shares of its common stock to the trust for PEP from
        its
        treasury or from authorized and unissued shares without shareholder approval.
        As
        of September 30, 2006, the trust has not purchased any shares (see Note
        9).
 
 Amounts
        credited to a partner’s accounts are fully vested at all times and participants
        will have no discretion with respect to the time and form of benefit payments
        under the PEP. Except in the event of the death or disability of the
        participant, each account will be distributed to the participant in three
        payments:
 
 ·
              25%
                  of the then total account balance will be distributed five years
                  after the
                  Company contribution is made (which generally occurs at the end
                  of the
                  five-year employment term);
 
 ·
              an
                  additional 25% of the account (i.e., one-third of the remaining
                  account
                  balance) will be distributed seven years after the Company contribution
                  is
                  made; and
 
 ·
              the
                  remaining account balance will be distributed 10 years after the
                  Company
                  contribution is made.
 16
 Table
              of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 2.  Stock-Based
        Compensation (continued)
 
 **Stock-Based
        Compensation Plans (continued)**
 
 The
        Company currently administers the PEP Stock Plan. The administrator may,
        at any
        time, amend or terminate the PEP Stock Plan, except that no amendment or
        termination may reduce a participant’s account balance or accelerate benefits
        under the PEP Stock Plan in violation of Section 409A of the IRC. If the
        Company
        terminates the PEP Stock Plan, the Company must pay to each participant the
        balance of the participant’s accounts at the time and in the form such amounts
        would have been paid absent termination of the PEP Stock Plan. Notwithstanding
        the foregoing, to the extent permitted under Section 409A of the IRC, the
        Company may, in its complete and sole discretion, accelerate distributions
        under
        the PEP Stock Plan in the event of (i) change in the ownership or effective
        control of the Company, (ii) change in the ownership of a substantial portion
        of
        the assets of the Company, (iii) liquidation or bankruptcy of the Company,
        or
        (iv) any other circumstances permitted under Section 409A of the
        IRC.
 
 After
        completion of each five-year employment term under the current terms of the
        PEP,
        each partner will be issued 1,000 shares of the Company’s common stock (“Partner
        Shares”) under the MP Stock Plan. Once awarded, these Partner Shares are
        unrestricted and may be sold or transferred at any time. Partner Shares are
        accounted for in a similar manner as restricted stock and compensation expense
        is recognized over the five-year service period prior to the issuance date
        at
        the end of the employment term.
 
 **Stock
        Options**
 
 The
        following table presents a summary of the Company’s stock options as of
        September 30, 2006 and activity in the Company’s stock option plans for the nine
        months ended September 30, 2006 (in thousands, except option prices and
        contractual life):
  **WEIGHTED-****WEIGHTED-**
              
              **AVERAGE****AVERAGE**
              
              **REMAINING**
              
              **AGGREGATE****EXERCISE**
              
              **CONTRACTUAL**
              
              **INTRINSIC****OPTIONS**
              
              **PRICE**
              
              **LIFE
                  (YEARS)**
              
              **VALUE**Outstanding
                  at December 31, 2005
              
              
              16,643
              
              $
              32.25Granted
              
              
              25
              
              
              38.95Exercised
              
              
              (864
              )
              
              24.91Forfeited
              
              
              (669
              )
              
              39.49Outstanding
                  at September 30, 2006
              
              
              15,135
              
              $
              32.36
              
              
              8.4
              
              $
              46,733Exercisable
                  at September 30, 2006
              
              
              3,048
              
              $
              26.29
              
              
              4.8
              
              $
              18,224Fully
                  vested, non-exercisable at September 30, 2006
              
              
              8,327
              
              $
              32.52
              
              
              10.4
              
              $
              25,757
 
 The
        following assumptions were used for options granted during the nine months
        ended
        September 30, 2006: (1) risk-free interest rate of 4.8%; (2) dividend yield
        of
        1.25%; (3) expected life of 7.5 years; and (4) volatility of 28.5%.
 
 The
        total
        intrinsic value (market value on date of exercise less exercise price) of
        options exercised during the nine months ended September 30, 2006 was
        approximately $15,365,000. The aggregate intrinsic value of options outstanding
        as of September 30, 2006, disclosed in the table above, represents the closing
        stock price on the last trading day of the quarter less the exercise price,
        multiplied by the number of in-the-money stock options outstanding. The excess
        cash tax benefit classified as a financing cash inflow for the nine months
        ended
        September 30, 2006 was approximately $3,398,000.
  17
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 2.  Stock-Based
        Compensation (continued)
 
 **Stock
        Options (continued)**
 
 At
        September 30, 2006, there was approximately $19,283,000 of unrecognized,
        pre-tax
        compensation expense related to non-vested stock options. This cost is expected
        to be recognized over a weighted-average period of 4.3 years. The
        weighted-average grant date fair value of stock options granted during the
        nine
        months ended September 30, 2006 was $14.03 per share.
 
 The
        Company has a policy of repurchasing shares on the open market to satisfy
        stock
        option exercises, to reduce the dilutive effect of restricted stock and for
        deposits in the PEP Stock Plan. The Company generally repurchases shares
        based
        on estimates of exercises, vesting of restricted stock and contributions
        to the
        PEP Stock Plan and has repurchased 1,419,000 shares in 2006. The Company
        typically issues treasury shares upon exercise of stock options.
 
 **Restricted
        Stock and Partner Shares**
 
 The
        following table presents restricted stock and Partner Share activity in the
        Company’s plans for the nine months ended September 30, 2006 (in thousands,
        except average fair value):
 
 **NUMBER
                  OF RESTRICTED SHARE AWARDS**
              
              **WEIGHTED-AVERAGE
                  GRANT DATE FAIR VALUE PER AWARD**Restricted
                  stock and Partner Share awards outstanding at December 31,
                  2005
              
              
              1,044
              
              $
              41.54Granted
              
              
              357
              
              
              38.39Vested
              
              
              -
              
              
              -Forfeited
              
              
              (48
              )
              
              41.30Restricted
                  stock and Partner Share awards outstanding at September 30,
                  2006
              
              
              1,353
              
              $
              40.83
 
 The
        preceding table includes 256,750 non-vested Partner Shares granted with a
        weighted-average fair value of $36.86 and 5,500 Partner Shares forfeited
        with a
        weighted-average fair value of $38.01 during the nine months ended September
        30,
        2006.
 
 Compensation
        expense recognized in net income for restricted stock and Partner Share awards
        granted during the three and nine months ended September 30, 2006 was
        approximately $2,071,000 and $6,669,000, respectively. At September 30, 2006,
        unrecognized pre-tax compensation expense related to non-vested restricted
        stock
        and Partner Share awards was approximately $45,000,000 and will be recognized
        over a weighted-average period of 5.5 years.
 
 On
        April
        27, 2005, the Company’s Board of Directors approved a grant of restricted common
        stock to the Company’s Chief Executive Officer under the Stock Plan. Under the
        terms of the grant, 300,000 shares of restricted common stock were issued
        and
        will vest as follows: on December 31, 2009, 90,000 shares, plus an additional
        30,000 shares if the market capitalization of the Company exceeds
        $6,060,000,000; on December 31, 2011, 90,000 shares, plus an additional 30,000
        shares if the market capitalization of the Company exceeds $8,060,000,000;
        and
        on December 31, 2014, the balance of all remaining unvested shares. On December
        8, 2005, the Company’s Board of Directors approved an additional grant of
        restricted stock to the Company’s Chief Executive Officer under the Stock Plan.
        Under the terms of the grant, 150,000 shares of restricted stock were issued
        effective December 31, 2005 and will vest as follows: on December 31, 2009,
        75,000 shares and on December 31, 2011, the remaining 75,000
        shares.
 18
 Table
              of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 2.  Stock-Based
        Compensation (continued)
 
 **Restricted
        Stock and Partner Shares (continued)**
 
 On
        July
        27, 2005, the Company’s Board of Directors approved a grant of 50,000 shares of
        restricted common stock to the Senior Vice President of Real Estate and
        Development as an inducement grant in connection with his hiring. These shares
        were not issued under any existing stock plan of the Company. Under the terms
        of
        the grant, the 50,000 shares of restricted stock will vest as follows: on
        June
        13, 2008, 10,000 shares; on June 13, 2010, 10,000 shares; on June 13, 2012,
        15,000 shares; and on June 13, 2015, the balance of all remaining unvested
        shares.
 
 On
        October 26, 2005, the Company’s Board of Directors approved a grant of 100,000
        shares of restricted common stock to the Senior Vice President and Chief
        Financial Officer as an inducement grant in connection with his hiring,
        effective November 1, 2005. These shares were not issued under any existing
        stock plan. Under the terms of the grant, the 100,000 shares of restricted
        stock
        will vest as follows: on November 1, 2010, 50,000 shares, plus an additional
        10,000 shares if the market capitalization of the Company exceeds
        $6,000,000,000; and on November 1, 2012, the balance of all remaining unvested
        shares.
 
 **Liability-Based
        Awards**
 
 On
        April
        25, 2006, the Company’s Board of Directors awarded an equivalent of 79,000
        shares of the Company’s common stock to certain employees with a
        weighted-average grant date fair value of $41.61 per award. These awards
        may be
        settled in cash or through issuance of restricted stock, and therefore, qualify
        as liability-based awards under SFAS No. 123R. The awards will be revalued
        at
        each reporting period and compensation expense will be adjusted
        accordingly.
 
 Compensation
        expense recognized in net income for these awards granted during the three
        and
        nine months ended September 30, 2006 was approximately $144,000 and $266,000,
        respectively. At September 30, 2006, unrecognized, pre-tax compensation expense
        related to these awards was approximately $2,239,000 and will be recognized
        over
        a weighted-average period of 4.4 years.
 
 3.  Other
        Current Assets
 
 Other
        current assets consisted of the following (in thousands):
 
 **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****2006**
              
              **2005****(restated)**Prepaid
                  expenses
              
              $
              21,516
              
              $
              16,625Accounts
                  receivable
              
              
              21,594
              
              
              19,396Accounts
                  receivable - vendors
              
              
              11,873
              
              
              9,874Accounts
                  receivable - franchisees
              
              
              2,032
              
              
              1,777Deposits,
                  which includes $7,504 of income tax deposits
              
              
              9,798
              
              
              2,651Other
                  current assets
              
              
              500
              
              
              500$
              67,313
              
              $
              50,823
  19
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 4.  Property,
        Fixtures and Equipment, Net
 
 Property,
        fixtures and equipment, net, consisted of the following (in
        thousands):
 
 **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****2006**
              
              **2005****(restated)**Land
              
              $
              194,766
              
              $
              200,394Buildings
                  and building improvements
              
              
              740,765
              
              
              689,056Furniture
                  and fixtures
              
              
              271,319
              
              
              231,608Equipment
              
              
              542,823
              
              
              498,018Leasehold
                  improvements
              
              
              376,532
              
              
              345,640Construction
                  in progress
              
              
              118,395
              
              
              68,878Less:
                  Accumulated depreciation
              
              
              (742,291
              )
              
              (645,894
              )$
              1,502,309
              
              $
              1,387,700
 
 During
        the nine months ended September 30, 2005, the Company recorded a provision
        for
        impaired assets and restaurant closings of $10,026,000 which included $1,373,000
        for the closing of two domestic Outback Steakhouse restaurants, $1,072,000
        for
        the partial impairment of one Bonefish Grill restaurant and $7,581,000 for
        an
        impairment charge against the deferred license fee receivable related to
        certain
        non-restaurant operations.
 
 During
        the nine months ended September 30, 2006, the Company recorded a provision
        for
        impaired assets and restaurant closings of $13,547,000 which included the
        following charges: $1,693,000 for the impairment of seven domestic Outback
        Steakhouse restaurants, $1,574,000 for the impairment of three international
        Outback Steakhouse restaurants, $3,468,000 for the impairment of three
        Carrabba’s Italian Grill restaurants, $2,055,000 for the closing of one
        Cheeseburger in Paradise restaurant and $1,855,000 for the impairment of
        two
        Cheeseburger in Paradise restaurants, $844,000 for the closing of one Bonefish
        Grill restaurant and $423,000 for the impairment of two Bonefish Grill
        restaurants that were sold in the second quarter, $704,000 for the loss
        associated with certain non-restaurant operations (see Note 16) and $931,000
        for
        an impairment charge for intangible and other asset impairments related to
        the
        closing of Paul Lee’s Chinese Kitchen.
 
 On
        May
        31, 2006, the Company sold its interests in two of its Company-owned Bonefish
        Grills to the minority owners of those restaurants in exchange for future
        royalties and other contingent payments. These two locations are now operated
        as
        franchises.
 
 In
        January 2005, the Company executed a lease termination agreement to vacate
        a
        premises occupied by a Company-owned Outback Steakhouse. In accordance with
        the
        terms of this agreement, the Company vacated the restaurant and terminated
        its
        lease in June 2006. The Company received approximately $6,014,000 and recorded
        a
        gain of $5,165,000 on the disposal of this restaurant during the three months
        ended June 30, 2006, which is included in the line item “Other income (expense),
        net” in the Company’s Unaudited Consolidated Statements of
        Income.
  20
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.** ****
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 5.  Goodwill
        and Intangible Assets, Net
 
 The
        change in the carrying amount
        of goodwill for the nine months ended September 30, 2006 is as follows (in
        thousands):
 
 December
                  31, 2005, as restated
              
              $
              112,627Acquisitions
                  (see Note 11)
              
              
              4,391Acquisition
                  adjustment
              
              
              (378
              )September
                  30, 2006
              
              $
              116,640
  Intangible
        assets, net, consisted of the following (in thousands):
 
 **WEIGHTED
                  AVERAGE**
              
              **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****AMORTIZATION**
              
              **2006**
              
              **2005****PERIOD
                  (YEARS)**Tradename
                  (gross)
              
              
              
              
              $
              14,210
              
              $
              -Trademarks
                  (gross)
              
              
              24
              
              
              8,344
              
              
              8,344Less:
                  accumulated amortization
              
              
              
              
              
              (774
              )
              
              (511
              )Net
                  trademarks
              
              
              
              
              
              7,570
              
              
              7,833Trade
                  dress (gross)
              
              
              15
              
              
              777
              
              
              777Less:
                  accumulated amortization
              
              
              
              
              
              (110
              )
              
              (72
              )Net
                  trade dress
              
              
              
              
              
              667
              
              
              705Favorable
                  leases (gross, lives ranging from 2 to 30 years)
              
              
              17
              
              
              4,162
              
              
              3,224Less:
                  accumulated amortization
              
              
              
              
              
              (431
              )
              
              (200
              )Net
                  favorable leases
              
              
              
              
              
              3,731
              
              
              3,024Intangible
                  assets, less total accumulated amortization of $1,315 and$783
                  at September 30, 2006 and December 31, 2005, respectively
              
              
              21
              
              $
              26,178
              
              $
              11,562
 
 The
        aggregate amortization expense related to these intangible assets was $605,000
        for the nine months ended September 30, 2006. Annual amortization expense
        related to these intangible assets for each of the next five years is
        anticipated to be approximately $715,000.
  21
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 6.  Other
        Assets
 
 Other
        assets consisted of the following (in thousands):
 
 **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****2006**
              
              **2005**Other
                  assets
              
              $
              68,579
              
              $
              59,921Insurance
                  receivables (see Notes 9 and 15)
              
              
              2,207
              
              
              41,696Liquor
                  licenses, net of accumulated amortization of $5,699 and $5,037
                  atSeptember
                  30, 2006 and December 31, 2005, respectively
              
              
              15,610
              
              
              15,728Deferred
                  license fee
              
              
              1,474
              
              
              2,136Assets
                  held for sale
              
              
              17,682
              
              
              22,633$
              105,552
              
              $
              142,114
 
 In
        accordance with SFAS
        No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
the Company has classified certain land and building assets as “held for sale”
in its Unaudited Consolidated Balance Sheets. Assets held for sale as of
        September 30, 2006 consisted of $16,713,000 of land and $969,000 of buildings
        (see Note 16). Assets held for sale as of December 31, 2005 consisted of
        $21,439,000 of land and $1,194,000 of buildings. No gain or loss has been
        recorded as it is anticipated that proceeds from the sale will exceed the
        net
        book value of the assets.
 
 7.  Accrued
        Expenses
 
 Accrued
        expenses consisted of the following (in thousands):
 
 **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****2006**
              
              **2005****(restated)**Accrued
                  payroll and other compensation
              
              $
              45,729
              
              $
              53,709Accrued
                  insurance
              
              
              37,052
              
              
              29,801Other
                  accrued expenses
              
              
              58,912
              
              
              52,150$
              141,693
              
              $
              135,660
 
 Remaining
        accrued restaurant closing expenses o f
        less
        than $100,000 were included
        in other accrued expenses as of September 30, 2006 and December 31, 2005,
        related to restaurant closing provisions.
 22
 Table
              of Contents
 **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  Long-term
        Debt
 
 Long-term
        debt consisted of the following (in thousands):
 **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****2006**
              
              **2005**Revolving
                  lines of credit, uncollateralized, interest rates ranging from
                  5.88% to
                  8.25% atSeptember
                  30, 2006 and 5.00% to 5.21% at December 31, 2005
              
              $
              218,000
              
              $
              73,000Outback
                  Korea notes payable, interest rates ranging from 5.34% to 6.40%
                  atSeptember
                  30, 2006 and 4.95% to 6.06% at December 31, 2005
              
              
              47,981
              
              
              46,670Outback
                  Korea long-term note payable, interest rate of 5.86% at September
                  30,
                  2006
              
              
              10,352
              
              
              -Outback
                  Japan notes payable, uncollateralized, interest rates ranging from
                  0.86%to
                  1.14% at September 30, 2006 and 0.86% at December 31, 2005
              
              
              6,845
              
              
              5,085Outback
                  Japan revolving lines of credit, interest rates ranging from 1.02%
                  to
                  1.12% atSeptember
                  30, 2006 and 0.69% to 0.77% at December 31, 2005
              
              
              11,172
              
              
              14,636Other
                  notes payable, uncollateralized, interest rates ranging
                  from2.07%
                  to 7.00% at September 30, 2006 and December 31, 2005
              
              
              7,319
              
              
              8,424Sale-leaseback
                  obligation
              
              
              6,250
              
              
              6,250Guaranteed
                  debt of franchisee
              
              
              31,883
              
              
              31,283Guaranteed
                  debt of unconsolidated affiliate
              
              
              2,495
              
              
              -342,297
              
              
              185,348Less:
                  current portion
              
              
              (68,587
              )
              
              (63,442
              )Less:
                  guaranteed debt
              
              
              (34,378
              )
              
              (31,283
              )Long-term
                  debtof
                  OSI Restaurant Partners, Inc.
              
              $
              239,332
              
              $
              90,623
 
 Effective
        March 10, 2006, the Company amended an uncollateralized $150,000,000 revolving
        credit facility that was scheduled to mature in June 2007 with a new
        $225,000,000 maximum borrowing amount and maturity date of June 2011. The
        amended line of credit permits borrowing at interest rates ranging from 45
        to 65
        basis points over the 30, 60, 90 or 180-day London Interbank Offered Rate
        (LIBOR) (ranging from 5.32% to 5.37% at September 30, 2006 and ranging from
        4.39% to 4.69% at December 31, 2005). At September 30, 2006, the unused portion
        of the revolving line of credit was $21,000,000.
 
 The
        credit agreement contains certain restrictions and conditions as defined
        in the
        agreement that require the Company to maintain consolidated net worth equal
        to
        or greater than consolidated total debt and to maintain a ratio of total
        consolidated debt to EBITDAR (earnings before interest, taxes, depreciation,
        amortization and rent) equal to or less than 3.0 to 1.0. The Company obtained
        from its lenders temporary waivers of certain covenants in its revolving
        credit
        facility for the quarter ended September 30, 2006 (see Note 16).
 
