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 June 30, 2004

OR

o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________.

1-15935
(Commission File Number)
___________________________

OUTBACK STEAKHOUSE, INC.
(Exact name of Registrant as specified in its charter)

___________________________

Delaware (State or other jurisdiction of incorporation or organization)		59-3061413 (I.R.S. Employer Identification No.)
2202 N. West Shore Boulevard, Suite 500 Tampa, Florida (Address of principal executive offices)		33607 (Zip Code)

(813) 282-1225
(Registrant's telephone number, including area code)
___________________________

                Indicate by check mark whether 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 report(s)), and (2) has been subject to such filing requirements for the past 90 days.

YES  x  NO  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES  x  NO  o

              As of August 2, 2004, the registrant had outstanding 73,682,701 shares of Common Stock, $.01 par value.

OUTBACK STEAKHOUSE, INC.

QUARTERLY REPORT ON FORM 10‑Q
For the Quarterly Period Ended June 30, 2004

INDEX

                                                                                                                                                                         &n bsp;                                         

2

Table of Contents

PART I:  FINANCIAL INFORMATION

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS

OUTBACK STEAKHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

  See notes to unaudited consolidated financial statements.

3

Table of Contents

OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data, unaudited)

See notes to unaudited consolidated financial statements.

4

Table of Contents

OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)

				SIX MONTHS ENDED JUNE 30,
				2004			2003
Cash flows from operating activities:
Net income				$	92,430		$	87,277
Adjustments to reconcile net income to cash provided by operating activities:
	Depreciation				49,322			40,511
	Employee partner stock buyout expense				4,397			2,690
	Minority partners’ interest in consolidated partnerships’ income				7,315			2,112
	Income from operations of unconsolidated affiliates				(660	)		(2,939	)
	(Decrease) increase in deferred income taxes				(1,736	)		837
	Loss on disposal of property, fixtures and equipment				1,968			1,708
	Change in assets and liabilities, net of effects of acquisitions and FIN 46 consolidations:
		Decrease (increase) in inventories			15,468			(14,297	)
		Increase in other current assets			(16,110	)		(10,306	)
		(Increase) decrease in other assets			(3,132	)		5,384
		Increase in accounts payable, sales taxes payable and accrued expenses			15,527			3,815
		Increase (decrease) in partner deposit and accrued buyout liability			2,918			(701	)
		Decrease in unearned revenue			(58,191	)		(48,476	)
		Increase (decrease) in income taxes payable			10,174			(10,109	)
		Decrease in other long-term liabilities			-			(1,000	)
			Net cash provided by operating activities		119,690			56,506
Cash flows used in investing activities:
	Purchase of investment securities				(55,311	)		(21,270	)
	Maturities and sales of investment securities				62,153			27,747
	Cash paid for acquisition of business, net of cash acquired				(3,738	)		(2,069	)
	Capital expenditures				(114,476	)		(78,954	)
	Proceeds from the sale of property, fixtures and equipment				2,426			2,223
	Increase in cash from adoption of FIN 46				1,080			-
	Payments from unconsolidated affiliates				110			9,196
	Distributions to unconsolidated affiliates				-			(2,028	)
	Investments in and advances to unconsolidated affiliates				(350	)		(698	)
			Net cash used in investing activities		(108,106	)		(65,853	)
Cash flows from financing activities:
	Proceeds from issuance of long-term debt				17,123			1,781
	Proceeds from minority partners' contributions				2,459			7,902
	Distributions to minority partners				(8,061	)		(1,053	)
	Repayments of long-term debt				(10,378	)		(431	)
	Dividends paid				(19,330	)		(18,169	)
	Payments for purchase of treasury stock				(63,172	)		(58,459	)
	Proceeds from reissuance of treasury stock				27,105			19,374
			Net cash used in financing activities		(54,254	)		(49,055	)
Net decrease in cash and cash equivalents					(42,670	)		(58,402	)
Cash and cash equivalents at the beginning of the period					102,892			187,578
Cash and cash equivalents at the end of the period				$	60,222		$	129,176
Supplemental disclosures of cash flow information:
	Cash paid for interest			$	1,202		$	829
	Cash paid for income taxes			$	45,464		$	54,251
Supplemental disclosures of non-cash items:
	Purchase of minority partners and employee partners' interests in cash flows of their restaurants			$	-		$	8,402
	Assets received for note			$	-		$	5,569

See notes to unaudited consolidated financial statements.

5

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.         Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by Outback Steakhouse, Inc. (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 2003 Annual Report on Form 10-K.

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

2.         Stock-Based Compensation

The Company accounts for its stock-based employee compensation under the intrinsic value method.  No stock-based employee compensation cost is 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 Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (in thousands, except per share data):

		THREE MONTHS ENDED							SIX MONTHS ENDED
		JUNE 30,							JUNE 30,
		2004			2003				2004			2003
Net income		$	44,099		$	44,702			$	92,430		$	87,277
Stock-based employee compensation expense included in net
	income, net of related taxes		1,414			898				2,686			1,701
Total stock-based employee compensation expense determined
	under fair value based method, net of related taxes		(4,959	)		(4,105	)			(9,380	)		(8,037	)
Pro forma net income		$	40,554		$	41,495			$	85,736		$	80,941
Earnings per common share:
	Basic	$	0.59		$	0.59			$	1.24		$	1.15
	Basic - pro forma	$	0.55		$	0.55			$	1.15		$	1.07
	Diluted	$	0.57		$	0.57			$	1.18		$	1.11
	Diluted - pro forma	$	0.52		$	0.53			$	1.10		$	1.03

In 2004, the Board of Directors approved an amendment and restatement (the “Amendment”) of the Company’s Amended and Restated Stock Option Plan (the “Plan”) to allow for the grant of shares of restricted common stock under the Plan and to increase the number of shares for which options and shares of restricted common stock may be granted under the Plan by 1,000,000, or from 22,500,000 to 23,500,000.  This amendment was approved by vote of the shareholders of the Company on April 21, 2004.

6

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3.         Other Current Assets

Other current assets consisted of the following (in thousands):

	JUNE 30,			DECEMBER 31,
	2004			2003
	(UNAUDITED)
Deposits (including income tax deposits of approximately $5,698 as of June 30, 2004)	$	8,295		$	2,218
Accounts receivable		15,647			12,855
Accounts receivable - franchisees		2,055			2,633
Prepaid expenses		27,340			18,485
Other current assets		1,000			1,338
	$	54,337		$	37,529

4.         Property, Fixtures and Equipment, Net

Property, fixtures and equipment consisted of the following (in thousands):

	JUNE 30,			DECEMBER 31,
	2004			2003
	(UNAUDITED)
Land	$	174,774		$	170,815
Buildings & building improvements		563,559			516,081
Furniture & fixtures		167,524			145,151
Equipment		393,051			347,560
Leasehold improvements		284,271			259,914
Construction in progress		37,277			38,548
Accumulated depreciation		(484,944	)		(428,523	)
	$	1,135,512		$	1,049,546

5.         Goodwill

The change in the carrying amount of goodwill for the six months ended June 30, 2004 is as follows (in thousands):

December 31, 2003	$	86,745
Acquisitions (see Note 11 of Notes to Unaudited Consolidated Financial Statements)		4,722
June 30, 2004	$	91,467

7

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6.         Other Assets

Other assets consisted of the following (in thousands):

		JUNE 30,			DECEMBER 31,
		2004			2003
		(UNAUDITED)
Other assets		$	56,227		$	51,389
Liquor licenses, net of accumulated amortization of $3,949 and $3,617 at June 30, 2004
	and December 31, 2003, respectively		9,707			9,619
Deferred license fee, net of valuation provision of approximately $2,500 and $2,000
	at June 30, 2004 and December 31, 2003, respectively		12,500			13,000
Intangible assets			10,000			-
		$	88,434		$	74,008

In January 2001, the Company entered into a ten-year licensing agreement with an entity owned by minority interest owners of certain non-restaurant operations. The licensing agreement transferred the right and license to use certain assets of these non-restaurant operations.  The Company has deferred recognition of a gain of $1,189,000 associated with the transaction until such time as the fees due under the licensing agreement are realized.  (See Note 9 of Notes to Unaudited Consolidated Financial Statements.)