 Effective
        March 10, 2006, the Company also amended a $30,000,000 line of credit that
        was
        scheduled to mature in June 2007 with a new $40,000,000 maximum borrowing
        amount
        and maturity date of June 2011. The amended line permits
        borrowing at interest rates ranging from 45 to 65 basis points over LIBOR
        for
        loan draws and 55 to 80 basis points over LIBOR for letter of credit advances.
        The credit agreement contains certain restrictions and conditions as defined
        in
        the agreement. The Company received two covenant waivers from its lender
        on this
        line of credit for the quarter ended September 30, 2006 (see Note 16). At
        September 30, 2006, the outstanding balance on the line of credit was
        $14,000,000. There were no draws outstanding on this line of credit as of
        December 31, 2005. At September 30, 2006 and December 31, 2005, $25,072,000
        and
        $20,072,000, respectively, of the line of credit 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.  23
 Table
              of Contents
 **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  Long-term
        Debt (continued)
 
 The
        Company has notes payable with banks bearing interest at rates ranging from
        5.34% to 6.40% and from 4.95% to 6.06% at September 30, 2006 and December
        31,
        2005, respectively, to finance development of the Company’s restaurants in South
        Korea. The notes are denominated and payable in Korean won, with outstanding
        balances as of September 30, 2006 maturing at dates ranging from October
        2006 to
        August 2007. As of September 30, 2006 and December 31, 2005, the combined
        outstanding balance was approximately $47,981,000 and $46,670,000, respectively.
        Certain of the notes payable are collateralized by lease and other deposits.
        At
        September 30, 2006 and December 31, 2005, collateralized notes totaled
        approximately $40,178,000 and $34,326,000, respectively. The Company has
        been
        pre-approved by these banks for additional borrowings of approximately
        $8,000,000 and $4,800,000 at September 30, 2006 and December 31, 2005,
        respectively.
 
 Effective
        September 28, 2006, the Company established an uncollateralized note payable
        at
        a principal amount of 10,000,000,000 Korean won, which bears interest at
        1.25%
        over the Korean Stock Exchange 3-month certificate of deposit rate (5.86%
        as of
        September 30, 2006).  The proceeds of this note were used to refinance
        approximately 9,000,000,000 Korean won of short-term borrowings and to pay
        estimated 2006 corporate income taxes of 1,000,000,000 Korean won.  The
        note is denominated and payable in Korean won and matures in September
        2009.  As of September 30, 2006, the outstanding principle on this note was
        approximately $10,352,000. The note contains certain restrictions and conditions
        as defined in the agreement that require the Company’s Korean subsidiary to
        maintain a ratio of debt to equity equal to or less than 2.5 to 1.0 and to
        maintain a ratio of bank borrowings to total assets equal to or less than
        0.4 to
        1.0.  At September 30, 2006, the Company was in compliance with these debt
        covenants.
 
 The
        Company has notes payable with banks to finance the development of the Company’s
        restaurants in Japan (“Outback Japan”). The notes are payable to banks,
        collateralized by letters of credit and lease deposits of approximately
        $ 3,100,000
        at September 30, 2006 and December 31, 2005, and bear interest at rates ranging
        from 0.86% to 1.14% and at 0.86% at September 30, 2006 and December 31, 2005,
        respectively. The notes are denominated and payable in Japanese yen, with
        outstanding balances as of September 30, 2006 maturing in October 2006. As
        of
        September 30, 2006 and December 31, 2005, outstanding balances totaled
        approximately $6,845,000 and $5,085,000, respectively.
 
 In
        October 2003, Outback Japan established a revolving line of credit to finance
        the development of new restaurants in Japan and refinance certain notes payable.
        The line permits borrowing up to a maximum of $10,000,000.
        Effective March 10, 2006, this revolving credit facility that was scheduled
        to
        mature in June 2007 was amended with a new maturity date in June 2011. The
        amended line of credit permits borrowing at interest rates ranging from 45
        to 65
        basis points over LIBOR. As of September 30, 2006 and December 31, 2005,
        the
        Company had borrowed approximately $9,121,000 and $9,043,000, respectively,
        on
        the line of
        credit
        at an average interest rate of 1.05%, with draws as of September 30, 2006
        maturing from December 2006 to February 2007. The revolving line of credit
        contains certain restrictions and conditions as defined in the agreement. Outback
        Japan received two covenant waivers from its lender on this line of credit
        for
        the quarter ended September 30, 2006 (see Note 16).
 
 In
        February 2004, Outback Japan established an additional revolving line of
        credit
        to finance the development of new restaurants in Japan and to refinance certain
        notes payable. The line permits borrowing up to a maximum of $10,000,000
        with
        interest of LIBOR divided by a percentage equal to 1.00 minus the Eurocurrency
        Reserve Percentage. The line was originally scheduled to mature in December
        2006. As of September 30, 2006 and December 31, 2005, the Company had borrowed
        approximately $2,051,000 and $5,593,000, respectively, on the line of credit
        at
        an average interest rate of 1.10%, with draws as of September 30, 2006 maturing
        in November 2006. The revolving line of credit contains certain restrictions
        and
        conditions as defined in the agreement. As of September 30, 2006, the Company
        was in compliance with all of the debt covenants.
  24
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  Long-term
        Debt (continued)
 
 As
        of
        September 30, 2006, the Company had approximately $7,319,000 of notes payable
        at
        interest rates ranging from 2.07% to 7.00%. These notes have been primarily
        issued for buyouts of general manager interests in the cash flows of their
        restaurants and generally are payable over five years.
 
 In
        August
        2005, the Company entered into a sale-leaseback arrangement for five of its
        properties. Pursuant to this arrangement, the Company sold these properties
        for
        a total of $6,250,000, including $1,250,000 for tenant improvements. The
        Company
        then leased the sites back for a 30-year term and will make lease payments
        on
        the first day of each calendar month. Since this transaction does not qualify
        for sale-leaseback accounting treatment, the Company has included the proceeds
        in the Company’s Unaudited Consolidated Balance Sheets as long-term
        debt.
 
 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 revised FASB Interpretation No.
        46 (“FIN 46R”), “Consolidation of Variable Interest Entities.” At September 30,
        2006 and December 31, 2005, the outstanding balance on the line of credit
        was
        approximately $31,883,000 and $31,283,000, respectively, and is included
        in the
        Company’s Unaudited Consolidated Balance Sheets as long-term debt. 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 requiring the Company to perform
        under the guarantee obligation, 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 which is leased to those franchise locations. Events of default
        are defined in the line of credit agreement and include the Company’s covenant
        commitments under existing lines of credit. 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.
  DEBT
        GUARANTEES
 
 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,
        Inc. (“RY-8”), in the development of Roy's restaurants. The line of credit
        originally expired in December 2004 and was renewed twice with a new termination
        date in June 2011. 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, 2006 and December 31, 2005, the outstanding
        balance on the line of credit was approximately $23,962,000 and $22,926,000,
        respectively.
 
 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, and including the Company’s covenant commitments under
        existing lines of credit), then the total outstanding balance, including
        any
        accrued interest, is immediately due from the guarantors. The
        Company received two covenant waivers from the lender on its guarantee of
        this
        line of credit for the quarter ended September 30, 2006 (see Note
        16).
  25
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  Long-term
        Debt (continued)
 
 DEBT
        GUARANTEES (continued)
 
 If
        an
        event of default occurs 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 favor
        of
        the Company. 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 the Company 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.
 
 As
        a
        result of the Company’s recourse provisions and the financial performance of the
        restaurants that collateralize the guarantee, the estimated fair value of
        the
        guarantee to be recorded is immaterial to the Company’s financial condition and
        financial statements.
 
 The
        Company is a guarantor of a portion 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. At September 30, 2006 and December 31, 2005, the outstanding balance
        on
        the bonds was $63,300,000.
 
 In
        June
        2006, Speedway modified certain terms and conditions of its debt, including
        (i)
        lowering its interest rate, (ii) removing a liquidity coverage requirement,
        (iii) reducing a fixed charge coverage ratio, (iv) delaying redemption payments
        for 2006, 2007, and 2008, and (v) revising a put feature that now allows
        the
        lenders to require full payment of the debt on or after June 2011. In connection
        with these modifications, in June 2006, the Company and other equity owners
        of
        Speedway entered into an amended guarantee, which increased the Company’s
        guarantee on the bonds from $9,445,000 to $17,585,000. The Company’s guarantee
        will proportionally decrease as payments are made on the bonds.
 
 As
        part
        of the amended 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 made additional working capital contributions and loans to this
        affiliate in payments totaling $5,503,000. Of this amount, $1,867,000 was
        loaned
        during the nine months ended September 30, 2006 and $1,392,000 was loaned
        in
        2005.
 
 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 of 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.
  26
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 8.  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 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.
 
 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 September 30, 2006. 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 as of September 30, 2006. 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 $2,900,000. As a result, the Company has not recognized a
        liability related to these guarantees in accordance with FIN 45. The Company
        has
        various depository and banking relationships with the lender, including several
        outstanding notes payable.
 
 The
        Company’s contractual debt guarantees as of September 30, 2006 are summarized in
        the table below (in thousands):
 
 **MAXIMUM**
              
              **AMOUNT****AVAILABILITY**
              
              **OUTSTANDING**
              
              **CARRYING****OF
                  DEBT**
              
              **UNDER
                  DEBT**
              
              **AMOUNT
                  OF****GUARANTEES**
              
              **GUARANTEES**
              
              **LIABILITIES**T-Bird
                  Nevada, LLC
              
              $
              35,000
              
              $
              31,883
              
              $
              31,883RY-8,
                  Inc.
              
              
              24,500
              
              
              23,962
              
              
              -Kentucky
                  Speedway, LLC
              
              
              17,585
              
              
              17,585
              
              
              2,495Korean
                  landlord
              
              
              4,200
              
              
              4,200
              
              
              -$
              81,285
              
              $
              77,630
              
              $
              34,378
  27
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 9.  Other
        Long-term Liabilities
 
 Other
        long-term liabilities consisted of the following (in thousands):
 
 **SEPTEMBER
                  30,**
              
              **DECEMBER
                  31,****2006**
              
              **2005**Litigation
                  (See Notes 6 and 15)
              
              $
              -
              
              $
              39,000Accrued
                  insuranceliability
              
              
              6,607
              
              
              6,696Other
                  liabilities
              
              
              14,554
              
              
              194$
              21,161
              
              $
              45,890
 
 Other
        long-term liabilities at September 30, 2006 also include $8,062,000 for the
        unfunded portion of the PEP Stock Plan and $4,365,000 for the Diversified Plan,
        which are owed to managing partners and chef partners (see Note 2).
 
 10.  Foreign
        Currency Translation and Comprehensive Income
 
 For
        all
        significant non-U.S. operations, the functional currency is the local currency.
        Assets and liabilities of those operations are translated into U.S. dollars
        using the exchange rates in effect at the balance sheet date. Results of
        operations are translated using the average exchange rates for the reporting
        period. Translation gains and losses are reported as a separate component
        of
        accumulated other comprehensive income (loss) in stockholders’ equity.
 
 Comprehensive
        income includes net income and foreign currency translation adjustments.
        Total
        comprehensive income for the three months ended September 30, 2006 and 2005
        was
        $19,611,000 and $29,253,000, respectively, which included the effect of gains
        and (losses) from translation adjustments of approximately $2,343,000 and
        ($219,000), respectively. Total comprehensive income for the nine months
        ended
        September 30, 2006 and 2005 was $82,696,000 and $120,271,000, respectively,
        which included the effect of gains from translation adjustments of approximately
        $4,365,000 and $914,000, respectively.
 
 11.  Business
        Combinations
 
 In
        February 2006, the Company purchased ten Outback Steakhouses from its franchisee
        in Eastern Canada for approximately $7,456,000 in cash and the assumption
        of the
        employee partner buyout liability for these locations of approximately $748,000
        and other liabilities of approximately $134,000.  The Company completed
        this acquisition because it believes the additional cash flows provided from
        ownership of these restaurants will meet its internally required rate of
        return
        and provide additional shareholder value.  The Company recorded goodwill of
        approximately $3,209,000 associated with this transaction, $2,407,000 of
        which
        is expected to be deductible for income tax purposes. Additionally, the Company
        recorded favorable lease intangibles of $300,000, which will be amortized
        over
        the remaining terms of the associated leases, ranging from 4 to 15 years
        (see
        Note 5).
  28
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 11 .  Business
        Combinations (continued)
 
 In
        August
        2006, the Company acquired the remaining 50% minority ownership interests
        in
        nineteen Carrabba’s restaurants, the remaining 20% minority ownership interests
        in six Carrabba’s restaurants, and an additional 10% ownership interest in one
        Carrabba’s restaurant for a total of $28,500,000 in cash, the assumption of an
        employee partner buyout liability at one store of $83,000 and the forgiveness
        of
        amounts owed by the minority owners of $551,000. Since the date of acquisition,
        the Company has reduced the minority partners’ remaining interest to 50% for one
        store, with no minority interests for the remaining twenty-five stores in
        the
        consolidated financial statements. The Company completed this acquisition
        because it believes the additional cash flows provided from increased ownership
        of these restaurants will meet its internally required rate of return and
        provide additional shareholder value. The Company recorded goodwill of
        $1,182,000 associated with this transaction, all of which is expected to
        be
        deductible for income tax purposes. Additionally, the Company recorded fixed
        assets of $7,827,000, a trade name asset of $14,210,000 and favorable lease
        intangibles of $641,000, which will be amortized over the remaining terms
        of
        these associated leases, ranging from three to 14 years (see Note 5). The
        Company allocated the purchase
        price on a preliminary
        basis using information currently available. The allocation
        of the purchase
        price to the assets and liabilities acquired will be finalized no later than
        the
        first quarter of fiscal 2007, as the Company obtains more information regarding
        asset valuations, liabilities assumed and revisions of preliminary
        estimates of fair values made at the date of purchase.
 
 On
        an
        unaudited pro forma basis, the effects of these acquisitions were not
        significant to the Company’s results of operations.
 
 1 2.  Related
        Party Transactions
 
 In
        August
        2006, the Company acquired additional ownership of twenty-six Carrabba’s
        restaurants (see Note 11). A named executive officer of the Company received
        approximately $56,000 as a result of his ownership interest in one of these
        joint venture restaurants. He
        had
        contributed an aggregate amount of approximately $40,000 for this
        interest.
 
 Nine
        current and former employees own 20% of Outback Steakhouse Japan Co., Ltd.,
        a
        subsidiary of the Company. The value of this ownership interest as of September
        30, 2006 is approximately $279,000.
  13.  Recently
        Issued Financial Accounting Standards
 
 In
        June
        2006, the EITF reached a consensus on EITF Issue No. 06-4, “Accounting for
        Deferred Compensation and Postretirement Benefit Aspects of Endorsement
        Split-Dollar Life Insurance Arrangements” (“EITF 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. This would require recognition of a liability for
        the
        discounted future benefit obligation owed to an insured employee by the
        insurance carrier. EITF 06-4 is effective for fiscal years beginning after
        December 15, 2007. The Company may have certain policies subject to the
        provisions of EITF 06-4 and is currently evaluating the impact that EITF
        06-4
        would have on its financial statements.
 
 In
        July
        2006, the FASB issued 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.
        FIN
        48 prescribes a recognition threshold and measurement attribute for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. FIN 48 also provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transition associated with tax positions. The provisions
        of FIN 48 are effective for fiscal years beginning after December 15, 2006.
        The
        Company is currently evaluating the impact that FIN 48 will have on its
        financial statements.
  29
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 13.  Recently
        Issued Financial Accounting Standards (continued)
 
 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.
        The
        Company is currently evaluating the impact that SFAS No. 157 will have on
        its
        financial statements.
 
 In
        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
        No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). This statement requires balance
        sheet recognition of the overfunded or underfunded status of pension and
        postretirement benefit plans. Under SFAS No. 158, actuarial gains and losses,
        prior service costs or credits, and any remaining transition assets or
        obligations that have not been recognized under previous accounting standards
        must be recognized in other comprehensive income, net of tax effects, until
        they
        are amortized as a component of net periodic benefit cost. In addition, the
        measurement date, the date at which plan assets and the benefit obligation
        are
        measured, is required to be a company’s fiscal year end. SFAS No. 158 is
        effective for publicly-held companies for fiscal years ending after
        December 15, 2006, except for the measurement date provisions, which are
        effective for fiscal years ending after December 15, 2008. The Company does
        not believe the adoption of SFAS No. 158 will have a material impact on its
        financial statements.
 
 In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements” (“SAB 108”). SAB 108 requires companies to
        evaluate the materiality of identified unadjusted errors on each financial
        statement and related financial statement disclosure using both the rollover
        approach and the iron curtain approach, as those terms are defined in SAB
        108.
        The rollover approach quantifies misstatements based on the impact of the
        misstatement, whereas the iron curtain approach quantifies misstatements
        based
        on the effects of correcting the misstatement existing in the balance sheet
        at
        the end of the current year, irrespective of the reversing effect of prior
        year
        misstatements on the income statement. Financial statements would require
        adjustment when either approach results in quantifying a misstatement that
        is
        material. Correcting prior year financial statements for immaterial errors
        would
        not require previously filed reports to be amended. If a company determines
        that
        an adjustment to prior year financial statements is required upon adoption
        of
        SAB 108 and does not elect to restate its previous financial statements,
        then it
        must recognize the cumulative effect of applying SAB 108 in fiscal 2006
        beginning balances of the affected assets and liabilities with a corresponding
        adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108
        is
        effective for the first fiscal year ending after November 15, 2006. The Company
        is currently evaluating the impact that SAB 108 will have on its financial
        statements.
  30
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 14.  Earnings
        Per Share
 
 The
        following table represents the computation of basic and diluted earnings
        per
        common share (in thousands, except per share data):
 
 **THREE
                  MONTHS ENDED**
              
              **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,**
              
              **SEPTEMBER
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(restated)**
              
              
              
              **(restated)**Net
                  income
              
              $
              17,268
              
              $
              29,472
              
              $
              78,331
              
              $
              119,357Basic
                  weighted average number of common shares outstanding
              
              
              73,554
              
              
              74,167
              
              
              73,903
              
              
              73,991Basic
                  earnings per common share
              
              $
              0.23
              
              $
              0.40
              
              $
              1.06
              
              $
              1.61Effect
                  of stock-based compensation awards
              
              
              1,625
              
              
              2,665
              
              
              2,521
              
              
              2,803Diluted
                  weighted average number of common shares outstanding
              
              
              75,179
              
              
              76,832
              
              
              76,424
              
              
              76,794Diluted
                  earnings per common share
              
              $
              0.23
              
              $
              0.38
              
              $
              1.02
              
              $
              1.55
 
 Basic
        earnings per common share is computed using net income and the basic weighted
        average number of common shares outstanding during the period. Diluted earnings
        per common share is computed using net income and the diluted weighted average
        number of common shares outstanding. Diluted weighted average common shares
        outstanding includes potentially dilutive common shares, restricted stock
        awards, Partner Shares and contingently issuable shares under the PEP
        outstanding during the period. Potentially dilutive common shares include
        the
        assumed exercise of stock options and issuance of restricted stock awards
        and
        Partner Shares using the treasury stock method.
 
 Diluted
        earnings per common share excludes antidilutive stock options of approximately
        7,807,000 and 2,281,000 for the three months ended September 30, 2006 and
        2005,
        respectively, and approximately 4,419,000 and 1,072,000 for the nine months
        ended September 30, 2006 and 2005, respectively.
  15.  Commitments
        and Contingencies
 
 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 its partner in
        the
        Roy’s consolidated venture have been funded by loans to the partner from a third
        party where the Company is required to be a guarantor of the debt, which
        provides the Company control through its collateral interest in the joint
        venture partner’s membership interest. As a result of its controlling financial
        interest in this venture, it is included in the 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 Unaudited Consolidated Statements of Income
        entitled “Elimination of minority interest.” 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 anytime after June 17, 2004 and up to
        another 25% of its interests in the joint venture at anytime 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.
  31
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 15.  Commitments
        and Contingencies (continued)
 
 In
        June
        2003, in a civil case against the Company in Indiana state court alleging
        liability under the “dramshop” liquor liability
        statute, a jury returned a verdict in favor of the two plaintiffs who were
        injured by a drunk driver. The portion of the verdict against the Company
        was
        $39,000,000. The Company appealed the verdict to the Indiana Court of Appeals.
        On July 25, 2005, the Court of Appeals affirmed the verdict of the trial
        courts.
        The Company petitioned the Court of Appeals for rehearing and rehearing was
        denied. The Company filed a petition for
        transfer with the Indiana Supreme Court. On February 21, 2006, the Indiana
        Supreme Court granted transfer. Subsequent to September 30, 2006, the Indiana
        Supreme Court rendered a decision in the Company’s favor (see Note
        16).
 