Other assets includes approximately $17,384,000and $16,245,000 as of June 30, 2004 and December 31, 2003, respectively, in loans to the Company’s operating partners in the Outback/Fleming’s, LLC (the “LLC”, which is a consolidated entity) for its partners’ share of capital to build new restaurants required beyond the initial capital contributed by the Company pursuant to the LLC agreement. The Company expects to continue to make advances to its operating partners for the construction of new restaurants, and the assets of the LLC will continue to collateralize these advances.  The Company periodically assesses the loan balance for impairment, which is generally measured by expected future cash flows of the restaurant system as compared to the partners’ interest in the LLC. The Company has a 51% ownership interest in the LLC, and is subject to a purchase or sale option after the twentieth restaurant is opened, which may require the Company to purchase an additional 40% in the LLC at a market value as determined by the terms of the LLC agreement.  The LLC opened its twentieth restaurant in 2004, which initiated the one-year exercise period on the purchase or sale option.

In February 2004, the Company acquired the future royalty payments of one of the cofounders of Bonefish Grill in accordance with the terms of the Bonefish agreements, as the founder was killed in a boating accident in January 2004.  The Company paid approximately $978,000 for the royalty interest, which is now included in other assets in the Unaudited Consolidated Balance Sheet.

Intangible assets as of June 30, 2004 include trademark and trade dress assets related to Paul Lee’s Chinese Kitchen of $4,000,000 and $6,000,000, respectively.  These intangible assets are amortized on a straight-line basis over the expected period of benefit of 15 years for the trademark and 10 years for the trade dress.  Annual amortization expense related to these intangible assets for the next five years is anticipated to be approximately $870,000.

8

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

7.         Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	JUNE 30,			DECEMBER 31,
	2004			2003
	(UNAUDITED)
Accrued payroll and other compensation	$	36,897		$	30,103
Accrued insurance		22,614			18,669
Accrued property taxes		11,410			8,985
Other accrued expenses		21,841			24,608
	$	92,762		$	82,365

During the second quarter of 2004, the Company recorded a provision for impaired assets and restaurant closings of approximately $86,000 for one Carrabba's Italian Grill restaurant closing in Georgia.  During 2003, the Company recorded a provision for impaired assets and restaurant closings of approximately $5,319,000, which included approximately $1,200,000 for one Outback Steakhouse restaurant closing in Puerto Rico, and approximately $1,944,000 for one Fleming's Prime Steakhouse and Wine Bar closing in Dallas.  The remainder of the provision was for the reduction in carrying value of five Outback Steakhouses.  The restaurant closing provision primarily consisted of the write down of the Dallas building and write off of leasehold improvements and furniture and fixtures as well as expenses to terminate the Puerto Rico restaurant’s property lease.  Remaining accrued restaurant closing expenses of approximately $168,000 and $307,000 were included in other accrued expenses as of June 30, 2004 and December 31, 2003, respectively, related to the restaurant closing provisions.

8.         Long-term Debt

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

		JUNE 30,			DECEMBER 31,
		2004			2003
		(UNAUDITED)
Revolving lines of credit, interest at 1.84% and 1.83% at June 30, 2004 and
	December 31, 2003, respectively	$	10,000		$	10,000
Outback Korea notes payable, interest rates ranging from 5.90% to 7.00% at
	June 30, 2004 and 5.60% to 6.00% at December 31, 2003		26,652			21,130
Outback Japan notes payable, uncollateralized, interest rates ranging from
	1.30% to 1.88% at June 30, 2004 and 0.68% to 1.88% at December 31, 2003		5,995			16,249
Outback Japan revolving lines of credit, interest rates ranging from 0.69% to 0.77% at
	June 30, 2004 and 0.77% at December 31, 2003		15,983			5,648
Other notes payable, uncollateralized, interest rates ranging
	from 2.07% to 7.00% at June 30, 2004 and
	2.40% to 7.00% at December 31, 2003		6,566			5,424
Guaranteed debt of franchisee			28,743			-
			93,939			58,451
Less current portion			50,637			48,901
Less current guaranteed debt of franchisee			28,743			-
Long-term debt of Outback Steakhouse, Inc.		$	14,559		$	9,550