 The
        Company has insurance coverage related to this case provided by its primary
        carrier for $21,000,000 and by an excess insurance carrier for the balance
        of
        the verdict of approximately $19,000,000. The excess insurance carrier has
        filed
        a declaratory judgment suit claiming it was not notified of the case and
        is
        therefore not liable for its portion of the verdict. The Company does not
        believe the excess carrier’s case has any merit and is vigorously defending this
        case. Activity in this case has been held in abeyance pending resolution
        of
        appeals in the “dramshop” case. The Company has filed counter-claims against the
        excess carrier and cross-claims against the primary carrier and its third-party
        administrator. The Company’s third-party administrator has executed an
        indemnification agreement indemnifying the Company against any liability
        resulting from the alleged failure to give notice to the excess insurance
        carrier (see Note 16).
 
 In
        2005,
        in connection with the Company’s customary review of the results of
        international operations, it discovered that employees of Aussie Chung, Ltd.,
        the Company’s 82% owned subsidiary in South Korea, may have made improper
        payments to government officials. Following that discovery, the Company’s Audit
        Committee engaged outside counsel to investigate the matter, and that
        investigation is complete. Based on the results of the investigation to date,
        the payments, which were less than $75,000, may have violated the U.S. Foreign
        Corrupt Practices Act as well as South Korean law. The chief executive officer,
        chief operating officer and director of treasury of Aussie Chung have resigned
        as employees and from all offices they hold with that company and, in the
        case
        of the chief executive officer and chief operating officer, from its board
        of
        directors. The chief executive officer and the chief operating officer are
        minority owners of Aussie Chung (see Note 16). No other employees of Aussie
        Chung and no members of the Company’s management outside South Korea were
        implicated in the improper payments.
 
 The
        Company has voluntarily reported this matter to the staff of the Securities
        and
        Exchange Commission and the U.S. Department of Justice. If the U.S. authorities
        determine that there has been a violation of the Foreign Corrupt Practices
        Act,
        they may seek to impose sanctions on the Company that may include injunctive
        relief, fines, penalties and modifications to the Company’s business practices.
        The Company could also face sanctions from South Korean authorities.
  It
        is not
        possible at this time to predict whether the authorities will seek to impose
        sanctions on the Company, and if they do, what those sanctions might be.
        It is
        also not possible to predict how any U.S. or South Korean governmental
        investigation or resulting sanctions may impact the Company’s business in South
        Korea. Depending upon how these matters are resolved, the Company’s results of
        operations and prospects for growth in South Korea could be significantly
        impacted. For the nine months ended September 30, 2006, Aussie Chung had
        revenues and net income of $183,744,000 and $7,246,000, respectively,
        representing approximately 6.0% and 9.3% of the Company’s consolidated revenues
        and net income. In 2005, Aussie Chung had revenues and net income of
        $220,291,000 and $11,458,000, respectively, representing approximately 5.8%
        and
        7.8% of the Company’s consolidated revenues and net income.
  32
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 16.  Subsequent
        Events
 
 The
        Company’s Board of Directors approved a grant of 50,000 shares of restricted
        common stock to the Chief Marketing Officer of its Outback Steakhouse brand
        as
        an inducement grant in connection with her hiring, effective October 1, 2006.
        These shares were not issued under any existing stock plan. Under the terms
        of
        the grant, all of the shares will vest on October 1, 2011 unless this employee
        is terminated after October 1, 2009 for other than “cause”, as defined in the
        employment agreement, at which time 50% of the shares will vest.
 
 On
        October 1, 2006, the Company acquired the remaining 50% minority ownership
        interests in six Carrabba’s restaurants and the remaining 20% minority ownership
        interests in five Carrabba’s restaurants for $3,400,000 in cash and the
        assumption of employee partner buyout liabilities at six restaurants of
        $296,000. Goodwill and favorable lease intangibles, if applicable, are subject
        to finalization of the purchase price allocation. The Company completed this
        acquisition because it believes the additional cash flows provided from
        increased ownership of these restaurants will meet its internally required
        rate
        of return and provide additional shareholder value. A named executive officer
        of
        the Company received approximately $35,000 as a result of his ownership interest
        in three of these joint venture restaurants. He had contributed an aggregate
        amount of approximately $60,000 for this interest.
 
 On
        October 1, 2006, the Company acquired the remaining 20% minority ownership
        interests in eight Bonefish Grill restaurants and the remaining 13% minority
        ownership interest in one Bonefish Grill restaurant for $2,500,000 in
        cash.  Goodwill and favorable lease intangibles, if applicable, are subject
        to finalization of the purchase price allocation. The Company completed this
        acquisition because it believes the additional cash flows provided from
        increased ownership of these restaurants will meet its internally required
        rate
        of return and provide additional shareholder value.
 
 On
        October 12, 2006, the Company entered into a short-term uncollateralized
        line of
        credit agreement that has a maximum borrowing amount of $50,000,000. The
        line of
        credit matures in March 2007 and permits borrowing at an interest rate 55
        basis
        points over the LIBOR Market Index Rate at the time of each draw. The credit
        agreement contains certain restrictions and conditions as defined in the
        agreement and includes the Company’s covenant commitments under existing lines
        of credit that require the Company to provide the lender with financial
        statements, calculations and certifications within 45 days from the end of
        the
        quarter. Failure to timely provide this information is considered an event
        of
        default. On November 14, 2006, the Company received a covenant waiver from
        its
        lender on this line of credit for the quarter ended September 30, 2006. This
        waiver extended the deadline to provide the financial information and
        certifications until December 29, 2006. On December 29, 2006, the Company
        received a second covenant waiver from its lender on this line of credit.
        This
        waiver extended the deadline to provide the financial information and
        certifications until January 31, 2007. An event of default did not occur
        as the
        financial information for the quarter ended September 30, 2006 was provided
        before the extended deadline.
 
 O n
        October
        24, 2006, the Company’s Board of Directors declared a quarterly dividend of
        $0.13 per share of the Company’s common stock. The dividend will be paid
        December 1, 2006 to shareholders of record as of November 17, 2006.
 
 In
        October 2006, the Company recorded a provision for impaired assets and
        restaurant closings of $566,000 for the closing of two domestic Outback
        Steakhouse restaurants.
 
 On
        November 5, 2006, the Company entered into a definitive agreement to be acquired
        by an investor group co mprised
        of affiliates of Bain Capital Partners, LLC and Catterton Partners and
        Company founders Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon,
        for
        $40.00 per share in cash.  The
        Company’s Board of Directors, on the unanimous recommendation of a Special
        Committee of independent directors, approved the merger agreement and
        recommended that the Company’s shareholders adopt the
        agreement.
  33
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 16.  Subsequent
        Events (continued)
 
 The
        total
        transaction value, including assumed debt, is approximately $3.2 billion.
        The
        transaction is expected to close prior to the end of April 2007, and is subject
        to approval of the Company’s shareholders (other than those Company
        managers investing in the acquisition) and customary closing conditions.
        The transaction is not subject to a financing condition.
 
 The
        merger agreement also contains certain termination rights for both the Company
        and the investor group. The merger agreement provides that in certain
        circumstances, upon termination, the Company may be required to pay the investor
        group a termination fee of either $25,000,000 or, in certain
        circumstances, $45,000,000, and reimburse it for its out-of-pocket fees and
        expenses incurred with respect to the transactions contemplated by the merger
        agreement, up to a maximum of $7,500,000.
 
 On
        November 5, 2006, the Company entered into amendments to certain employment,
        stock option and restricted stock agreements with the Company’s Chief Executive
        Officer, Chief Operating Officer, Chief Officer - Legal and Corporate Affairs
        and Chief Financial Officer.
 
 Pursuant
        to the Amendments, in the event of a separation of service of the executive
        by
        the Company without cause or by the executive for good reason within two
        years
        after a change of control, the executive will be paid a lump sum equal to
        two
        times the sum of (i) his gross annual base salary at the rate in effect
        immediately prior to the change of control and (ii) the aggregate cash bonus
        compensation paid to him for the two fiscal years preceding the year in which
        the change of control occurs divided by two. However, in the case of the
        Chief
        Financial Officer, if he is not employed for the two entire fiscal years
        preceding the year in which a change of control occurs, the amount for the
        purposes of clause (ii) will be equal to his target bonus for the year in
        which
        the change of control occurs.
 
 Pursuant
        to the Chief Executive Officer’s Amendment, if a change of control and
        subsequent separation of service cause the vesting of all restricted stock
        granted to him pursuant to certain Restricted Stock Agreements, the Company
        will
        not be required to pay him severance compensation of $5,000,000, as previously
        required under his employment agreement in certain circumstances.
 
 Pursuant
        to the Amendments for the Chief Executive Officer, Chief Operating Officer
        and
        Chief Officer - Legal and Corporate Affairs, the options owned by each of
        them
        will become fully vested and exercisable if, within two years after a change
        of
        control, the executive is terminated by the Company without cause, resigns
        for
        good reason, dies or suffers a disability.
 
 Pursuant
        to the Amendments for each of the Chief Executive Officer, Chief Officer
        - Legal
        and Corporate Affairs and Chief Financial Officer, the restricted stock owned
        by
        each of them will become fully vested and all restrictions will lapse if,
        within
        two years after a change of control, the executive is terminated by the Company
        without cause, resigns for good reason, dies or suffers a
        disability.
 
 Each
        Amendment provides a “conditional gross-up” for excise and related taxes in the
        event the severance compensation and other payments or distributions to an
        executive pursuant to an employment agreement, stock option agreement,
        restricted stock agreement or otherwise would constitute “excess parachute
        payments,” as defined in Section 280G of the Internal Revenue Code. The tax
        gross up will be provided if the aggregate parachute value of all severance
        and
        other change in control payments to the executive is greater than 110% of
        the
        maximum amount that may be paid under Section 280G of the Code without
        imposition of an excise tax. If the parachute value of an executive’s payments
        does not exceed the 110% threshold, the executive’s payments under the change in
        control agreement will be reduced to the extent necessary to avoid imposition
        of
        the excise tax on “excess parachute payments.”
  34
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 16.  Subsequent
        Events (continued)
 
 On
        November 5, 2006, the Company amended the Outback Steakhouse, Inc. Amended
        and
        Restated Stock Plan (the “Stock Plan”) and the Outback Steakhouse, Inc. Amended
        and Restated Managing Partner Stock Plan (the “MP Stock Plan”). Pursuant to
        these amendments, each option granted under the Stock Plan and the MP Stock
        Plan
        that is outstanding immediately prior to the effective time of the Merger
        (the
“Effective Time”) will, as of the Effective Time, become fully vested and be
        converted into an obligation to pay cash in an amount equal to the product
        of
        (i) the total number of shares of common stock subject to such option and
        (ii)
        the excess, if any, of the Merger Consideration over the per share option
        price.
        Additionally, pursuant to such amendments, at the Effective Time, unless
        otherwise agreed to by the award recipient, each award of restricted stock
        will
        be converted into a right to receive cash in an amount equal to the product
        of
        (i) the Merger Consideration and (ii) the number of shares of restricted
        stock
        in respect of such award. Such cash amount will vest and be paid in accordance
        with the original scheduled vesting dates applicable to the converted restricted
        stock; provided, however, that such cash amount will vest and be paid upon
        the
        death, disability or termination other than for cause of the holder of the
        restricted stock. Prior to the Effective Time, the Company will establish
        an
        irrevocable grantor trust to provide for the payment of these cash amounts
        in
        respect of such outstanding restricted stock awards.
 
 Pursuant
        to the Amendment to the Outback Steakhouse, Inc. Partner Equity Plan (the
        “PEP”), dated November 5, 2006, phantom shares of Company stock credited to each
        participant’s account will be converted into cash credits in an amount equal to
        the product of (i) the Merger Consideration and (ii) the number of shares
        of
        Company common stock credited to such participant’s account. Such cash amounts
        will be credited to an account for each participant and will be eligible
        to be
        invested by participants in the investment alternatives available under the
        Partner Equity Deferred Compensation Diversified Plan part of the PEP and,
        except for such administrative changes as may be necessary to effectuate
        the
        foregoing, will be administered in accordance with the payment schedule and
        consistent with the terms of the PEP.
 
 Pursuant
        to the Amendment to the Directors’ Deferred Compensation and Stock Plan (the
“Directors’ Plan”), dated November 5, 2006, each share unit credited to a
        deferral account will be converted into the right to receive the Merger
        Consideration immediately upon the Effective Time.
 
 On
        November 7, 2006, a stockholder complaint was filed as a purported class
        action
        on behalf of all public stockholders of the Company, against the Company,
        each
        of Company’s directors, J. Timothy Gannon, Bain Capital Partners, LLC and
        Catterton Partners in the Circuit Court of the 13th Judicial Circuit in and
        for
        Hillsborough County, Florida. The complaint is captioned Charter Township
        of
        Clinton Police and Fire Retirement System v. OSI Restaurant Partners, Inc.,
        Chris T. Sullivan, Robert D. Basham, A. William Allen, III, John A. Brabson,
        Jr., W.R. "Max" Carey, Jr., Debbie Fields, General (Ret.) Tommy Franks, Thomas
        A. James, Lee Roy Selmon, Toby S. Wilt, J. Timothy Gannon, Bain Capital
        Partners, LLC and Catterton Partners, Case No. 06-CA-010348 Div. B. The
        plaintiff alleges that it is an owner of the Company’s common stock. The
        complaint alleges, among other things, that the directors of the Company
        breached their fiduciary duties in connection with the proposed transaction
        by
        failing to maximize stockholder value and by approving a transaction that
        purportedly benefits the Company’s management expected to invest in the
        proposed transaction at the expense of the Company’s public stockholders.
        Among other things, the complaint seeks to enjoin the Company, its directors
        and
        the other defendants from proceeding with or consummating the merger. Bain
        Capital Partners, LLC and Catterton Partners are alleged to have aided and
        abetted the individual defendants in breaching their fiduciary duties. Based
        on
        the facts known to date, the Company and other defendants believe that the
        claim
        asserted is without merit and intend to defend this suit
        vigorously.
  35
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 16.  Subsequent
        Events (continued)
 
 On
        November 8, 2006, the Company acquired the remaining 18% minority ownership
        interests in eighty-eight Outback Steakhouse restaurants in South Korea. 
The total acquisition price was approximately $34,872,000, of which $17,831,000
        was paid in cash to the sellers, $14,041,000 was paid in satisfaction of
        amounts
        outstanding under loans previously made by the Company to the sellers and
        $3,000,000 was placed into an interest-bearing escrow account. The escrowed
        monies are to provide a source for indemnification against claims of
        misrepresentation or breach of warranty and payment of certain expenses. 
Goodwill and identifiable intangibles, if applicable, are subject to
        finalization of the purchase price allocation. The Company completed this
        acquisition to relinquish all relations associated with the minority owners
        of
        Aussie Chung, Ltd. (see Note 15).
  On
        November 8, 2006, in the “dramshop” liquor liability case, (see Note 15), the
        Indiana Supreme Court issued its decision reversing the verdict of the Indiana
        Court of Appeals, reversing the order of the trial court denying a new trial
        and
        remanding the case to the trial court with direction to vacate the judgment
        and
        schedule a new trial. The decision of the Indiana Supreme Court has been
        certified to the trial court and the verdict vacated. A new trial will be
        scheduled.
 
 As
        a
        result of the Indiana Supreme Court’s decision ,
        the
        Company reversed its entry for the original $39,000,000 verdict that was
        recorded as a non-current liability in its Unaudited Consolidated Balance
        Sheets
        and as a non-current receivable in other assets.
 
 On
        November 14, 2006, the Company obtained a covenant waiver from its lenders
        on
        its uncollateralized $225,000,000 revolving credit facility for the quarter
        ended September 30, 2006. The credit agreement contains certain restrictions
        and
        conditions as defined in the agreement that require the Company to provide
        the
        lenders with financial statements, calculations and certifications within
        45
        days from the end of the quarter. Failure to timely provide this information
        is
        considered an event of default. This waiver extended the deadline to provide
        the
        financial information and certifications until November 29, 2006.
 
 On
        November 28, 2006, the Company received a second covenant waiver from its
        lenders on its revolving credit facility that further extended the deadline
        to
        December 29, 2006. It also provided that pricing would remain at its current
        level until the financial statements were received.  At that time, pricing
        would change retroactive to November 30, 2006 if the calculations determined
        a
        change was warranted.
 
 On
        December 29, 2006, the Company received a third covenant waiver from its
        lenders
        on its revolving credit facility that further extended the deadline to January
        31, 2007. It also changed pricing effective November 29, 2006 to a margin
        of 65
        basis points over LIBOR as of November 29, 2006 and to a facility fee of
        15
        basis points. Upon delivery of the financial statements, the pricing returned
        to
        a margin of 55 basis points over LIBOR as of January 8, 2007 and to a facility
        fee of 12.5 basis points as determined by the covenant calculations completed
        for the quarter ended September 30, 2006. An event of default did not occur
        as
        the financial information was provided before the extended
        deadline.
  36
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 16.  Subsequent
        Events (continued)
 
 On
        November 14, 2006, Outback
        Japan received a covenant waiver from its lender on its $10,000,000 line
        of
        credit and the
        Company received covenant waivers from its lender on its $40,000,000 line
        of
        credit and on its guarantee of
        an
        uncollateralized line of credit for RY-8 for the quarter ended September
        30,
        2006. These
        credit agreements contain certain restrictions and conditions as defined
        in the
        agreements that require Outback Japan or the Company to provide the lender
        with
        financial statements, calculations and certifications within 45 days from
        the
        end of the quarter. Failure to timely provide this information is considered
        an
        event of default. These waivers extended the deadline to provide the financial
        information and certifications until December 29, 2006. They also provided
        that
        pricing would remain at its current level until the financial statements
        were
        received.  At that time, pricing would change retroactive to November 30,
        2006 if the calculations determined a change was warranted.
 
 On
        December 29, 2006, Outback Japan received a second covenant waiver from its
        lender on its $10,000,000 line of credit and the Company received second
        covenant waivers from its lender on its $40,000,000 line of credit and on
        its
        guarantee of an uncollateralized line of credit for RY-8 that further extended
        the deadline to January 31, 2007. These waivers also changed pricing for
        Outback
        Japan and for the $40,000,000 line of credit effective November 29, 2006
        to a
        margin of 65 basis points over LIBOR as of November 29, 2006 and to a facility
        fee of 15 basis points. Upon delivery of the financial statements, the pricing
        returned to a margin of 55 basis points over LIBOR as of January 8, 2007
        and to
        a facility fee of 12.5 basis points as determined by the covenant calculations
        completed for the quarter ended September 30, 2006. An event of default did
        not
        occur as the financial information was provided before the extended
        deadline.
 
 On
        December 5, 2006, the Company sold approximately 41.5 acres of property in
        Tampa, Florida for $17,300,000 and an escrow for site work improvements valued
        at $7,500,000. The Company kept approximately 4.5 acres of land for the
        development of three restaurants.
 
 On
        December 13, 2006, the Company negotiated a lump sum of $750,000 as settlement
        of a $1,454,000 note receivable from the owner of certain non-restaurant
        operations. The Company recorded the resulting loss of $704,000 in the line
        item
“Provision for impaired assets and restaurant closings” in its Unaudited
        Consolidated Statements of Income for the nine months ended September 30,
        2006
        (see Note 4).
 
 In
        December 2006, Outback Japan amended its $10,000,000 revolving line of credit
        to
        extend the maturity of the line from December 2006 until the earlier of March
        31, 2007 or the date on which the acquisition of the Company by the investor
        group is final.  All other material provisions of the agreement remained
        the same.
 37
 Table
              of Contents
  **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,
        wit h
        a
        portfolio of eight re staurant
        concepts, ove r
        1,350 system-wide
        restaurants and 2005 annual revenues for Company-owned stores exceeding $3.5
        billion. We operate in all 50 states and in 21 countries internationally,
        predominantly through Company-owned stores, but we also operate under a variety
        of partnerships and franchises. 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 users 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
        store 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 stores 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 store 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.
 