9

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8.         Long-term Debt (continued)

LONG-TERM DEBT

Effective April 27, 2004, the Company replaced a $125,000,000 revolving credit facility that was scheduled to mature in December 2004, with a new uncollateralized three-year $150,000,000 revolving bank credit facility that matures in June 2007.  The revolving line of credit permits borrowing at interest rates ranging from 50 to 90 basis points over the 30, 60, 90 or 180 day London Interbank Offered Rate (LIBOR) (ranging from 1.36% to 1.90% at June 30, 2004 and ranging from 1.12% to 1.22% at December 31, 2003).  At June 30, 2004, the unused portion of the revolving line of credit was $140,000,000. 

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 a maximum total consolidated debt to EBITDAR (earnings before interest taxes, depreciation, amortization and rent) ratio of 3.0 to 1.0. At June 30, 2004, the Company was in compliance with all of the above debt covenants.

The Company also replaced a $15,000,000 line of credit that was scheduled to mature in December 2004, with a new $20,000,000 uncollateralized line of credit.  The new line of credit matures in June 2007 and permits borrowing at interest rates ranging from 50 to 90 basis points over LIBOR for loan draws and 65 to 112.5 basis points over LIBOR for letters of credit.  The credit agreement contains certain restrictions and conditions as defined in the agreement.  Approximately $11,882,000 and $8,942,000 of the line of credit was committed for the issuance of letters of credit at June 30, 2004 and December 31, 2003, respectively, as required by insurance companies that underwrite the Company’s workers’ compensation insurance and also where required for construction of new restaurants.  The remaining $8,118,000 at June 30, 2004 is available to the Company. 

As of June 30, 2004, the Company had approximately $6,566,000 of notes payable at interest rates ranging from 2.07% to 7.00%, which mature through 2009.  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.

The Company has notes payable with banks bearing interest at rates ranging from 5.90% to 7.00% to finance development of the Company’s restaurants in Korea.  The notes are denominated and payable in Korean won and mature at dates ranging from August 2004 to April 2005. As of June 30, 2004 and December 31, 2003, the outstanding balance was approximately $26,652,000 and $21,130,000, respectively.  Certain of the notes payable are collateralized by lease and other deposits. At June 30, 2004 and December 31, 2003, collateralized notes totaled approximately $19,974,000 and $16,490,000, respectively.

In April 2003, the Company obtained a controlling interest in its franchised restaurants in Japan (“Outback Japan”). As a result, upon closing of the transaction the Company became directly liable for notes outstanding that it had previously guaranteed. The notes are payable to banks, collateralized by lease deposits of approximately $3,400,000 and letters of credit and bear interest at rates ranging from 1.30% to 1.88%. The notes are denominated and payable in Japanese yen, with outstanding balances maturing in September 2004. As of June 30, 2004 and December 31, 2003, outstanding balances totaled approximately $5,995,000 and $16,249,000, 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 with interest rates ranging from 70.0 to 107.5 basis points over LIBOR. The line originally matured in December 2004, but was amended in April 2004 with a new maturity date in June 2007.  As of June 30, 2004 and December 31, 2003, the Company had borrowed approximately $9,745,000 and $5,648,000, respectively, on the line of credit at an average interest rate of 0.72%, with draws maturing in August and December 2004.  The revolving line of credit contains certain restrictions and conditions as defined in the agreement.  As of June 30, 2004, the Company was in compliance with all of the debt covenants. 

10

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8.         Long-term Debt (continued)

In February 2004, Outback Japan established an additional 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 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 June 30, 2004, the Company had borrowed approximately $6,238,000 on the line of credit at an interest rate of 0.77%, with draws maturing in September and November 2004.  The revolving line of credit contains certain restrictions and conditions as defined in the agreement.  As of June 30, 2004, the Company was in compliance with all of the debt covenants.