 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 newer brands. We generally do not attempt to lure
        customers with discounts, as is common to many restaurants in the casual
        dining
        industry. Our advertising dollars are targeted to promote and maintain brand
        image and develop consumer awareness. We strive to drive sales through
        excellence in execution rather than through discounting and other short-lived
        marketing efforts. Our marketing strategy of encouraging customers 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.
  38
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Overview
        (continued)**
 
 Key
        factors that can be used in evaluating and understanding our restaurants
        and
        assessing our business include the following:
 
 -
              Average
                  unit volumes - a per store average sales amount, which helps us
                  gauge the
                  changes in consumer traffic, pricing and development of the
                  brand;
 -
              Operating
                  margins - store revenues after deduction of the main store-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 stores, 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
                  stores that are open in both years in order to remove the impact
                  of new
                  openings in comparing the operations of existing
                  stores.
 
 Our
        consolidated operating results are affected by the growth of our newer brands.
        As we continue to develop and expand new 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 new format stores than have typically
        been
        experienced at Outback Steakhouses. However, cost of sales as a percentage
        of
        restaurant sales at those stores is lower than those at Outback. These trends
        are expected to continue with our planned development of stores.
 
 Revenues
        from restaurant sales for the nine months ended September 30, 2006 increased
        9.1% compared with the same period in 2005. This increase was primarily driven
        by new unit openings as we experienced a softening of sales in our existing
        restaurants in the second and third quarters. This trend affected the casual
        dining segment as a whole and impacted all of our restaurant brands and certain
        international locations.
 
 As
        previously disclosed, management has been working with the Board of Directors
        to
        analyze ideas for increasing shareholder value. In April 2006, the Board
        of
        Directors retained Wachovia Securities to assist it and management in analyzing
        these ideas. As a result of this initiative, on November 5, 2006, we entered
        into a definitive agreement to be acquired by an investor group comprised
        of
        Bain Capital Partners, LLC, Catterton Partners and Company founders Chris
        T.
        Sullivan, Robert D. Basham and J. Timothy Gannon, for $40.00 per share in
        cash.  Our
        Board
        of Directors approved the merger agreement and recommended that our shareholders
        adopt the agreement.
 
 Our
        industry’s challenges and risks include, but are not limited to, 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, economic conditions
        and
        commodity pricing. Additionally, our planned development schedule is subject
        to
        risk because of rising real estate and construction costs, and our results
        are
        affected by consumer tolerance of price increases. Changes in our operations
        in
        the remainder of this year and 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.
 
 **Restatement
        of Previously Issued Consolidated Financial Statements**
 
 In
        October 2006, we identified errors in our accounting for unearned revenue
        for
        unredeemed gift cards and certificates. Upon completion of the review of
        accounting policies for gift cards and certificates as well as a review of
        certain other balance sheet accounts, we have restated the consolidated
        financial statements as
        of
        December 31, 2005 and for the
        three
        and nine month periods ended September 30, 2005, to correct these and other
        errors, as more fully described in Note 1 to the Notes to Unaudited Consolidated
        Financial Statements of Item 1: Consolidated Financial Statements, which
        is
        included in this Form 10-Q. All applicable amounts related to this restatement
        have been reflected herein and in our consolidated financial statements included
        in this Form 10-Q.
  39
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Results
        of Operations**
 
 The
        following tables set forth, for the periods indicated, (i) percentages that
        items in our Unaudited Consolidated Statements of Income bear to total revenues
        or restaurant sales, as indicated, and (ii) selected operating data:
 
 **THREE
                  MONTHS ENDED**
              
              **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,**
              
              **SEPTEMBER
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(restated)**
              
              
              
              **(restated)**RevenuesRestaurant
                  sales
              
              
              99.5
              %
              
              99.4
              %
              
              99.5
              %
              
              99.4
              %Other
                  revenues
              
              
              0.5
              
              
              0.6
              
              
              0.5
              
              
              0.6Total
                  revenues
              
              
              100.0
              
              
              100.0
              
              
              100.0
              
              
              100.0Costs
                  and expensesCost
                  of sales (1)
              
              
              36.3
              
              
              36.7
              
              
              36.3
              
              
              36.7Labor
                  and other related (1)
              
              
              28.2
              
              
              26.3
              
              
              27.8
              
              
              25.8Other
                  restaurant operating (1)
              
              
              22.2
              
              
              22.6
              
              
              22.3
              
              
              21.3Depreciation
                  and amortization
              
              
              4.0
              
              
              3.7
              
              
              3.8
              
              
              3.5General
                  and administrative
              
              
              5.8
              
              
              5.3
              
              
              5.7
              
              
              5.5Hurricane
                  property and inventory losses
              
              
              -
              
              
              0.2
              
              
              -
              
              
              0.1Provision
                  for impaired assets and restaurant closings
              
              
              1.1
              
              
              0.2
              
              
              0.5
              
              
              0.4Contribution
                  for "Dine Out for Hurricane Relief"
              
              
              -
              
              
              0.1
              
              
              -
              
              
              *(Income)
                  loss from operations of unconsolidated affiliates
              
              
              *
              
              
              (0.1
              )
              
              *
              
              
              (*
              )Total
                  costs and expenses
              
              
              97.2
              
              
              94.5
              
              
              96.0
              
              
              92.7Income
                  from operations
              
              
              2.8
              
              
              5.5
              
              
              4.0
              
              
              7.3Other
                  income (expense), net
              
              
              -
              
              
              (*
              )
              
              0.2
              
              
              (*
              )Interest
                  income
              
              
              0.1
              
              
              *
              
              
              0.1
              
              
              *Interest
                  expense
              
              
              (0.4
              )
              
              (0.2
              )
              
              (0.3
              )
              
              (0.2
              )Income
                  before provision for income taxes andelimination
                  of minority interest
              
              
              2.5
              
              
              5.3
              
              
              4.0
              
              
              7.1Provision
                  for income taxes
              
              
              0.7
              
              
              1.8
              
              
              1.1
              
              
              2.4Income
                  before elimination of minority interest
              
              
              1.8
              
              
              3.5
              
              
              2.9
              
              
              4.7Elimination
                  of minority interest
              
              
              *
              
              
              0.1
              
              
              0.2
              
              
              0.3Net
                  income
              
              
              1.8
              %
              
              3.4
              %
              
              2.7
              %
              
              4.4
              %
 __________________
 (1)
              As
                  a percentage of restaurant sales.
 *
              Less
                  than 1/10 of one percent of total
                  revenues.
 40
 Table
              of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Results
        of Operations (continued)**
 
 System-wide
        sales grew by 7.9% and 7.9% for the three and nine months ended September
        30,
        2006, respectively, compared with the corresponding periods in 2005. 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. The two components
        of system-wide sales, including those of OSI Restaurant Partners, Inc. and
        those
        of franchisees and unconsolidated development joint ventures, are provided
        in
        the following tables:
 
 **THREE
                  MONTHS ENDED**
              
              **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,**
              
              **SEPTEMBER
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****(restated)**
              
              
              
              **(restated)****OSI
                  RESTAURANT PARTNERS, INC. RESTAURANT SALES****(in
                  millions):**Outback
                  SteakhousesDomestic
              
              $
              540
              
              $
              536
              
              $
              1,694
              
              $
              1,683International
              
              
              78
              
              
              64
              
              
              226
              
              
              193Total
              
              
              618
              
              
              600
              
              
              1,920
              
              
              1,876Carrabba's
                  Italian Grills
              
              
              156
              
              
              143
              
              
              481
              
              
              428Bonefish
                  Grills
              
              
              78
              
              
              55
              
              
              231
              
              
              162Fleming's
                  Prime Steakhouse and Wine Bars
              
              
              42
              
              
              33
              
              
              134
              
              
              106Other
                  restaurants
              
              
              52
              
              
              37
              
              
              153
              
              
              103Total
                  Company-owned restaurant sales
              
              $
              946
              
              $
              868
              
              $
              2,919
              
              $
              2,675
  41
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Results
        of Operations (continued)**
 
 The
        following information presents sales for 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, Inc., 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.
 
 **THREE
                  MONTHS ENDED**
              
              **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,**
              
              **SEPTEMBER
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****FRANCHISE
                  AND DEVELOPMENT JOINT VENTURE SALES****(in
                  millions) (1):**Outback
                  SteakhousesDomestic
              
              $
              87
              
              $
              88
              
              $
              271
              
              $
              270International
              
              
              28
              
              
              28
              
              
              77
              
              
              84Total
              
              
              115
              
              
              116
              
              
              348
              
              
              354Bonefish
                  Grills
              
              
              4
              
              
              3
              
              
              12
              
              
              9Total
                  franchise and development joint venture sales (1)
              
              $
              119
              
              $
              119
              
              $
              360
              
              $
              363Income
                  from franchise and development joint ventures (2)
              
              $
              6
              
              $
              6
              
              $
              16
              
              $
              15
 __________________
 (1)
              Franchise
                  and development joint venture sales are not included in revenues
                  as
                  reported in the Unaudited Consolidated Statements of
                  Income.
 (2)
              Represents
                  the franchise royalty and portion of total income related to restaurant
                  operations included in the Unaudited Consolidated Statements of
                  Income in
                  the line items Other revenues or Income from operations of unconsolidated
                  affiliates.
  42
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Results
        of Operations (continued)**
 **SEPTEMBER
                  30,****2006**
              
              **2005**Number
                  of restaurants (at end of the period):Outback
                  SteakhousesCompany-owned
                  - domestic
              
              
              683
              
              
              661Company-owned
                  - international
              
              
              117
              
              
              87Franchised
                  and development joint venture-
                  domestic
              
              
              107
              
              
              105Franchised
                  and development joint venture-
                  international
              
              
              44
              
              
              51Total
              
              
              951
              
              
              904Carrabba's
                  Italian GrillsCompany-owned
              
              
              217
              
              
              189Bonefish
                  GrillsCompany-owned
              
              
              106
              
              
              78Franchised
                  and development joint venture
              
              
              7
              
              
              4Total
              
              
              113
              
              
              82Fleming’s
                  Prime Steakhouse and Wine BarsCompany-owned
              
              
              43
              
              
              34Roy’sCompany-owned
              
              
              22
              
              
              19Cheeseburger
                  in ParadiseCompany-owned
              
              
              36
              
              
              21Lee
                  Roy Selmon’sCompany-owned
              
              
              5
              
              
              3Blue
                  Coral Seafood and SpiritsCompany-owned
              
              
              1
              
              
              -Paul
                  Lee's Chinese KitchensCompany-owned
              
              
              -
              
              
              4System-wide
                  total
              
              
              1,388
              
              
              1,256
 43
 Table
              of Contents
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Three
        months ended September 30, 2006** **and 2005**
 
 REVENUES
 
 *Restaurant
        sales.* Restaurant sales increased by 9.0% to $945,779,000 during the third quarter
        of
        2006 compared with $867,851,000 in the same period in 2005. The increase
        in
        restaurant sales was attributable to additional revenues of approximately
        $90,390,000 from the opening of new restaurants after September 30, 2005
        and
        revenues of approximately $5,234,000 from the purchase in February 2006 of
        ten
        Eastern Canada Outback Steakhouse franchise restaurants. This increase was
        partially offset by decreases in sales at existing restaurants. The following
        table includes additional information about changes in restaurant sales at
        domestic Company-owned restaurants for the three months ended September 30,
        2006
        and 2005:
 **THREE
                  MONTHS ENDED****SEPTEMBER
                  30,****2006**
              
              **2005**Average
                  restaurant unit volumes (weekly):Outback
                  Steakhouses(1)
              
              $
              60,574
              
              $
              61,961Carrabba's
                  Italian Grills(1)
              
              
              55,327
              
              
              58,314Bonefish
                  Grills (1)
              
              
              56,080
              
              
              56,301Fleming's
                  Prime Steakhouse and Wine Bars
              
              
              76,001
              
              
              76,616Roy's
              
              
              62,680
              
              
              64,060Operating
                  weeks:Outback
                  Steakhouses
              
              
              8,918
              
              
              8,648Carrabba's
                  Italian Grills
              
              
              2,815
              
              
              2,446Bonefish
                  Grills
              
              
              1,387
              
              
              983Fleming's
                  Prime Steakhouse and Wine Bars
              
              
              551
              
              
              430Roy's
              
              
              289
              
              
              250Year
                  to year percentage change:Menu
                  price increases (2):Outback
                  Steakhouses
              
              
              0.8
              %
              
              4.0
              %Carrabba's
                  Italian Grills
              
              
              0.8
              %
              
              2.5
              %Bonefish
                  Grills
              
              
              1.1
              %
              
              3.7
              %Same-store
                  sales (stores open 18 months or more):Outback
                  Steakhouses
              
              
              -2.4
              %
              
              -1.6
              %Carrabba's
                  Italian Grills
              
              
              -2.6
              %
              
              6.4
              %Bonefish
                  Grills
              
              
              0.0
              %
              
              7.7
              %Fleming's
                  Prime Steakhouse and Wine Bars
              
              
              2.8
              %
              
              13.4
              %Roy's
              
              
              -1.0
              %
              
              9.1
              %
 __________________
 (1)
              We
                  have restated our previously reported consolidated financial statements
                  to
                  reflect certain adjustments as discussed in Note 1 of Unaudited
                  Notes to
                  Consolidated Financial Statements of Item 1: Consolidated Financial
                  Statements, which is included in this Form
                  10-Q.
 (2)
              Reflects
                  nominal amounts of menu price changes, prior to any change in product
                  mix
                  because of price increases, and may not reflect amounts effectively
                  paid
                  by the customer. Menu price increases are not provided for Fleming's
                  and
                  Roy's as a significant portion of their sales come from specials,
                  which
                  fluctuate daily.
 
 *Other
        revenues.* Other
        revenues, consisting primarily of initial franchise fees and royalties,
        decreased by $163,000 to $4,857,000 in the third quarter of 2006 as compared
        with $5,020,000 in 2005. This
        decrease primarily resulted from lower franchise fees and royalties for Outback
        Steakhouse International as a result of the purchase in February 2006 of
        ten  Eastern
        Canada Outback Steakhouse franchise restaurants. This decrease was also due
        to
        fewer franchise fees for Outback Steakhouse, and it was partially offset
        by
        increased catering revenue during the third quarter of 2006 compared with
        the
        same period in 2005.  44
 Table
              of Contents
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Three
        months ended September 30, 2006 and 2005 (continued)**
 
 COSTS
        AND EXPENSES
 
 *Cost
        of sales.* Cost of
        sales, consisting of food and beverage costs, decreased 0.4% to 36.3% as
        a
        percentage of restaurant sales in the third quarter of 2006 compared with
        the
        same period in 2005. This decrease in cost of sales was attributable to an
        increase in the proportion of consolidated sales associated with our non-Outback
        Steakhouse restaurants that have lower cost of goods sold ratios than Outback
        Steakhouses. Decreases in dairy costs, particularly butter and cream, and
        decreases in beef costs for our international restaurants for the quarter
        ended
        September 30, 2006 compared with the same period in 2005 were partially offset
        by higher produce costs for potatoes, tomatoes and onions.
 
 *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 Program and other stock-based compensation
        expenses. Labor and other related expenses increased 1.9% as a percentage
        of
        restaurant sales to 28.2% in the third quarter of 2006 compared with the
        same
        period in 2005. Of the increase, approximately 0.5% was attributable to
        conversion costs related to the implementation of the new Partner Equity
        Program
        and 0.9% resulted from ongoing costs from the Partner Equity Program,
        stock-based compensation expenses resulting from the implementation of a
        new
        accounting standard and restricted stock grants to managing partners.
        Additionally, declines in average unit volumes at domestic Outback Steakhouses
        and Carrabba’s Italian Grills, minimum wage increases and 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 as a percentage of restaurant sales compared to 2005.
        This increase was partially offset by a 0.2% decrease in managing partner
        distribution expense.
 
 *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. Substantial portions
        of
        these expenses are fixed or indirectly variable. These costs decreased 0.4%
        to
        22.2% as a percentage of restaurant sales in the third quarter of 2006 compared
        with the same period in 2005. This
        decrease resulted from significantly lower advertising costs and lower
        pre-opening costs. This decrease is partially offset by declines in average
        unit
        volumes at domestic Outback Steakhouses and Carrabba’s Italian Grills, higher
        occupancy costs 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.
 
 *Depreciation
        and amortization* .
        Depreciation and amortization costs increased 0.3% as a percentage of total
        revenues to 4.0% in the third quarter of 2006 compared to the same period
        in
        2005. Increased depreciation expense as a percentage of total revenues resulted
        from lower average unit volumes at domestic Outback Steakhouses and Carrabba’s
        Italian Grills during the quarter and higher depreciation costs for certain
        of
        our new restaurant formats, which have higher average construction costs
        than an
        Outback Steakhouse.
 
 *General
        and administrative* .
        General
        and administrative costs increased by $8,475,000 to $54,945,000 in the third
        quarter of 2006 compared with $46,470,000 during the same period in
        2005. This
        increase resulted from an increase in overall administrative costs associated
        with operating additional domestic and international Outback Steakhouses,
        Carrabba’s Italian Grills, Fleming’s Prime Steakhouses, Roy’s, Bonefish Grills
        and Cheeseburger in Paradise restaurants. Additionally, the increase resulted
        from $868,000 of compensation expense recognized for restricted stock benefits
        for certain members of senior management that was not recognized in the same
        period last year and $1,144,000 of stock options expensed as a result of
        the
        implementation of a new accounting standard. Also, during the three months
        ended
        September 30, 2006, we incurred $1,600,000 of consulting expenses for reviewing
        branding and strategic initiatives .
  45
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Three
        months ended September 30, 2006 and 2005 (continued)**
 
 *Hurricane
        property and inventory losses.* Hurricane property and inventory losses of $1,412,000 in the third quarter
        of
        2005 included the physical damage costs of hurricanes and associated severe
        weather that occurred in the southeastern United States.
 
 *Provision
        for impaired assets and restaurant closings.* A
        provision of $10,513,000 was recorded during the third quarter of 2006 which
        included the following charges: $1,208,000 for the impairment of six domestic
        Outback Steakhouse restaurants, $1,574,000 for the impairment of three
        international Outback Steakhouse restaurants, $1,850,000 for the impairment
        of
        two Carrabba’s Italian Grill restaurants, $844,000 for the closing of one
        Bonefish Grill restaurant, $423,000 for the impairment of two Bonefish Grill
        restaurants, $2,055,000 for the closing of one Cheeseburger in Paradise
        restaurant, $1,855,000 for the impairment of two Cheeseburger in Paradise
        restaurants and $704,000 for the loss associated with certain non-restaurant
        operations. During the third quarter of 2005, a provision of $1,396,000 was
        recorded which included $974,000 for the impairment of one Bonefish Grill
        restaurant and $422,000 for the closing of one domestic Outback Steakhouse
        restaurant.
 
 *Contribution
        for “Dine Out for Hurricane Relief.”* This
        line
        item represents our $1,000,000 contribution for “Dine for America,” a
        fundraising effort in October 2005 to provide support to the victims of
        hurricanes.
 
 *(Income)
        loss from operations of unconsolidated affiliates* .
        Income
        from operations of unconsolidated affiliates represents our portion of net
        income from restaurants operated as development joint ventures. Income from
        development joint ventures decreased by $1,036,000 to a loss of $270,000
        during
        the third quarter of 2006 compared with income of $766,000 during the same
        period in 2005. This decrease was attributable primarily to losses of $793,000
        incurred on our investment in Kentucky Speedway, LLC during the third quarter
        of
        2006. Also, a decline in the performance of our Brazilian joint venture
        contributed to this decrease.
 
 *Income
        from operations* . Income
        from operations decreased by $21,369,000 to $26,372,000 in the third quarter
        of
        2006 compared with $47,741,000 in the same period in 2005 as a result of
        declines in average unit volumes at domestic Outback Steakhouses and Carrabba’s
        Italian Grills, conversion costs related to the implementation of the Partner
        Equity Program, stock-based compensation expenses resulting from the
        implementation of a new accounting standard, the provisions for impaired
        assets
        and restaurant closings and the changes in the relationships between revenues
        and expenses discussed above.
 
 *Interest
        income* .
        Interest income was $761,000 during the third quarter of 2006 compared with
        $658,000 in the same period in 2005. Interest
        income increased due to higher interest rates on short-term investment and
        cash
        equivalent balances during the third quarter of 2006 compared with the same
        period in 2005. Interest income for the quarters ended September 30, 2006
        and
        2005 included interest of approximately $466,000 and $286,000, respectively,
        from notes receivable held by a limited liability company owned by our
        California franchisee.
 
 *Interest
        expense* .
        Interest expense was $3,870,000 during the third quarter of 2006 compared
        with
        $1,848,000 in the same period in 2005. The
        increase in interest expense was due to higher average debt balances and
        higher
        interest rates during the third quarter of 2006 compared with the third quarter
        of 2005. Interest
        expense for the quarters ended September 30, 2006 and 2005 included
        approximately $466,000 and $286,000, respectively, of expense from outstanding
        borrowings on the line of credit held by a limited liability company owned
        by
        our California franchisee.
 
 *Provision
        for income taxes* . The
        provision for income taxes was $6,219,000, or 26.7% of pretax income, for
        the
        third quarter of 2006 compared to $15,874,000, or 34.2%, in the third quarter
        of
        2005. The decline in the effective tax rate during the third quarter of 2006
        was
        primarily due to an increase in FICA tax credits for employee-reported tips
        as a
        percentage of income before provision for income taxes and a higher percentage
        of profits in lower-taxed jurisdictions.
  46
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Three
        months ended September 30, 2006 and 2005 (continued)**
 
 *Net
        income and earnings per share* .
        Net
        income for the third quarter of 2006 was $17,268,000 compared with $29,472,000
        in the same period in 2005. Basic earnings per share decreased to $0.23 during
        the third quarter of 2006 compared with $0.40 for the same period in 2005
        as a
        result of the decreas e
        in net
        income, partially offset by the decrease in basic weighted average shares
        outstanding of approximately 613,000 shares. The decrease in basic weighted
        average shares outstanding was primarily a result
        of common stock repurchases partially offset by the
        issuance of shares under stock option plans.  Diluted
        earnings per share decreased to $0.23 during the third quarter of 2006 compared
        with $0.38 for the same period in 2005 as a resu lt
        of the
        decrease in net income and partially offset by the decrease in diluted weighted
        average shares outstanding of approximately 1,653,000 shares. The decrease
        in diluted weighted average shares outstanding was primarily due to the reduced
        number of dilutive options outstanding and the decreased number of basic
        shares
        outstanding and was partially offset by the effect of contingently issuable
        shares related to the PEP Stock Plan for the quarter ended September 30,
        2006
        compared with September 30, 2005 .
  47
 Table
            of Contents
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Nine
        months ended September 30, 2006 and 2005**
 
 REVENUES
 
 *Restaurant
        sales.* Restaurant sales increased by 9.1% to $2,919,110,000 during the first nine
        months of 2006 compared with $2,674,657,000 in the same period in 2005. The
        increase in restaurant sales was primarily attributable to additional revenues
        of approximately $212,441,000 from the opening of new restaurants after
        September 30, 2005, revenues of approximately $13,373,000 from the purchase
        in
        February 2006 of ten Eastern Canada Outback Steakhouse franchise restaurants,
        offset in part by decreases in sales at existing restaurants. The following
        table includes additional information about changes in restaurant sales at
        domestic Company-owned restaurants for the nine months ended September 30,
        2006
        and 2005:
 **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,****2006**
              
              **2005**Average
                  restaurant unit volumes (weekly):Outback
                  Steakhouses(1)
              
              $
              64,448
              
              $
              65,844Carrabba's
                  Italian Grills(1)
              
              
              59,254
              
              
              61,402Bonefish
                  Grills (1)
              
              
              59,828
              
              
              60,043Fleming's
                  Prime Steakhouse and Wine Bars
              
              
              84,216
              
              
              84,527Roy's
              
              
              72,764
              
              
              71,906Operating
                  weeks:Outback
                  Steakhouses
              
              
              26,292
              
              
              25,537Carrabba's
                  Italian Grills
              
              
              8,122
              
              
              6,965Bonefish
                  Grills
              
              
              3,862
              
              
              2,699Fleming's
                  Prime Steakhouse and Wine Bars
              
              
              1,587
              
              
              1,252Roy's
              
              
              836
              
              
              736Year
                  to year percentage change:Menu
                  price increases (2):Outback
                  Steakhouses
              
              
              0.7
              %
              
              4.3
              %Carrabba's
                  Italian Grills
              
              
              0.9
              %
              
              2.5
              %Bonefish
                  Grills
              
              
              1.6
              %
              
              2.9
              %Same-store
                  sales (stores open 18 months or more):Outback
                  Steakhouses
              
              
              -2.2
              %
              
              -0.9
              %Carrabba's
                  Italian Grills
              
              
              -0.6
              %
              
              6.4
              %Bonefish
                  Grills
              
              
              0.9
              %
              
              3.6
              %Fleming's
                  Prime Steakhouse and Wine Bars
              
              
              4.4
              %
              
              12.2
              %Roy's
              
              
              0.9
              %
              
              6.1
              %
 __________________
 (1)
              We
                  have restated our previously reported consolidated financial statements
                  to
                  reflect certain adjustments as discussed in Note 1 of Unaudited
                  Notes to
                  Consolidated Financial Statements of Item 1: Consolidated Financial
                  Statements, which is included in this Form
                  10-Q.
 (2)
              Reflects
                  nominal amounts of menu price changes, prior to any change in product
                  mix
                  because of price increases, and may not reflect amounts effectively
                  paid
                  by the customer. Menu price increases are not provided for Fleming's
                  and
                  Roy's as a significant portion of their sales come from specials,
                  which
                  fluctuate daily.
 
 *Other
        revenues.* Other
        revenues, consisting primarily of initial franchise fees and royalties,
        increased by $141,000 to $15,911,000 in the first nine months of 2006 as
        compared with $15,770,000 in 2005. This
        increase primarily resulted from higher initial franchise fees and royalties
        from additional stores opened and operated as franchises during the first
        nine
        months of 2006 compared with the same period in 2005, increased international
        royalties and increased catering revenue. This increase was partially offset
        by
        lower franchise fees and royalties for Outback Steakhouse International as
        a
        result of the purchase in February 2006 of ten Eastern Canada Outback Steakhouse
        franchise restaurants.  48
 Table
              of Contents
 **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Nine
        months ended September 30, 2006 and 2005 (continued)**
 
 COSTS
        AND EXPENSES
 
 *Cost
        of sales.* Cost of
        sales, consisting of food and beverage costs, decreased 0.4% to 36.3% as
        a
        percentage of restaurant sales in the first nine months of 2006 compared
        with
        the same period in 2005. This decrease in cost of sales was attributable
        to an
        increase in the proportion of consolidated sales associated with our non-Outback
        Steakhouse restaurants that have lower cost of goods sold ratios than Outback
        Steakhouses.  Decreases
        in dairy, chicken and international beef costs for the first nine months
        of 2006
        compared with the same period in 2005 were partially offset by higher produce
        and seafood costs.
 
 *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 Program and other stock-based compensation
        expenses. Labor and other related expenses increased 2.0% as a percentage
        of
        restaurant sales to 27.8% in the first nine months of 2006 compared with
        the
        same period in 2005. Of the increase, approximately 0.7% was attributable
        to
        conversion costs related to the implementation of the new Partner Equity
        Program
        and 0.5% resulted from ongoing costs from the Partner Equity Program,
        stock-based compensation expenses resulting from the implementation of a
        new
        accounting standard and restricted stock grants to managing partners. The
        total
        costs associated with implementation of the Partner Equity Program caused
        a
        corresponding $24,094,000 increase in the “Partner deposit and accrued buyout
        liability” balance in our Unaudited Consolidated Balance Sheet as of September
        30, 2006 as compared to December 31, 2005. Additionally, declines in average
        unit volumes at domestic Outback Steakhouses and Carrabba’s Italian Grills,
        minimum wage increases and 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
        as a
        percentage of restaurant sales compared to 2005.
 
 *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. Substantial portions
        of
        these expenses are fixed or indirectly variable. These costs increased 1.0%
        to
        22.3% as a percentage of restaurant sales in the first nine months of 2006
        compared with the same period in 2005. This
        increase resulted from higher utility, pre-opening and repair and maintenance
        costs, declines in average unit volumes at domestic Outback Steakhouses and
        Carrabba’s Italian Grills 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.
 
 *Depreciation
        and amortization* .
        Depreciation and amortization costs increased 0.3% as a percentage of total
        revenues to 3.8% during the first nine months of 2006 compared to the same
        period in 2005. Increased depreciation expense as a percentage of total revenues
        resulted from lower average unit volumes at domestic Outback Steakhouses
        and
        Carrabba’s Italian Grills during the first nine months of the year and higher
        depreciation costs for certain of our new restaurant formats, which have
        higher
        average construction costs than an Outback Steakhouse.
  49
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Nine
        months ended September 30, 2006 and 2005 (continued)**
 
 *General
        and administrative* .
        General
        and administrative costs increased by $20,184,000 to $167,804,000 during
        the
        first nine months of 2006 compared with $147,620,000 during the same period
        in
        2005. This
        increase resulted from an increase in overall administrative costs associated
        with operating additional domestic and international Outback Steakhouses,
        Carrabba’s Italian Grills, Fleming’s Prime Steakhouses, Roy’s, Bonefish Grills
        and Cheeseburger in Paradise restaurants. Additionally, the increase resulted
        from $3,461,000 of compensation expense recognized for restricted stock benefits
        for certain members of senior management that was not recognized in the same
        period last year and $4,032,000 of stock options expensed as a result of
        the
        implementation of a new accounting standard. Also, during the first nine
        months
        of 2006 we incurred $1,060,000 of expense from writing off investments in
        new
        Cheeseburger in Paradise restaurant development that was discontinued due
        to the
        anticipation that there would not be a favorable return on the investments,
        $2,000,000 of investigation costs for the possible violation of the Foreign
        Corrupt Practices Act in South Korea, $2,800,000 of consulting expenses for
        reviewing branding and strategic initiatives and a loss of $360,000 in the
        cash
        surrender value of life insurance. These increases were offset by the reduction
        of $2,100,000 in compensation expense associated with our Chief Executive
        Officer recognized during the first quarter of 2005, which did not recur
        in
        2006.
 
 *Hurricane
        property and inventory losses.* Hurricane property and inventory losses of $1,412,000 in the nine months
        ended
        September 30, 2005 included the physical damage costs of hurricanes and
        associated severe weather that occurred in the southeastern United States.
 
 *Provision
        for impaired assets and restaurant closings.* A
        provision of $13,547,000 was recorded during the first nine months of 2006
        which
        included the following charges: $1,693,000 for the impairment of seven domestic
        Outback Steakhouse restaurants, $1,574,000 for the impairment of three
        international Outback Steakhouse restaurants, $3,468,000 for the impairment
        of
        three Carrabba’s Italian Grill restaurants, $2,055,000 for the closing of one
        Cheeseburger in Paradise restaurant and $1,855,000 for the impairment of
        two
        Cheeseburger in Paradise restaurants, $844,000 for the closing of one Bonefish
        Grill restaurant and $423,000 for the impairment of two Bonefish Grill
        restaurants, $704,000 for the loss associated with certain non-restaurant
        operations and $931,000 for an impairment charge for intangible and other
        asset
        impairments related to the closing of Paul Lee’s Chinese Kitchen. During the
        nine months ended September 30, 2005, a provision of $10,026,000 was recorded
        which included $1,373,000 for the closing of two domestic Outback Steakhouse
        restaurants, $1,072,000 for the partial impairment of one Bonefish Grill
        restaurant and $7,581,000 for an impairment charge against the deferred license
        fee receivable related to certain non-restaurant operations.
 
 *Contribution
        for “Dine Out for Hurricane Relief.”* This
        line
        item represents our $1,000,000 contribution for “Dine for America,” a
        fundraising effort in October 2005 to provide support to the victims of
        hurricanes.
 
 *(Income)
        loss from operations of unconsolidated affiliates* .
        Income
        from operations of unconsolidated affiliates represents our portion of net
        income from restaurants operated as development joint ventures. Income from
        development joint ventures decreased by $810,000 to a loss of $145,000 during
        the first nine months of 2006 compared with income of $665,000 during the
        same
        period in 2005. This increase is due to losses of $1,747,000 incurred on
        our
        investment in Kentucky Speedway, LLC during the first nine months of 2006.
        This
        decrease is partially offset by expenses resulting from the adoption of a
        buyout
        program for managing and area operating partners in certain Outback Steakhouses
        in our joint venture in Brazil during the first quarter of 2005, which did
        not
        recur in 2006. This decrease is also offset by a $574,000 write-down of an
        Outback Steakhouse operated as a joint venture in Pennsylvania during the
        second
        quarter of 2005. Operating performance issues and our inability to obtain
        more
        favorable lease terms resulted in a decision not to extend the lease for
        this
        restaurant past the initial term.
  50
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Nine
        months ended September 30, 2006 and 2005 (continued)**
 
 *Income
        from operations* . Income
        from operations decreased by $76,718,000 to $118,578,000 during the first
        nine
        months of 2006 compared with $195,296,000 in the same period in 2005 as a
        result
        of declines in average unit volumes at domestic Outback Steakhouses and
        Carrabba’s Italian Grills, conversion costs related to the implementation of the
        Partner Equity Program, stock-based compensation expenses resulting from
        the
        implementation of a new accounting standard, the provisions for impaired
        assets
        and restaurant closings and the changes in the relationships between revenues
        and expenses discussed above.
 
 *Other
        income (expense), net.* Other
        income (expense), net increased by $6,263,000 to income of $5,165,000 in
        the
        first nine months of 2006 compared with an expense of $1,098,000 in the same
        period in 2005 as a result of a gain of $5,165,000 recorded
        during the second quarter of 2006 for amounts recovered in accordance with
        the
        terms of a lease termination agreement.
 
 *Interest
        income* .
        Interest income was $2,122,000 during the first nine months of 2006 compared
        with $1,476,000 in the same period in 2005. Interest
        income increased due to higher interest rates on short-term investment and
        cash
        equivalent balances during the first nine months of 2006 compared with the
        same
        period in 2005. Interest income for the nine months ended September 30, 2006
        and
        2005 included interest of approximately $1,278,000 and $786,000, respectively,
        from notes receivable held by a limited liability company owned by our
        California franchisee.
 
 *Interest
        expense* .
        Interest expense was $9,452,000 during the first nine months of 2006 compared
        with $4,519,000 in the same period in 2005. The
        increase in interest expense was due to higher average debt balances and
        higher
        interest rates during the first nine months of 2006 compared with the first
        nine
        months of 2005. Interest
        expense for the nine months ended September 30, 2006 and 2005 included
        approximately $1,278,000 and $786,000, respectively, of expense from outstanding
        borrowings on the line of credit held by a limited liability company owned
        by
        our California franchisee.
 
 *Provision
        for income taxes* . The
        provision for income taxes was $32,881,000, or 28.2% of pretax income, for
        the
        first nine months of 2006 compared to $64,328,000, or 33.7%, during the first
        nine months of 2005. The decline in the effective tax rate during the 2006
        period was primarily due to an increase in FICA tax credits for
        employee-reported tips as a percentage of income before provision for income
        taxes and a higher percentage of profits in lower-taxed
        jurisdictions.
 
 *Net
        income and earnings per share* .
        Net
        income for the first nine months of 2006 was $78,331,000 compared with
        $119,357,000 in the same period in 2005. Basic earnings per share decreased
        to
        $1.06 during the first nine months of 2006 compared with $1.61 for the same
        period in 2005 as a result of the decreas e
        in net
        income, partially offset by the decrease in basic weighted average shares
        outstanding of approximately 88,000 shares. Basic weighted average shares
        outstanding decreased as
        a
        result of common stock repurchases, partially offset by t he
        issuance of shares under stock option plans.  Diluted
        earnings per share decreased to $1.02 during the first nine months of 2006
        compared with $1.55 for the same period in 2005 as a resu lt
        of the
        decrease in net income and partially offset by the decrease in diluted weighted
        average shares outstanding of approximately 370,000 shares. The decrease
        in diluted weighted average shares outstanding was primarily due to the reduced
        number of dilutive options outstanding and the decreased number of basic
        shares
        outstanding and was partially offset by the effect of contingently issuable
        shares related to the PEP Stock Plan for the nine months ended September
        30,
        2006 compared with September 30, 2005 .
  51
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources**
 
 The
        following table presents a summary of our cash flows from operating, investing
        and financing activities for the periods indicated (in thousands):
 
 **NINE
                  MONTHS ENDED****SEPTEMBER
                  30,****2006**
              
              **2005****(restated)**Net
                  cash provided by operating activities
              
              $
              137,895
              
              $
              187,309Net
                  cash used in investing activities
              
              
              (251,862
              )
              
              (218,308
              )Net
                  cash provided by (used in) financing activities
              
              
              73,895
              
              
              (16,707
              )Net
                  decrease in cash and cash equivalents
              
              $
              (40,072
              )
              $
              (47,706
              )
 
 We
        require capital principally for the development of new restaurants, remodeling
        older restaurants and investments in technology, and on occasion also use
        capital for acquisitions of franchisees and joint venture partners. We also
        require capital to pay dividends to common stockholders (refer to additional
        discussion in the Dividends section of Management’s Discussion and Analysis of
        Financial Condition and Results of Operations). We also utilize capital to
        repurchase our common stock as part of an ongoing share repurchase program.
        Capital expenditures totaled approximately $327,862,000 for the year ended
        December 31, 2005 and approximately $225,751,000 and $215,236,000 during
        the
        first nine months of 2006 and 2005, respectively. We either lease our
        restaurants under operating leases for periods ranging from five to 30 years
        (including renewal periods) or build free-standing restaurants where it is
        cost
        effective.
 
 Pursuant
        to our joint venture agreement for the development of Roy’s restaurants, RY-8,
        our joint venture partner, has the right to require us to purchase up to
        25% of
        RY-8’s interests in the joint venture at anytime after June 17, 2004 and up to
        another 25% (total 50%) of its interest in the joint venture at anytime after
        June 17, 2009. Our purchase price 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.
 
 In
        January 2005, we executed a lease termination agreement to vacate a premises
        occupied by a Company-owned O utback
        Steakhouse. In accordance with the terms of this agreement, we vacated the
        restaurant and terminated its lease in June 2006. We received $6,014,000
        and
        recorded a gain of $5,165,000 on the disposal of this restaurant during the
        three months ended June 30, 2006.
 
 On
        October 11, 2005 we executed a sale agreement for certain land in Las Vegas,
        Nevada where a Company-owned Outback Steakhouse was operated. Pursuant to
        the
        agreement if the sale is consummated after the inspection and title and survey
        contingency periods, we will receive $8,800,000 on the closing date of the
        sale,
        which will be on or before March 31, 2008, and will be provided space in
        a new
        development to operate an Outback Steakhouse. The purchaser will pay us an
        additional $5,000,000 if plans for the new restaurant are not agreed upon
        prior
        to the closing date. In October 2006, a fire occurred at this Outback
        Steakhouse, and we recorded an impairment charge of $455,000 for the closing
        of
        this restaurant. This event does not affect the sale agreement, and, at this
        time, we do not intend to rebuild the restaurant before the closing date
        of the
        sale.
 
 On
        October 26, 2005, our Board of Directors approved up to $24,000,000 to be
        used
        for the purchase and development of 46 acres in Tampa, Florida. This purchase
        closed in December 2005. On December 5, 2006, we sold approximately 41.5
        acres
        of this property for $17,300,000 and an escrow for site work improvements
        valued
        at $7,500,000. We kept approximately 4.5 acres of land for the development
        of
        three restaurants.
  52
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 In
        the
        first quarter of 2006, we implemented changes to our general manager partner
        program that are effective for all new general manager partner and chef
        partner employment agreements signed after March 1, 2006. Additionally, all
        managing partners currently under contract were given an opportunity to elect
        participation in the new plan. Upon completion of each five-year term of
        employment, the managing partner will participate in a deferred compensation
        program in lieu of receiving stock options under the historical plan. We
        will
        require the use of capital to fund this new Partner Equity Plan as each general
        managing partner earns a contribution and currently estimate funding
        requirements ranging from $20,000,000 to $25,000,000 in each of the first
        two
        years of the plan. Future funding requirements could vary significantly
        depending on timing of managing partner contracts, forfeiture rates and numbers
        of partner participants and may differ materially from estimates.
 