The Company is the guarantor of an uncollateralized line of credit that permits borrowing of up to $35,000,000, maturing in December 2004, for a limited liability company owned by its California franchisee.  The Company was required to consolidate the entity holding this debt (“T-Bird”) effective January 1, 2004 upon adoption of a new accounting standard (see Note 13 of Notes to Unaudited Consolidated Financial Statements).  At June 30, 2004, the outstanding balance on the line of credit was $28,743,000 and is included in the Company’s Consolidated Balance Sheet.  The Company also guarantees additional term loans associated with the owner of T-Bird, which are not consolidated, and which had outstanding balances of approximately $294,000 as of June 30, 2004.  As of December 31, 2003, the outstanding balance was approximately $28,583,000, and was disclosed as a guarantee, but was not consolidated in the Company’s financial statements.  The line of credit bears interest at rates ranging from 57.5 to 95.0 basis points over LIBOR based on T-Bird’s ratio of consolidated debt to EBITDA, as defined by the line of credit agreement. 

DEBT GUARANTEES

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  FIN 45 requires that upon the issuance of a guarantee, the guarantor must recognize the liability for the fair value of the obligation it assumes under the guarantee.  FIN 45 provides that initial recognition and measurement should be applied on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year end.  The disclosure requirements are effective for financial statements of both interim and annual periods that end after December 15, 2002.  The Company has complied with the disclosure requirements and did not have any modifications of outstanding guarantees subsequent to December 31, 2002 through June 30, 2004.  The Company has the following outstanding debt guarantees, all of which existed prior to December 31, 2002, that could require recognition in the Consolidated Financial Statements if future modifications occur or upon renewal of the guarantee.

The Company is the guarantor of an uncollateralized line of credit that permits borrowing of up to a maximum of $24,500,000, maturing in December 2004, for its joint venture partner in the development of Roy’s restaurants. At June 30, 2004 and December 31, 2003, the outstanding balance was approximately $21,647,000 and $21,435,000, respectively.

The Company is the guarantor of up to $9,445,000 of a $68,000,000 note for an unconsolidated affiliate, Kentucky Speedway, in which the Company has a 22.22% equity interest and for which the Company operates catering and concession facilities. Payments on this note began in December 2003 with final maturity in December 2022. At June 30, 2004 and December 31, 2003, the outstanding balance and our guarantee on the note were approximately $66,550,000 and $9,244,000, respectively.

The Company’s contractual unconsolidated debt guarantees as of June 30, 2004 are summarized in the table below (in thousands):

				CURRENT			LONG-TERM
	TOTAL			PORTION			PORTION
Debt guarantees	$	33,744		$	24,715		$	9,029
Amount outstanding under debt guarantees	$	30,891		$	21,862		$	9,029

11

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

9.         Other Long-term Liabilities

Other long-term liabilities consisted of the following (in thousands):

	JUNE 30,			DECEMBER 31,
	2004			2003
	(UNAUDITED)
Accrued insurance	$	4,000		$	4,000
Other deferred liability		1,189			1,189
	$	5,189		$	5,189

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 and six months ended June 30, 2004 was $43,769,000 and $92,038,000, respectively, which included the effect of losses from translation adjustments of approximately $330,000 and $392,000, respectively.

11.        Business Combinations

On March 1, 2004, the Company acquired the 36% minority ownership interests of its partners in nine Carrabba's restaurants in Texas for approximately $3,738,000 in cash.  The Company completed this acquisition because it believes the additional cash flows provided from 100% ownership of these restaurants will meet its internally required rate of return and provide additional shareholder value.  No minority interest for these stores has been reflected in the consolidated financial statements since that date.  The Company recorded goodwill of approximately $4,722,000 associated with this transaction, all of which is expected to be deductible for income tax purposes.

12.        Earnings Per Share

The following table represents the computation of basic and diluted earnings per common share as required by SFAS No. 128 “Earnings Per Share” (in thousands, except per share data):

	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2004			2003			2004			2003
Net income	$	44,099		$	44,702		$	92,430		$	87,277
Basic weighted average number of common shares outstanding		74,289			75,399			74,388			75,576
Basic earnings per common share	$	0.59		$	0.59		$	1.24		$	1.15
Effect of dilutive stock options		3,694			3,038			3,853			2,748
Diluted weighted average number of common shares outstanding		77,983			78,437			78,241			78,324
Diluted earnings per common share	$	0.57		$	0.57		$	1.18		$	1.11

Diluted earnings per common share excludes antidilutive stock options of approximately 611,000 and 50,000 for the second quarter of 2004 and 2003, respectively, and approximately 424,000 and 1,597,000 for the six months ended June 30, 2004 and 2003, respectively.

12

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

13.        Recently Issued Financial Accounting Standards

“Consolidation of Variable Interest Entities”

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.”  This interpretation of Accounting Research Bulletin 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.  The interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. 

This interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date.  FIN 46 initially applied to preexisting variable interest entities no later than the beginning of the first interim reporting period beginning after June 15, 2003.  However, the implementation deadline was delayed by the FASB to periods ending after March 15, 2004 and the FASB issued a revised “FIN 46R” in December 2003.  The Company adopted FIN 46R effective January 1, 2004 and is an investor in several variable interest entities as discussed below.

The Company’s joint ventures in the Outback/Fleming’s LLC (the “LLC”) and the Roy’s/Outback Joint Venture (the “Roy’s JV”) have historically been consolidated by the Company.  These ventures are considered variable interest entities under the provisions of FIN 46, and the Company has continued consolidating them upon adoption of that interpretation.  The LLC and the Roy’s JV restaurant systems consist of 19 and 13 restaurants, respectively, as of June 30, 2004. 

The Company has ownership interests in 33 individual joint ventures that were previously reported by the Company as unconsolidated development joint ventures.  As of January 1, 2004, the Company consolidated those joint ventures, which consist of 29 Carrabba's Italian Grills, two Outback Steakhouses, one Roy’s and one Bonefish Grill, as it is the primary beneficiary of those entities.  The Company has ownership interests in 11 individual 50/50 joint ventures that remained unconsolidated upon adoption of FIN 46, as the Company was not deemed the primary beneficiary.

The Company has a minority investment in an unconsolidated affiliate in which it has a 22.22% equity interest and for which it operates catering and concession facilities.  Additionally, the Company guarantees a portion of the affiliate’s debt (see Note 8 of Notes to Unaudited Consolidated Financial Statements).  Although the Company holds an interest in this variable interest entity, the Company is not the primary beneficiary of this entity and therefore it was not consolidated upon adoption of FIN 46.

The Company is a franchisor of 145 restaurants as of June 30, 2004, but does not possess any ownership interests in its franchisees and generally does not provide financial support to franchisees in its typical franchise relationship.  These franchise relationships were not deemed variable interest entities and were not consolidated upon adoption of FIN 46.  However, the Company guarantees an uncollateralized line of credit that permits borrowing of up to $35,000,000, maturing in December 2004, for one of its franchisees (see Note 8 of Notes to Unaudited Consolidated Financial Statements).  The limited liability company that holds this line of credit was deemed to be a variable interest entity and was consolidated by the Company effective January 1, 2004.  This entity draws on its line of credit to loan funds to corporations in California to purchase and/or build land and buildings for lease to individual Outback Steakhouse franchisee partnerships.  Therefore, it holds as collateral the notes receivable and underlying assets from these corporations in offsetting amounts to the debt owed to the bank, which are both now included in the Company’s Consolidated Balance Sheet and Statement of Income as of January 1, 2004 and for the quarter and six months ended June 30, 2004.

13

Table of Contents

OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

13.        Recently Issued Financial Accounting Standards (continued)

“Consolidation of Variable Interest Entities” (continued)

The following table reflects the approximate effect of consolidation of the above entities on the Company’s Unaudited Consolidated Statement of Income for the six months ended June 30, 2004 and Unaudited Consolidated Balance Sheet as of January 1, 2004 (in thousands):

Revenues				$	44,363
Income from operations of unconsolidated affiliates					(2,326	)
Elimination of minority partners’ interest					1,991
Net income					-
Basic and diluted earnings per common share					-
Current assets					2,845
Property, fixtures and equipment, net					25,206
Current liabilities					5,858
Interest of minority partners in consolidated partnerships					6,148

14.        Commitments and Contingencies

In June 2003, in a civil case against the Company in Indiana state court alleging liability under the "dram shop" 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 is appealing the decision and believes it has valid grounds for appeal.  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.  During the quarter ended September 30, 2003, the excess insurance carrier 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 the Company intends to vigorously defend the case.  If the excess carrier’s suit were to succeed, the Company believes it would have rights against the primary carrier and its third party administrator to recover any amounts the Company may have to pay.