 On
        November 5, 2006, we entered into a definitive agreement to be acquired by
        an
        investor group comprised of Bain Capital Partners, LLC, Catterton Partners
        and
        our founders Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon, for
        $40.00 per share in cash.  Our
        Board
        of Directors, on the unanimous recommendation of a Special Committee of
        independent directors, approved the merger agreement and recommended that
        our
        shareholders adopt the agreement.
 
 The
        total
        transaction value, including assumed debt, is approximately $3.2 billion.
        The
        transaction is expected to close prior to the end of April 2007, and is subject
        to approval of our shareholders (other than those participating in the
        acquisition) and customary closing conditions. The transaction is not subject
        to
        a financing condition.
  The
        merger agreement also contains certain termination rights for both us and
        the
        investor group. The merger agreement provides that in certain circumstances,
        upon termination, we may be required to pay the investor group a termination
        fee
        of $25,000,000 to $45,000,000 and reimburse it for its out-of-pocket fees
        and
        expenses incurred with respect to the transactions contemplated by the merger
        agreement, up to a maximum of $7,500,000.
 
 On
        November 5, 2006, we entered into amendments to certain employment, stock
        option
        and restricted stock agreements with our Chief Executive Officer, Chief
        Operating Officer, Chief Officer - Legal and Corporate Affairs and Chief
        Financial Officer.
 
 Pursuant
        to the Amendments, in the event of a separation of service of the executive
        by
        us without cause or by the executive for good reason within two years after
        a
        change of control, the executive will be paid a lump sum equal to two times
        the
        sum of (i) his gross annual base salary at the rate in effect immediately
        prior
        to the change of control and (ii) the aggregate cash bonus compensation paid
        to
        him for the two fiscal years preceding the year in which the change of control
        occurs divided by two. However, in the case of the Chief Financial Officer,
        if
        he is not employed for the two entire fiscal years preceding the year in
        which a
        change of control occurs, the amount for the purposes of clause (ii) will
        be
        equal to his target bonus for the year in which the change of control occurs.
 
 Pursuant
        to the Chief Executive Officer’s Amendment, if a change of control and
        subsequent separation of service cause the vesting of all restricted stock
        granted to him pursuant to certain Restricted Stock Agreements, we will not
        be
        required to pay him severance compensation of $5,000,000, as previously required
        under his employment agreement in certain circumstances.
 
 Pursuant
        to the Amendments for the Chief Executive Officer, Chief Operating Officer
        and
        Chief Officer - Legal and Corporate Affairs, the options owned by each of
        them
        will become fully vested and exercisable if, within two years after a change
        of
        control, the executive is terminated by us without cause, resigns for good
        reason, dies or suffers a disability.
  53
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 Pursuant
        to the Amendments for each of the Chief Executive Officer, Chief Officer
        - Legal
        and Corporate Affairs and Chief Financial Officer, the restricted stock owned
        by
        each of them will become fully vested and all restrictions will lapse if,
        within
        two years after a change of control, the executive is terminated by us without
        cause, resigns for good reason, dies or suffers a disability.
 
 Each
        Amendment provides a “conditional gross-up” for excise and related taxes in the
        event the severance compensation and other payments or distributions to an
        executive pursuant to an employment agreement, stock option agreement,
        restricted stock agreement or otherwise would constitute “excess parachute
        payments,” as defined in Section 280G of the Internal Revenue Code. The tax
        gross up will be provided if the aggregate parachute value of all severance
        and
        other change in control payments to the executive is greater than 110% of
        the
        maximum amount that may be paid under Section 280G of the Code without
        imposition of an excise tax. If the parachute value of an executive’s payments
        does not exceed the 110% threshold, the executive’s payments under the change in
        control agreement will be reduced to the extent necessary to avoid imposition
        of
        the excise tax on “excess parachute payments.”
 
 On
        November 5, 2006, we amended the Outback Steakhouse, Inc. Amended and Restated
        Stock Plan (the “Stock Plan”) and the Outback Steakhouse, Inc. Amended and
        Restated Managing Partner Stock Plan (the “MP Stock Plan”). Pursuant to these
        amendments, each option granted under the Stock Plan and the MP Stock Plan
        that
        is outstanding immediately prior to the effective time of the Merger (the
        “Effective Time”) will, as of the Effective Time, become fully vested and be
        converted into an obligation to pay cash in an amount equal to the product
        of
        (i) the total number of shares of common stock subject to such option and
        (ii)
        the excess, if any, of the Merger Consideration over the per share option
        price.
        Additionally, pursuant to such amendments, at the Effective Time, unless
        otherwise agreed to by the award recipient, each award of restricted stock
        will
        be converted into a right to receive cash in an amount equal to the product
        of
        (i) the Merger Consideration and (ii) the number of shares of restricted
        stock
        in respect of such award. Such cash amount will vest and be paid in accordance
        with the original scheduled vesting dates applicable to the converted restricted
        stock; provided, however, that such cash amount will vest and be paid upon
        the
        death, disability or termination other than for cause of the holder of the
        restricted stock. Prior to the Effective Time, we will establish an irrevocable
        grantor trust to provide for the payment of these cash amounts in respect
        of
        such outstanding restricted stock awards.
 
 Pursuant
        to the Amendment to the Outback Steakhouse, Inc. Partner Equity Plan (the
        “PEP”), dated November 5, 2006, phantom shares of our stock credited to each
        participant’s account will be converted into cash credits in an amount equal to
        the product of (i) the Merger Consideration and (ii) the number of shares
        of our
        common stock credited to such participant’s account. Such cash amounts will be
        credited to an account for each participant and will be eligible to be invested
        by participants in the investment alternatives available under the Partner
        Equity Deferred Compensation Diversified Plan part of the PEP and, except
        for such administrative changes as may be necessary to effectuate the foregoing,
        will be administered in accordance with the payment schedule and consistent
        with
        the terms of the PEP.
 
 Pursuant
        to the Amendment to the Directors’ Deferred Compensation and Stock Plan (the
“Directors’ Plan”), dated November 5, 2006, each share unit credited to a
        deferral account will be converted into the right to receive the Merger
        Consideration immediately upon the Effective Time.
  54
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 On
        November 8, 2006, we acquired the remaining 18% minority ownership interests
        in
        eighty-eight Outback Steakhouse restaurants in South Korea.  The total
        acquisition price was approximately $34,872,000, of which $17,831,000 was
        paid
        in cash to the sellers, $14,041,000 was paid in satisfaction of amounts
        outstanding under loans previously made by us to the sellers and $3,000,000
        was
        placed into an interest-bearing escrow account. The escrowed monies are to
        provide a source for indemnification against claims of misrepresentation
        or
        breach of warranty and payment of certain expenses.  Goodwill and
        identifiable intangibles, if applicable, are subject to finalization of the
        purchase price allocation. We completed this acquisition to relinquish all
        relations associated with the minority owners of Aussie Chung, Ltd. On November
        8, 2006, the Company acquired the remaining 18% minority ownership interests
        in
        eighty-eight Outback Steakhouse restaurants in South Korea.  The total
        acquisition price was approximately $34,872,000, of which $17,831,000 was
        paid
        in cash to the sellers, $14,041,000 was paid in satisfaction of amounts
        outstanding under loans previously made by the Company to the sellers and
        $3,000,000 was placed into an interest-bearing escrow account. The escrowed
        monies are to provide a source for indemnification against claims of
        misrepresentation or breach of warranty and payment of certain expenses. 
Goodwill and identifiable intangibles, if applicable, are subject to
        finalization of the purchase price allocation. The Company completed this
        acquisition to relinquish all relations associated with the minority owners
        of
        Aussie Chung, Ltd. (see Note 15). .
 
 On
        December 13, 2006, we negotiated a lump sum of $750,000 as settlement of
        a
        $1,454,000 note receivable from the owner of certain non-restaurant operations.
        We recorded the resulting loss of $704,000 in the line item “Provision for
        impaired assets and restaurant closings” in our Unaudited Consolidated
        Statements of Income for the nine months ended September 30, 2006.
 
 CREDIT
        FACILITIES
 
 Effective March
        10,
        2006, we amended an uncollateralized $150,000,000 revolving credit facility
        that
        was scheduled to mature in June 2007 with a new $225,000,000 maximum borrowing
        amount and maturity date of June 2011. The amended line of credit permits
        borrowing at interest rates ranging from 45 to 65 basis points over the 30,
        60,
        90 or 180-day LIBOR (ranging from 5.32% to 5.37% at September 30, 2006).
        At
        September 30, 2006, the unused portion of the line of credit was
        $21,000,000.
 
 The
        credit agreement contains certain restrictions and conditions as defined
        in the
        agreement that require us to maintain consolidated net worth equal to or
        greater
        than consolidated total debt and to maintain a ratio of total consolidated
        debt
        to EBITDAR (earnings before interest, taxes, depreciation, amortization and
        rent) equal to or less than 3.0 to 1.0. We obtained from our lenders temporary
        waivers of certain covenants in our revolving credit facility for the quarter
        ended September 30, 2006.
 
 Effective
        March 10, 2006, we also amended a $30,000,000 line of
        credit that was scheduled to mature in June 2007 with a new $40,000,000 maximum
        borrowing amount and maturity date of June 2011. The amended line permits
        borrowing at interest rates ranging from 45 to 65 basis points over LIBOR
        for
        loan draws and 55 to 80 basis points over LIBOR for letter of credit advances.
        The credit agreement contains certain restrictions and conditions as defined
        in
        the agreement. We received two covenant waivers from our lender on this line
        of
        credit for the quarter ended September 30, 2006. At September 30, 2006, the
        outstanding balance on the line of credit was $14,000,000. There were no
        draws
        outstanding on this line of credit as of December 31, 2005. At September
        30,
        2006 and December 31, 2005, $25,072,000 and $20,072,000, respectively, of
        the
        line of credit 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.
  55
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 CREDIT
        FACILITIES (continued)
 
 On
        October 12, 2006, we entered into a short-term uncollateralized line of credit
        agreement that has a maximum borrowing amount of $50,000,000 and a maturity
        date
        of March 2007. The line permits borrowing at an interest rate 55 basis points
        over the LIBOR Market Index Rate at the time of each draw. The credit agreement
        contains certain restrictions and conditions as defined in the agreement. We
        received two covenant waivers from our lender on this line of credit for
        the
        quarter ended September 30, 2006.
 
 We
        have
        notes payable with banks bearing interest at rates ranging from 5.34% to
        6.40%
        and from 4.95% to 6.06% at September 30, 2006 and December 31, 2005,
        respectively, to finance development of our restaurants in South Korea. The
        notes are denominated and payable in Korean won, with outstanding balances
        as of
        September 30, 2006 maturing at dates ranging from October 2006 to August
        2007.
        As of September 30, 2006 and December 31, 2005, the combined outstanding
        balance
        was approximately $47,981,000 and $46,670,000, respectively. Certain of the
        notes payable are collateralized by lease and other deposits. At September
        30,
        2006 and December 31, 2005, collateralized notes totaled approximately
        $40,178,000 and $34,326,000, respectively. We have been pre-approved by these
        banks for additional borrowings of approximately $8,000,000 and $4,800,000
        at
        September 30, 2006 and December 31, 2005, respectively.
 
 Effective
        September 28, 2006, we established an uncollateralized note payable at a
        principal amount of 10,000,000,000 Korean won, which bears interest at 1.25%
        over the Korean Stock Exchange 3-month certificate of deposit rate (5.86%
        as of
        September 30, 2006).  The proceeds of this note were used to refinance
        approximately 9,000,000,000 Korean won of short-term borrowings and to pay
        estimated 2006 corporate income taxes of 1,000,000,000 Korean won.  The
        note is denominated and payable in Korean won and matures in September
        2009.  As of September 30, 2006, the outstanding principle on this note was
        approximately $10,352,000. The note contains certain restrictions and conditions
        as defined in the agreement that require our Korean subsidiary to maintain
        a
        ratio of debt to equity equal to or less than 2.5 to 1.0 and to maintain
        a ratio
        of bank borrowings to total assets equal to or less than 0.4 to 1.0.  At
        September 30, 2006, we were in compliance with these debt
        covenants.
 
 We
        have
        notes payable with banks to finance the development of our restaurants in
        Japan
        (“Outback Japan”). The notes are payable to banks, collateralized by letters of
        credit and lease deposits of approximately $3,100,000 at September 30, 2006
        and
        December 31, 2005, and bear interest at rates ranging from 0.86% to 1.14%
        and at
        0.86% at September 30, 2006 and December 31, 2005, respectively. The notes
        are
        denominated and payable in Japanese yen, with outstanding balances as of
        September 30, 2006 maturing in October 2006. As of September 30, 2006 and
        December 31, 2005, outstanding balances totaled approximately $6,845,000
        and
        $5,085,000, respectively.
 
 In
        October 2003, Outback Japan established a revolving line of credit to finance
        the development of new restaurants in Japan and refinance certain notes payable.
        The line permits borrowing up to a maximum of $10,000,000. Effective March 10,
        2006, this revolving credit facility that was scheduled to mature in June
        2007
        was amended with a new maturity date in June 2011. The amended line of credit
        permits borrowing at interest rates ranging from 45 to 65 basis points over
        LIBOR. As of September 30, 2006 and December 31, 2005, Outback Japan had
        borrowed approximately $9,121,000 and $9,043,000, respectively, on the line
        of
        credit at an average interest rate of 1.05%, with draws as of September 30,
        2006
        maturing from December 2006 to February 2007. The revolving line of credit
        contains certain restrictions and conditions as defined in the agreement.
        Outback Japan received two covenant waivers from its lender on this line
        of
        credit for the quarter ended September 30, 2006.
 
 As
        of
        September 30, 2006, we had approximately $7,319,000 of notes payable at interest
        rates ranging from 2.07% to 7.00%. These notes have been primarily issued
        for
        buyouts of general manager interests in the cash flows of their restaurants
        and
        generally are payable over five years.
  56
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 CREDIT
        FACILITIES (continued)
 
 In
        February 2004, Outback Japan established an additional revolving line of
        credit
        to finance the development of new restaurants in Japan and to refinance certain
        notes payable. The line permits borrowing up to a maximum of $10,000,000
        with
        interest of LIBOR divided by a percentage equal to 1.00 minus the Eurocurrency
        Reserve Percentage. The line matures in December 2006. As of September 30,
        2006
        and December 31, 2005, Outback Japan had borrowed approximately $2,051,000
        and
        $5,593,000, respectively, on the line of credit at an average interest rate
        of
        1.10%, with draws as of September 30, 2006 maturing in November 2006. The
        revolving line of credit contains certain restrictions and conditions as
        defined
        in the agreement. As of September 30, 2006, we were in compliance with all
        of
        the debt covenants.
 
 In
        December 2006, Outback Japan amended its $10,000,000 revolving line of credit
        to
        extend the maturity of the line from December 2006 until the earlier of March
        31, 2007 or the date on which the acquisition of us by the investor group
        is
        final.  All other material provisions of the agreement remain the
        same.
 
 In
        August
        2005, we entered into a sale-leaseback arrangement for five of our properties.
        Pursuant to this arrangement, we sold these properties for a total of
        $6,250,000, including $1,250,000 for tenant improvements. We then leased
        the
        sites back for a 30-year term and will make lease payments on the first day
        of
        each calendar month. Since this transaction does not qualify for sale-leaseback
        accounting treatment, we have recorded the proceeds in our Unaudited
        Consolidated Balance Sheets as long-term debt.
 
 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 bears interest at rates
        ranging from 50 to 90 basis points over LIBOR and matures in December 2008.
        We
        were required to consolidate T-Bird effective January 1, 2004 upon adoption
        of
        FIN 46R. The outstanding balance on the line of credit at September 30, 2006
        and
        December 31, 2005 was approximately $31,883,000 and $31,283,000, respectively,
        and is included in our Unaudited Consolidated Balance Sheets as long-term
        debt.  T-Bird
        uses proceeds from the line of credit for the purchase of real estate and
        construction of buildings to be operated 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 requiring us to perform under
        the
        guarantee obligation, 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 and include our covenant commitments under existing lines
        of
        credit. 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.
 
 We
        expect
        that our capital requirements through the end of 2006 will be met by cash
        flows
        from operations and, to the extent needed, advances on our lines of
        credit.
  57
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 CREDIT
        FACILITIES (continued)
 
 Our
        primary source of credit is our uncollateralized revolving line of credit
        that
        permits borrowing up to $225,000,000. Based upon provisions of the line of
        credit agreement and operating data and outstanding borrowings as of and
        through
        September 30, 2006, the margin over LIBOR rates charged to us on future amounts
        drawn under the line will continue to be 0.125% higher than our base margin
        unless: (i) outstanding debt balances decrease by more than $ 193,900,000;
        or (ii) earnings before interest, taxes, depreciation, amortization and rent
        increase more than 21.2%. Furthermore, the margin over LIBOR rates charged
        to us
        on future amounts drawn under the line would increase by an additional 0.125%
        if: (i) outstanding debt balances increased by more than $34,800,000; or
        (ii)
        earnings before interest, taxes, depreciation, amortization and rent decreased
        more than 3.0%. In addition, based upon provisions of the line of credit
        agreement, availability of funds under the uncollateralized revolving line
        of
        credit would not be affected unless: (i) outstanding debt balances increased
        by
        more than $75,500,000; (ii) earnings before interest, taxes, depreciation,
        amortization and rent decreased more than 19.2%; or (iii) our net worth
        decreased approximately 6.4%.
 
 On
        November 14, 2006, we obtained a covenant waiver from our lenders on our
        uncollateralized $225,000,000 revolving credit facility for the quarter ended
        September 30, 2006. The credit agreement contains certain restrictions and
        conditions as defined in the agreement that require us to provide the lenders
        with financial statements, calculations and certifications within 45 days
        from
        the end of the quarter. Failure to timely provide this information is considered
        an event of default. This waiver extended the deadline to provide the financial
        information and certifications until November 29, 2006.
 
 On
        November 28, 2006, we received a second covenant waiver from our lenders
        on our
        revolving credit facility that further extended the deadline to December
        29,
        2006. It also provided that pricing would remain at its current level until
        the
        financial statements were received.  At that time, pricing would change
        retroactive to November 30, 2006 if the calculations determined a change
        was
        warranted.
 
 On
        December 29, 2006, we received a third covenant waiver from our lenders on
        our
        revolving credit facility that further extended the deadline to January 31,
        2007. It also changed pricing effective November 29, 2006 to a margin of
        65
        basis points over LIBOR as of November 29, 2006 and to a facility fee of
        15
        basis points. Upon delivery of the financial statements, the pricing returned
        to
        a margin of 55 basis points over LIBOR as of January 8, 2007 and to a facility
        fee of 12.5 basis points as determined by the covenant calculations completed
        for the quarter ended September 30, 2006. An event of default did not occur
        as
        the financial information was provided before the extended
        deadline.
 
 On
        November 14, 2006, Outback
        Japan received a covenant waiver from its lender on its $10,000,000 line
        of
        credit and we
        received covenant waivers from our lender on our $40,000,000 line of credit
        and
        on our guarantee of
        an
        uncollateralized line of credit for RY-8 for the quarter ended September
        30,
        2006. These
        credit agreements contain certain restrictions and conditions as defined
        in the
        agreements that require Outback Japan or us to provide the lender with financial
        statements, calculations and certifications within 45 days from the end of
        the
        quarter. Failure to timely provide this information is considered an event
        of
        default. These waivers extended the deadline to provide the financial
        information and certifications until December 29, 2006. They also provided
        that
        pricing would remain at its current level until the financial statements
        were
        received.  At that time, pricing would change retroactive to November 30,
        2006 if the calculations determined a change was warranted.
  58
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 CREDIT
        FACILITIES (continued)
 
 On
        December 29, 2006, Outback Japan received a second covenant waiver from its
        lender on its $10,000,000 line of credit and we received second covenant
        waivers
        from our lender on our $40,000,000 line of credit and on our guarantee of
        an
        uncollateralized line of credit for RY-8 that further extended the deadline
        to
        January 31, 2007. These waivers also changed pricing for Outback Japan and
        for
        the $40,000,000 line of credit effective November 29, 2006 to a margin of
        65
        basis points over LIBOR as of November 29, 2006 and to a facility fee of
        15
        basis points. Upon delivery of the financial statements, the pricing returned
        to
        a margin of 55 basis points over LIBOR as of January 8, 2007 and to a facility
        fee of 12.5 basis points as determined by the covenant calculations completed
        for the quarter ended September 30, 2006. An event of default did not occur
        as
        the financial information was provided before the extended
        deadline.
 
 On
        November 14, 2006, we
        received a covenant waiver from our lender on our $50,000,000 line of credit
        for
        the quarter ended September 30, 2006. The credit agreement contains certain
        restrictions and conditions as defined in the agreement and includes our
        covenant commitments under existing lines of credit that require us to provide
        the lender with financial statements, calculations and certifications within
        45
        days from the end of the quarter. Failure to timely provide this information
        is
        considered an event of default. This waiver extended the deadline to provide
        the
        financial information and certifications until December 29, 2006. On December
        29, 2006, we received a second covenant waiver from our lender on this line
        of
        credit. This waiver extended the deadline to provide the financial information
        and certifications until January 31, 2007. An event of default did not occur
        as
        the financial information for the quarter ended September 30, 2006 was provided
        before the extended deadline.
 
 DEBT
        GUARANTEES
 
 The
        consolidated financial statements also 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 where we are required to
        be a
        guarantor of the debt, which 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
        Income entitled “Elimination of minority interest.” 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, Inc. (“RY-8”),
        in the development of Roy's restaurants. The line of credit originally expired
        in December 2004 and was renewed twice with a new termination date in June
        2011.
        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, 2006, the outstanding balance on the line of credit was
        approximately $23,962,000.
 
 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, and including our covenant commitments under existing lines of
        credit), then the total outstanding balance, including any accrued interest,
        is
        immediately due from the guarantors. We
        received two covenant waivers from the lender on our guarantee of this line
        of
        credit for the quarter ended September 30, 2006.
  59
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 DEBT
        GUARANTEES (continued)
 
 If
        an
        event of default occurs 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 favor of OSI Restaurant Partners,
        Inc. 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
        the guarantor on $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. At September 30,
        2006
        and December 31, 2005, the outstanding balance on the bonds was approximately
        $63,300,000.
 
 In
        June
        2006, Speedway modified certain terms and conditions of its debt, including
        (i)
        lowering its interest rate, (ii) removing a liquidity coverage requirement,
        (iii) reducing a fixed charge coverage ratio, (iv) delaying redemption payments
        for 2006, 2007, and 2008, and (v) revising a put feature which now allows
        the
        lenders to require full payment of the debt on or after June 2011. In connection
        with these modifications, in June 2006, we and other equity owners of Speedway
        entered into an amended guarantee, which increased our guarantee on the bonds
        from $9,445,000 to $17,585,000. Our guarantee will proportionally decrease
        as
        payments are made on the bonds.
 
 As
        part
        of the amended 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 made additional working
        capital contributions and loans to this affiliate in payments totaling
        $5,503,000. Of this amount, $1,867,000 was loaned during the nine months
        ended
        September 30, 2006 and $1,392,000 was loaned in 2005. In addition, based
        on
        current operating performance, we anticipate making additional contributions
        in
        2006 of approximately $750,000 to $1,250,000. This affiliate is expected
        to
        incur further operating losses at least through 2006 .
 
 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.
  60
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Liquidity
        and Capital Resources (continued)**
 
 DEBT
        GUARANTEES (continued)
 
 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 of September 30, 2006. 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 as
        of
        September 30, 2006. 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 $2,900,000.
        As a result, we have not recognized a liability related to these guarantees
        in
        accordance with FIN 45. We have various depository and banking relationships
        with the lender, including several outstanding notes payable.
 
 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.
 
 SHARE
        REPURCHASE
 
 On
        July
        26, 2000, our Board of Directors authorized the repurchase of up to 4,000,000
        shares of our common stock, with the timing, price, quantity and manner of
        the
        purchases to be made at the discretion of management, depending upon market
        conditions. In addition, the Board of Directors authorized the repurchase
        of
        shares on a regular basis to offset shares issued as a result of stock option
        exercises. On July 23, 2003, our Board of Directors extended both the repurchase
        authorization for an additional 2,500,000 shares of our common stock, and
        the
        authorization to offset shares issued as a result of stock option exercises.
        We
        will fund the repurchase program with available cash and bank credit facilities.
        On February 13, 2006, our Board of Directors authorized the repurchase of
        an
        additional 1,500,000 shares and authorized the continued repurchase of shares
        on
        a regular basis to offset shares issued as a result of stock option exercises
        and as restricted shares vest and become dilutive. During the period from
        the
        authorization date through September 30, 2006, approximately 9,525,000 shares
        of
        our common stock have been issued as the result of stock option exercises.
        As of
        September 30, 2006, under these authorizations we have repurchased approximately
        15,415,000 shares of our common stock for approximately
        $552,057,000.
  61
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 DIVIDENDS
 
 Our
        Board
        of Directors authorized the following dividends during 2005 and
        2006:
 
 Declaration
              
              Record
              
              Payable
              
              
              Amount
                  per ShareDate
              
              Date
              
              Date
              
              
              of
                  Common StockJanuary
                  26, 2005
              
              February
                  18, 2005
              
              March
                  4, 2005
              
              
              $
              0.13April
                  27, 2005
              
              May
                  20, 2005
              
              June
                  3, 2005
              
              
              
              0.13July
                  27, 2005
              
              August
                  19, 2005
              
              September
                  2, 2005
              
              
              
              0.13October
                  26, 2005
              
              November
                  18, 2005
              
              December
                  2, 2005
              
              
              
              0.13January
                  24, 2006
              
              February
                  17, 2006
              
              March
                  3, 2006
              
              
              
              0.13April
                  25, 2006
              
              May
                  19, 2006
              
              June
                  2, 2006
              
              
              
              0.13July
                  25, 2006
              
              August
                  18, 2006
              
              September
                  1, 2006
              
              
              
              0.13October
                  24, 2006
              
              November
                  17, 2006
              
              December
                  1, 2006
              
              
              
              0.13
 
 At
        the
        current dividend rate, the annual dividend payment is expected to be
        between $38,000,000 and $40,000,000 depending
        on the shares outstanding during the respective quarters. We intend to pay
        dividends with cash flow from operations.
 
 **Recently
        Issued Financial Accounting Standards**
 
 In
        June
        2006, the EITF reached a consensus on EITF Issue No. 06-4, “Accounting for
        Deferred Compensation and Postretirement Benefit Aspects of Endorsement
        Split-Dollar Life Insurance Arrangements” (“EITF 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. This would require recognition of a liability for
        the
        discounted future benefit obligation owed to an insured employee by the
        insurance carrier. EITF 06-4 is effective for fiscal years beginning after
        December 15, 2007. We may have certain policies subject to the provisions
        of
        EITF 06-4 and are currently evaluating the impact that EITF 06-4 would have
        on
        our financial statements.
 
 In
        July
        2006, the FASB issued 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.
        FIN
        48 prescribes a recognition threshold and measurement attribute for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. FIN 48 also provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transition associated with tax positions. The provisions
        of FIN 48 are effective for fiscal years beginning after December 15, 2006.
        We
        are currently evaluating the impact that FIN 48 will have on our financial
        statements.
  62
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
 
 **Recently
        Issued Financial Accounting Standards (continued)**
 
 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.
        We are
        currently evaluating the impact that SFAS No. 157 will have on our financial
        statements.
 
 In
        September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
        No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). This statement requires balance
        sheet recognition of the overfunded or underfunded status of pension and
        postretirement benefit plans. Under SFAS No. 158, actuarial gains and losses,
        prior service costs or credits, and any remaining transition assets or
        obligations that have not been recognized under previous accounting standards
        must be recognized in other comprehensive income, net of tax effects, until
        they
        are amortized as a component of net periodic benefit cost. In addition, the
        measurement date, the date at which plan assets and the benefit obligation
        are
        measured, is required to be a company’s fiscal year end. SFAS No. 158 is
        effective for publicly-held companies for fiscal years ending after
        December 15, 2006, except for the measurement date provisions, which are
        effective for fiscal years ending after December 15, 2008. We do not
        believe the adoption of SFAS No. 158 will have a material impact on our
        financial statements.
 
 In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements” (“SAB 108”). SAB 108 requires companies to
        evaluate the materiality of identified unadjusted errors on each financial
        statement and related financial statement disclosure using both the rollover
        approach and the iron curtain approach, as those terms are defined in SAB
        108.
        The rollover approach quantifies misstatements based on the impact of the
        misstatement, whereas the iron curtain approach quantifies misstatements
        based
        on the effects of correcting the misstatement existing in the balance sheet
        at
        the end of the current year, irrespective of the reversing effect of prior
        year
        misstatements on the income statement. Financial statements would require
        adjustment when either approach results in quantifying a misstatement that
        is
        material. Correcting prior year financial statements for immaterial errors
        would
        not require previously filed reports to be amended. If a company determines
        that
        an adjustment to prior year financial statements is required upon adoption
        of
        SAB 108 and does not elect to restate its previous financial statements,
        then it
        must recognize the cumulative effect of applying SAB 108 in fiscal 2006
        beginning balances of the affected assets and liabilities with a corresponding
        adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108
        is
        effective for the first fiscal year ending after November 15, 2006. We are
        currently evaluating the impact that SAB 108 will have on its financial
        statements.
  63
 Table
            of Contents
  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF**
 **FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS**
  **Cautionary
        Statement**
 
 Our
        actual results could differ materially from those stated or implied in the
        forward-looking statements included in this report as a result, among other
        things, of the following:
 
 (i)
              
              The
                  restaurant industry is a highly competitive industry with many
                  well-established competitors;(ii)
              
              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; and increases in various costs, including
                  construction and real estate costs;(iii)
              
              Our
                  results can be affected by consumer perception of food
                  safety;(iv)
              
              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;(v)
              
              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;(vi)
              
              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;(vii)
              
              Minimum
                  wage increases in certain states including Florida, Nevada, Colorado,
                  New
                  York, Missouri, Arizona, Ohio, California, Hawaii, Connecticut
                  and
                  Arkansas in the fourth quarter of 2006 and in 2007 could cause
                  a
                  significant increase in our “Labor and other related” expenses;
                  and/or(viii)
              
              The
                  occurrence of any event, change or other circumstance that could
                  result in
                  the termination of the merger agreement, including but not limited
                  to the
                  inability to obtain shareholder approval or the failure to satisfy
                  other
                  conditions required to complete the merger.
 64
 Table
              of Contents
  **OSI
        RestaurantPartners, Inc.**
 **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.
 
 Our
        exposure to interest rate fluctuations is limited to our outstanding bank
        debt.
        At September 30, 2006, outstanding borrowings under our revolving lines of
        credit bear interest at 45 to 65 basis points over the 30, 60, 90 or 180-day
        London Interbank Offered Rate. The weighted average effective interest rate
        on
        the $218,000,000 outstanding balance under these lines at September 30, 2006
        was
        6.15%. At September 30, 2006, outstanding borrowings under our Japanese lines
        of
        credit bear interest at either 45 to 65 basis points over LIBOR or LIBOR
        divided
        by a percentage equal to 1.00 minus the Eurocurrency Reserve Percentage.
        The
        weighted average effective interest rate on the approximately $11,172,000
        outstanding balance at September 30, 2006 was 1.06%. Notes payable of
        approximately $6,845,000 to Japanese banks bear interest at rates ranging
        from
        0.86% to 1.14%. Notes payable of approximately $58,333,000 to South Korean
        banks
        bear interest at rates ranging from 5.34% to 6.40% at September 30, 2006.
 
 At
        September 30, 2006 and December 31, 2005, our total debt, excluding consolidated
        guaranteed debt, was approximately $307,919,000 and $154,065,000, respectively.
        Should interest rates based on our average borrowings through September 30,
        2006
        increase by one percentage point, our estimated annual interest expense would
        increase by approximately $2,638,000 over amounts reported for the year ended
        December 31, 2005.
 
 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, our outstanding debt to Japanese and South Korean
        banks
        of approximately $18,017,000 and $58,333,000, respectively, at September
        30,
        2006 and to our royalties from international franchisees. We do not use
        financial instruments to hedge foreign currency exchange rate changes. Our
        investments in these countries totaled approximately $38,572,000 and $24,802,000
        as of September 30, 2006 and December 31, 2005, respectively.
 
 Many
        of
        the ingredients used in the products sold in our restaurants are commodities
        that are subject to unpredictable price volatility.  Although we attempt to
        minimize the effect of price volatility by negotiating fixed price contracts
        for
        the supply of key ingredients, there are no established fixed price markets
        for
        certain commodities such as produce and wild fish, and we are subject to
        prevailing market conditions when purchasing those types of commodities.
        Other
        commodities are purchased based upon negotiated price ranges established
        with
        vendors with reference to the fluctuating market prices. The related agreements
        may contain contractual features that limit the price paid by establishing
        certain price floors and caps. Extreme changes in commodity prices and/or
        long-term changes could affect our financial results adversely, although
        any
        changes in commodity prices would affect our competitors at about the same
        time
        as us.  We expect that in most cases increased commodity prices could be
        passed through to our consumers via increases in menu prices.  However, if
        there is a time lag between the increasing commodity prices and our ability
        to
        increase menu prices or, if we believe the commodity price increase to be
        short
        in duration and we choose not to pass on the cost increases, our short-term
        financial results could be negatively affected. Additionally, from time to
        time,
        competitive circumstances could limit menu price flexibility, and in those
        cases
        margins would be negatively impacted by increased commodity prices.
 
 Our
        restaurants are dependent upon energy to operate and are impacted by changes
        in
        energy prices, including natural gas. We utilized derivative instruments
        to
        hedge our exposure to material increases in natural gas prices between November
        2006 and March 2007. We are not applying hedge accounting, as defined by
        SFAS
        No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and any
        changes in fair value of the derivative instruments are marked-to-market
        through
        earnings in the period of change. The effects of these derivative instruments
        were immaterial to our financial statements for all periods
        presented.
  65
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
 
 **Item
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        (continued)**
 
 In
        addition to the market risks identified above and to the risks discussed
        in
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations,” we are subject to business risk as our beef supply is highly
        dependent upon five vendors. We currently purchase approximately 65% of our
        beef
        from two beef suppliers. If these vendors were unable to fulfill their
        obligations under their contracts, we would encounter supply shortages and
        incur
        higher costs to secure adequate supplies.
 
 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.
  66
 Table
            of Contents
 **OSI
        RestaurantPartners, Inc.**
 **CONTROLS
        AND PROCEDURES**
 
 **Item
        4. CONTROLS AND PROCEDURES**
 
 In
        October 2006, we identified errors in our accounting for unearned revenue
        for
        unredeemed gift cards and certificates. Upon completion of the review of
        accounting policies for gift cards and certificates as well as a review of
        certain other balance sheet accounts, we have restated our consolidated
        financial statements for certain prior periods to correct these and other
        errors, as described in this section.
 
 *Unearned
        revenue and revenue recognition*
 Unearned
        revenue represents our liability for gift cards and certificates that have
        been
        sold but not yet redeemed.  Historically, we recognized revenue for
        estimates of gift cards and certificates that will not be redeemed (“breakage”)
        at the time of the sale of the gift cards and certificates.  We have
        determined that the methodology we used to arrive at breakage was inappropriate
        and resulted in understatement of the liability for gift cards and certificates.
        We have also determined that revenue should not be recognized at the time
        of
        sale of the gift cards and certificates. Accordingly, we have revised our
        policy
        to recognize breakage for those gift cards and certificates that will never
        be
        redeemed at the time at which their redemption becomes remote. Furthermore,
        certain expenses associated with gift card and certificate promotions were
        incorrectly netted against breakage income rather than reflected as expenses
        in
        our financial statements. Correction of these errors in our consolidated
        financial statements resulted in an increase in unearned revenue of $60,337,000
        as of December 31, 2005 and decreases in net income of $323,000 and $1,045,000
        for the three and nine months ended September 30, 2005, respectively. It
        also
        resulted in a $37,548,000 decrease in retained earnings as of December 31,
        2004.
 
 *Minority
        interests in consolidated entities*
 We
        have
        identified errors in the recorded amount of our minority interests in certain
        of
        our Carrabba’s Italian Grill subsidiaries, which were understated as a result of
        our incorrectly recording the entries relating to the correction in accounting
        for managing partners' interests in their stores from investment accounting
        to
        compensation accounting in 2003.  Additionally, we determined that in
        connection with our 2002 purchase of the 20% interest in Outback Steakhouse
        International, LP, for the value of 28,570 shares that were payable upon
        meeting
        certain conditions should have been recorded at the acquisition date in 2002
        rather than upon their issuance in 2006.  Correction of these errors in our
        consolidated financial statements resulted in an increase in goodwill of
        $1,309,000 as of December 31, 2005, a decrease in minority interests in
        consolidated entities of $1,314,000 as of December 31, 2005 and decreases
        in
        elimination of minority interest of $38,000 and $88,000 for the three and
        nine
        months ended September 30, 2005, respectively. It also resulted in an $119,000
        increase in retained earnings as of December 31, 2004.
  *Deferred
        rent and property, fixtures and equipment*
 We
        identified errors in our straight-line lease calculations for certain properties
        where we received tenant improvement contributions from a landlord or where
        we
        determined that we were depreciating certain assets over lives different
        than
        the associated lease term.  Correction of these errors in our consolidated
        financial statements resulted in an increase to deferred rent of $6,303,000
        and
        a decrease to property, fixtures and equipment of $1,905,000 as of December
        31,
        2005 and decreases to net income of $337,000 and $1,093,000 for the three
        and
        nine months ended September 30, 2005, respectively. It
        also
        resulted in a $3,862,000 decrease in retained earnings as of December 31,
        2004.
 
 *Other
        adjustments*
 We have
        increased additional paid-in capital and decreased retained earnings as of
        December 31, 2002 by $2,333,000 to correct an error in equity classification
        that arose prior to 2000, relating to acquisitions recorded as
        pooling-of-interest transactions.
 
 Our
        Korean subsidiary receives payments from certain consumer product and service
        companies in connection with promotions under which we have agreed to provide
        discounts to their customers.  We have historically netted such monies
        received against cost of sales and other restaurant operating expenses.  We
        have determined that these amounts should be recorded as revenue with an
        equal
        offsetting amount in cost of sales and other restaurant operating
        expenses.  Correction of these errors in our consolidated financial
        statements increased restaurant sales $852,000 and $8,515,000 for the three
        and
        nine months ended September 30, 2005, respectively, and were offset by changes
        in cost of sales and other restaurant operating expense with no effect on
        income
        from operations or net income.  67
 Table
              of Contents
 **OSI
        Restaurant Partners, Inc.**
 **CONTROLS
        AND PROCEDURES**
 
 **Item
        4. CONTROLS AND PROCEDURES (continued)**
 
 As
        described in Note 1 to the Unaudited Notes to Consolidated Financial Statements
        in Item 1 of this Form 10-Q, the adjustments noted above impacted various
        items
        in our Unaudited Consolidated Statement of Cash Flows for the nine months
        ended
        September 30, 2005 by decreasing net cash provided by operating activities
        by
        $135,000 and decreasing net cash used in financing activities by $135,000.
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 We
        have
        established and maintain disclosure controls and procedures that are designed
        to
        ensure that material 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 (“CEO”) and Chief
        Financial Officer (“CFO”) ,
        to
        allow timely decisions regarding required disclosure. We carried out an
        evaluation, under the supervision and with the participation of our management,
        including our CEO and CFO ,
        of the
        effectiveness of the design and operation of our disclosure controls and
        procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under
        the
        Securities Exchange Act of 1934, as amended as of September 30, 2006. Based
        on
        that evaluation ,
        our
        management, including our CEO and CFO, concluded that the Company’s disclosure
        controls and procedures were not effective as of September 30, 2006 as a
        result
        of the material weakness described below. Notwithstanding the existence of
        the
        material weakness, management has concluded that the financial statements
        included in this quarterly report fairly present in all material respects
        our
        financial condition, results of operations and cash flows for the periods
        presented.
 
 In
        connection with the issuance of our 2005 Form 10-K/A for the year ended December
        31, 2005, management assessed the effectiveness of our disclosure controls
        and
        procedures and internal control over financial reporting as of December 31,
        2005
        as more fully described in Item 9A of our Form 10-K/A. Based on that assessment,
        management identified a material weakness in our internal controls. The
        Company did not maintain effective controls over the completeness and accuracy
        of unearned revenue. Specifically, the Company did not have controls designed
        and in place to ensure that the Company's obligations related to gift cards
        and
        certificates as presented in the financial statements were reconciled to
        the
        underlying detail of gift cards and certificates outstanding and that revenue
        was recognized in accordance with generally accepted accounting principles.
        This
        control deficiency resulted in the restatement of the Company's consolidated
        financial statements as of December 31, 2005 and 2004 and for the years ended
        December 31, 2005, 2004 and 2003, all quarters in 2005 and 2004 and the first
        and second quarters of 2006. In
        addition, this control deficiency could result in a material misstatement
        to
        unearned revenue for gift cards and certificates, revenue and related
        expenses  that
        would result in a material misstatement to the Company's annual or interim
        consolidated financial statements that would not be prevented or detected.
        Accordingly, management determined that this control deficiency constitutes
        a
        material weakness. As
        described in our 2005 Form 10-K/A, we made significant changes in our internal
        control over financial reporting through the date of this report, and we
        continue to spend a significant amount of time and effort to improve our
        control
        environment. Although the actions described below that we have taken
        significantly improved our internal control environment, we are currently
        assessing and testing the internal control initiatives implemented to determine
        whether they are operating as intended. As a result, they were not considered
        fully effective in remediating the material weakness as of September 30,
        2006.
  68
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **CONTROLS
        AND PROCEDURES**
 
 **Item
        4. CONTROLS AND PROCEDURES (continued)**
 
 **Management
        Consideration of Restatement**
 
 As
        discussed in Note 1 of the Notes to the Unaudited Consolidated Financial
        Statements included in this Report on Form 10-Q, we restated our consolidated
        financial statements as of December 31, 2005 and 2004 and for the years ended
        December 31, 2005, 2004 and 2003 and all quarters in 2005 and 2004 for
        matters other than the unearned revenue described above. The other restatement
        items are, in part, the result of a number of control deficiencies relating
        to
        accounting for minority interest in consolidated entities, additional
        paid-in-capital, deferred rent, lease expense, fixed assets and depreciation
        expense.
 
 Management
        has concluded that the other control deficiencies included in the restatement
        of
        the previously issued financial statements relating to the accounts referenced
        in the previous paragraph, either individually or in the aggregate, did not
        rise
        to the level of a material weakness as of September 30, 2005. Management's
        evaluation of these control deficiencies was based on a thorough assessment
        of
        the related quantitative impact of these deficiencies on these restated
        financial statements and an appropriate consideration of qualitative factors,
        including appropriate consideration of controls designed and in place to
        prevent
        or detect a material misstatement.
 
 **Changes
        in Internal Control over Financial Reporting and Remediation of Material
        Weakness in Internal Control over Financial Reporting**
 
 At
        the
        direction of our board of directors and audit committee, management has
        commenced a plan to remediate the material weakness described above. The
        remediation initiatives developed by management were both organizational
        and
        process focused.
 
 During
        the fourth quarter of 2006 and in connection with preparing our quarterly
        report
        on Form 10-Q for the quarter ended September 30, 2006, the Company implemented
        the following measures to address the material weakness described
        above:
 
 **·**
            Created
                a new position of Vice President, Corporate Controller, to lead process
                and organizational change required to improve substantiation of more
                complex and/or estimate-based accounting, including accounting for
                gift
                cards and certificates and related
                revenue. 
 ·
            Developed
                and implemented a consistent accounting policy for gift card and
                certificate accounting across all Company concepts in accordance
                with
                generally accepted accounting principles. 
 ·
            Implemented
                procedures to perform monthly reconciliations of the Company’s unearned
                revenue balance to detailed support for gift card and certificates
                outstanding, and gift card and certificate sales and redemptions. 
 ·
            Established
                a process for expensing gift card incentive programs as
                incurred.  69
 Table
            of Contents
  **OSI
        Restaurant Partners, Inc.**
 **CONTROLS
        AND PROCEDURES**
 
 **Item
        4. CONTROLS AND PROCEDURES (continued)**
 
 **Changes
        in Internal Control over Financial Reporting and Remediation of Material
        Weakness in Internal Control over Financial Reporting
        (continued)**
 
 The
        Company is in the process of implementing the following additional measures
        to
        address the material weakness described above:
 
 ·
            Acquiring
                additional resources to create a centralized accounting team that
                will be
                responsible for gift card and certificate
                accounting. 
 ·
            Establishing
                policies to ensure appropriate communication regarding operating
                changes
                affecting accounting and control design. 
 ·
            Developing
                a process for tracking and recording gift card discounts or expense
                as
                issued. 
 Except
        as
        described above, there were no changes in our internal control over financial
        reporting that occurred during the most recent fiscal quarter that have
        materially affected, or are reasonably likely to materially affect, our internal
        control over financial reporting.
 70
 Table
              of Contents
  **OSI
        RestaurantPartners, Inc.**
 **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.
 
 We
        filed
        a report on Form 8-K with the Securities and Exchange Commission dated June
        27,
        2003 regarding the jury verdict in a civil suit against us. On June 26, 2003,
        in
        a civil case against us in the Delaware Circuit Court, County of Delaware,
        State
        of Indiana, titled *David
        D. Markley and Lisa K. Markley, Plaintiffs, vs. Outback Steakhouse of Florida,
        Inc., et. al, Defendants* ,
        alleging liability under the “dramshop” liquor liability statute, a jury
        returned a verdict in favor of the two plaintiffs who were injured by a drunk
        driver. The portion of the verdict against us was $39,000,000. We appealed
        the
        verdict to the Indiana Court of Appeals.  On July 25, 2005, the Court of
        Appeals affirmed the verdict of the trial courts.  We petitioned the Court
        of Appeals for rehearing and rehearing was denied. We filed a petition for
        transfer with the Indiana Supreme Court.  On February 21, 2006, the Indiana
        Supreme Court granted transfer. On
        November 8, 2006, the Indiana Supreme Court issued its decision reversing
        the
        verdict of the Indiana Court of Appeals, reversing the order of the trial
        court
        denying a new trial and remanding the case to the trial court with direction
        to
        vacate the judgment and schedule a new trial. The decision of the Indiana
        Supreme Court has been certified to the trial court and the verdict vacated.
        A
        new trial will be scheduled.
 
 We
        have
        insurance coverage related to this case provided by our primary carrier for
        $21,000,000 and by an excess in surance
        carrier for the balance of the verdict of approximately $19,000,000. The
        excess
        insurance carrier, Fireman’s Fund Insurance Company, has filed a declaratory
        judgment suit in the U.S. District Court, Southern District of Indiana claiming
        it was not notified of the case and is therefore not liable for its portion
        of
        the verdict. We do not believe the excess carrier’s case has any merit and we
        are vigorously defending this case. Activity in this case has been held in
        abeyance pending resolution of appeals in the Markley case. We have filed
        counter-claims against the excess carrier and cross-claims against the primary
        carrier and our third-party administrator. Our third-party administrator,
        Wachovia Insurance Services, Inc., has executed an indemnification agreement
        indemnifying us against any liability resulting from the alleged failure
        to give
        notice to Fireman’s Fund Insurance Company.  Upon
        certification of the decision of the Indiana Supreme Court to the trial court
        the verdict was vacated and the Fireman’s Fund declaratory judgment action was
        rendered moot.
 
 On
        November 7, 2006 a stockholder complaint was filed as a purported class
        action on behalf of all of our public stockholders, against us, each of our
        directors, J. Timothy Gannon, Bain Capital Partners, LLC and Catterton Partners
        in the Circuit Court of the 13th Judicial Circuit in and for Hillsborough
        County, Florida. The complaint is captioned Charter Township of Clinton Police
        and Fire Retirement System v. OSI Restaurant Partners, Inc., Chris T. Sullivan,
        Robert D. Basham, A. William Allen, III, John A. Brabson, Jr., W.R. "Max"
        Carey,
        Jr., Debbie Fields, General (Ret) Tommy Franks, Thomas A. James, Lee Roy
        Selmon,
        Toby S. Wilt, J. Timothy Gannon, Bain Capital Partners, LLC and Catterton
        Partners, Case No. 06-CA-010348 Div. B. The plaintiff alleges that it is
        an
        owner of our common stock. The complaint alleges, among other things, that
        our
        directors breached their fiduciary duties in connection with the proposed
        transaction by failing to maximize stockholder value and by approving a
        transaction that purportedly benefits our management expected to invest in
        the proposed transaction at the expense of our public stockholders. Among
        other things, the complaint seeks to enjoin us, our directors and the other
        defendants from proceeding with or consummating the merger. Bain Capital
        Partners, LLC and Catterton Partners are alleged to have aided and abetted
        the
        individual defendants in breaching their fiduciary duties. Based on the facts
        known to date, we and the other defendants believe that the claim asserted
        is
        without merit and intend to defend this suit vigorously.
  71
 Table
            of Contents
  **OSI
        RestaurantPartners, Inc.**
 **PART
        II: OTHER INFORMATION**
 
 **Item
        1A. Risk Factors**
 
 In
        addition to the other information discussed in this report, the factors
        described in Part I, Item 1A., “Risk Factors” in our 2005 10-K/A should be
        considered as these could materially affect our business, financial condition
        or
        future results. 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.
 
 In
        addition to the risk factors described in our 2005 10-K/A, the failure to
        complete the merger with our investor group would likely have an adverse
        effect
        on us.
 
 On
        November 5, 2006, we entered into a definitive agreement to be acquired by
        an
        investor group for $40.00 per share in cash. There is no assurance that our
        shareholders will approve the merger agreement or that other closing conditions
        will be satisfied. We are subject to several risks as a result of this merger
        agreement, including the following:
 
 ·
            If
                the merger is not completed, the share price of our common stock
                may
                change to the extent that the current market price of our common
                stock
                reflects an assumption that the merger will be
                completed; ·
            Certain
                costs related to the merger, including legal, accounting and financial
                advisory fees, must be paid even if the merger is not
                completed; ·
            Under
                circumstances defined in the merger agreement, we may be required
                to pay
                the investor group a termination fee of $25,000,000 to $45,000,000
                and
                reimburse it for its out-of-pocket fees and expenses incurred with
                respect
                to the transactions contemplated by the merger agreement, up to a
                maximum
                of $7,500,000, if the merger agreement is
                terminated; ·
            Additional
                shareholder lawsuits may be filed against us in connection with the
                merger
                agreement; ·
            Our
                management and employees’ attention may have been diverted from day-to-day
                operations; ·
            Shareholders
                will receive $40.00 per share of our common stock in cash despite
                any
                changes in the market value of our common stock;
                and ·
            The
                completion of the merger agreement may result in substantially more
                debt
                for us. 
 Minimum
        wage increases in certain states, including Florida, Nevada, Colorado, New
        York,
        Missouri, Arizona, Ohio, California, Hawaii, Connecticut, Arkansas and North
        Carolina, are expected to occur in the fourth quarter of 2006 and in 2007,
        which
        could significantly increase our “Labor and other related”
expenses.
  72
 Table
            of Contents
  **Item
        2. UnregisteredSales of Equity Securities and Use of
        Proceeds**
  (a)
        Following is information relating to the shares of common stock issued by
        us in
        transactions not registered under the Securities Act of 1933:
  During
        the quarter ended September 30, 2006, we issued approximately 15,400 shares
        of
        our common stock at $36.17 per share to six of our area operating partners
        for
        their interests in five Outback Steakhouses, two Fleming’s Prime Steakhouse and
        Wine Bars and one Roy’s restaurant. The aggregate value of shares issued was
        approximately $557,000 .
        We also
        issued approximately 42,200 shares of our common stock at $28.95 per share
        to
        one of our area operating partners for his interest in six Carrabba’s Italian
        Grills. The aggregate value of shares issued was approximately $1,222,000. This
        issuance of securities was exempt from the registration requirements of the
        Securities Act of 1933 in reliance on Section 4(2) of the Securities Act
        as a
        transaction by an issuer not involving a public offering.
 
 (c)
        Issuer Purchases of Equity Securities
 
 The
        following table includes information with respect to purchases of our common
        stock made by us during the quarter ended September 30, 2006:
 
 **Period**
              
              **(a)
                  Total number of shares purchased (1)**
              
              **(b)
                  Average price paid per share**
              
              **(c)
                  Total number of shares purchased as part of publicly announced
                  programs
                  (1)**
              
              **(d)
                  Maximum number of shares that may yet be purchased under the programs
                  (2)**July
                  1, 2006 - July 31, 2006
              
              
              -
              
              $
              -
              
              
              -
              
              
              2,070,000August
                  1, 2006 - August 31, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              2,073,000September
                  1, 2006 - September 30, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              2,111,000Total
              
              
              -
              
              
              
              
              
              -
              
              
              2,111,000
 ___________
 (1)
              No
                  shares were repurchased other than through our publicly announced
                  repurchase programs and authorizations during the third quarter
                  ended
                  September 30, 2006.
 (2)
              On
                  July 26, 2000, our Board of Directors authorized the repurchase
                  of up to
                  4,000,000 shares of our common stock, with the timing, price, quantity
                  and
                  manner of the purchases to be made at the discretion of management,
                  depending upon market conditions. In addition, the Board of Directors
                  authorized the repurchase of shares on a regular basis to offset
                  shares
                  issued as a result of stock option exercises. On July 23, 2003,
                  our Board
                  of Directors extended both the repurchase authorization for an
                  additional
                  2,500,000 shares of our common stock, and the authorization to
                  offset
                  shares issued as a result of stock option exercises. On February
                  13, 2006,
                  our Board of Directors authorized the repurchase of an additional
                  1,500,000 shares and authorized the continued repurchase of shares
                  on a
                  regular basis to offset shares issued as a result of stock option
                  exercises and as restricted shares vest and become dilutive. During
                  the
                  period from the authorization date through September 30, 2006,
                  approximately 9,525,000 shares of our common stock have been issued
                  as the
                  result of stock option exercises. As of September 30, 2006, under
                  these
                  authorizations we have repurchased approximately 15,415,000 shares
                  of our
                  common stock for approximately
                  $552,057,000.
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  **OSI
        RestaurantPartners, Inc.**
 **PART
        II: OTHER INFORMATION**
 
 **Item
        6. Exhibits**
  **Number**
                
                **Description**2.1
                
                Agreement
                    and Plan of Merger among Kangaroo Holdings, Inc., Kangaroo Acquisition,
                    Inc. and OSI Restaurant Partners, Inc. dated as of November 5,
                    2006
                    (included as an exhibit to Registrant’s Current Report on Form 8-K filed
                    November 6, 2006 and incorporated herein by reference)10.01*
                
                General
                    Release dated August 30, 2006 by and between Benjamin Novello
                    and OS
                    Restaurant Services, Inc. (included as an exhibit to Registrant’s Current
                    Report on Form 8-K filed August 30, 2006 and incorporated herein
                    by
                    reference)10.02*
                
                Restricted
                    Stock Agreement effective October 1, 2006 by and between OSI
                    Restaurant
                    Partners, Inc. and Jody Bilney (filed herewith)10.03
                
                Credit
                    Agreement dated as of October 12, 2006 between OSI Restaurant
                    Partners,
                    Inc. and Wachovia Bank, National Association (included as an
                    exhibit to
                    Registrant’s Current Report on Form 8-K filed October 18, 2006 and
                    incorporated herein by reference)10.04*
                
                Officer
                    Employment Agreement amended November 1, 2006 and effective April
                    27,
                    2000, by and among Steven T. Shlemon and Carrabba’s Italian Grill, Inc.
                    (included as an exhibit to Registrant’s Current Report on Form 8-K filed
                    November 7, 2006 and incorporated herein by reference)10.05*
                
                Amendment
                    to Officer Employment Agreement and Restricted Stock Agreement
                    made and
                    entered into effective November 5, 2006, by and between Dirk
                    Montgomery
                    and OSI Restaurant Partners, Inc. (included as an exhibit to
                    Registrant’s
                    Current Report on Form 8-K filed November 6, 2006 and incorporated
                    herein
                    by reference)10.06*
                
                Amendment
                    to Officer Employment Agreement and Incentive Compensation Agreements
                    made
                    and entered into effective November 5, 2006, by and among A.
                    William
                    Allen, III, OSI Restaurant Partners, Inc., and OS Restaurant
                    Services,
                    Inc. (included as an exhibit to Registrant’s Current Report on Form 8-K
                    filed November 6, 2006 and incorporated herein by reference)10.07*
                
                Amendment
                    to Officer Employment Agreement and Stock Option Agreements made
                    and
                    entered into effective November 5, 2006, by and among Paul E.
                    Avery, OSI
                    Restaurant Partners, Inc., and Outback Steakhouse of Florida,
                    Inc.
                    (included as an exhibit to Registrant’s Current Report on Form 8-K filed
                    November 6, 2006 and incorporated herein by reference)10.08*
                
                Amendment
                    to Officer Employment Agreement and Incentive Compensation Agreements
                    made
                    and entered into effective November 5, 2006, by and among Joseph
                    J. Kadow,
                    OSI Restaurant Partners, Inc., OS Restaurant Services, Inc.,
                    OS
                    Management, Inc., and Outback Steakhouse of Florida, Inc. (included
                    as an
                    exhibit to Registrant’s Current Report on Form 8-K filed November 6, 2006
                    and incorporated herein by reference)10.09*
                
                Amendment
                    to Outback Steakhouse, Inc. Amended and Restated Stock Plan (included
                    as
                    an exhibit to Registrant’s Current Report on Form 8-K filed November 6,
                    2006 and incorporated herein by reference)10.10*
                
                Amendment
                    to Outback Steakhouse, Inc. Amended and Restated Managing Partner
                    Stock
                    Plan (included as an exhibit to Registrant’s Current Report on Form 8-K
                    filed November 6, 2006 and incorporated herein by
                    reference)10.11*
                
                Amendment
                    to Outback Steakhouse, Inc. Partner Equity Plan (included as
                    an exhibit to
                    Registrant’s Current Report on Form 8-K filed November 6, 2006 and
                    incorporated herein by reference)10.12*
                
                Amendment
                    to Outback Steakhouse, Inc. Directors’ Deferred Compensation and Stock
                    Plan (included as an exhibit to Registrant’s Current Report on Form 8-K
                    filed November 6, 2006 and incorporated herein by
                    reference)10.13*
                
                Unit
                    Purchase Agreement dated as of November 8, 2006 and effective
                    as of
                    October 31, 2006 by and among Outback Steakhouse International,
                    L.P.., Eun
                    Tae Chung, Chai Woo Yi and Yoon Hee Eoh (included as an exhibit
                    to
                    Registrant’s Current Report on Form 8-K filed November 15, 2006 and
                    incorporated herein by reference)
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 Table
                of Contents
  **Number**
                  
                  **Description**10.14*
                  
                  Officer
                      Employment Agreement amended November 10, 2006 and effective
                      January 1,
                      2002, by and among Michael W. Coble and Outback Steakhouse
                      International,
                      Inc. (included as an exhibit to Registrant’s Current Report on Form 8-K
                      filed November 13, 2006 and incorporated herein by
                      reference)31.1
                  
                  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
 *
        Management contract or compensatory plan or arrangement required to be filed
        as
        an exhibit.
 
 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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 Table
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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 of the undersigned thereunto
        duly authorized.
 
 
 
 Date:
                  January 8, 2007
              
              OSI
                  RESTAURANT PARTNERS, INC.By:/s/
                  Dirk A.
                  MontgomeryDirk
                  A. Montgomery
                Senior
                  Vice President and Chief Financial Officer
                (Principal
                  Financial and Accounting Officer)
 
 
 
 76