In January 2004, one of the cofounders of Bonefish Grill was killed in a boating accident.  Under the terms of the Bonefish agreements, the Company will purchase the ownership interest of this founder in the Bonefish partnership.  The purchase price of the ownership interest will be assessed at the fair market value of actual restaurants open and in operation at the time of purchase, estimated to be approximately $9,000,000.

15.        Subsequent Events

On July 21, 2004, the Board of Directors declared a quarterly dividend of $0.13 per share of the Company’s common stock. The dividend is payable September 3, 2004 to shareholders of record as of August 20, 2004.

On August 3, 2004, the Company was approved by the United States Bankruptcy Court for the District of Delaware as the successful bidder at an auction of designation rights for 76 properties of Chi-Chi’s, Inc. and its affiliates.  The properties include 23 locations with owned land and building, 15 sale-leaseback properties with reversion rights and purchase options, 23 ground leases and 15 leases.  The properties include any real property, furniture, fixtures and equipment and liquor licenses.  The designation rights allow the Company to transfer properties to itself, to transfer properties to others or to require Chi-Chi’s to retain properties.  The purchase price for the designation rights is $42,500,000, payable at closing.  The Company is responsible for paying the carrying costs on each of the properties from the closing date until the date the property is designated for transfer.  The right to designate properties will expire one year from the date of closing.  The closing is anticipated to occur prior to August 31, 2004.

As of the date of this filing, the definitive agreement has not been finalized.  The effect on the Company’s operating results, if any, will depend on the final agreement.

The Company’s objective in acquiring these rights is to have access to restaurant sites for conversion to one of its concepts under its current expansion plans.

14

Table of Contents

OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

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

Overview

We are one of the largest casual dining restaurant companies in the world, with seven restaurant concepts, over 1,000 system-wide restaurants and 2003 annual revenues for Company-owned stores exceeding $2.7 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 sale of franchises and ongoing royalties as well as the sale and redemption of gift certificates.

The restaurant industry is a highly competitive and fragmented business, which is subject to sensitivity from changes in the economy, trends in lifestyles 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 broadcast and spot television and radio media, which we have also begun to use 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 do not run price specials or 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 getting people to visit frequently and also recommend our restaurants to others complements what we believe are the fundamental elements of success: convenient sites, service-oriented employees, and flawless execution in a well-managed restaurant. 

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

–          Average unit volumes – a per store calculated 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.

15

Table of Contents

OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview (continued)

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 are higher at our new format stores than have typically been experienced at Outback Steakhouses.  However, cost of sales at those stores is lower than those at Outback.  These trends are expected to continue with our planned development of stores in 2004.

Our industry’s challenges and risks include, but are not limited to, the potential for government regulation, the availability of 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.  We have provided information in our Outlook section that outlines our current beliefs regarding the anticipated changes to our operations resulting from increased beef prices and other commodity costs, continued preopening expenses from the development of new restaurants and our expansion strategy, among other factors that may affect our results in 2004. 

Results of Operations (unaudited)

The following tables set forth, for the periods indicated, (i) the percentages that the 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					SIX MONTHS ENDED
			JUNE 30,					JUNE 30,
			2004		2003			2004		2003
Revenues
	Restaurant sales		99.4	%	99.3	%		99.4	%	99.2	%
	Other revenues		0.6		0.7			0.6		0.8
		Total revenues	100.0		100.0			100.0		100.0
Costs and expenses
	Cost of sales (1)		36.7		36.3			36.4		36.2
	Labor & other related (1)		24.7		24.6			24.6		24.6
	Other restaurant operating (1)		21.3		20.9			21.1		20.9
	Distribution expense to employee partners, excluding stock expense (1)		2.3		2.3			2.3		2.3
	Employee partner stock buyout expense (1)		0.3		0.2			0.3		0.2
	Depreciation		3.0		3.0			3.0		3.0
	General & administrative		3.7		3.6			3.7		3.5
	Income from operations of unconsolidated affiliates		(*	)	(0.2	)		(*	)	(0.2	)
		Total costs and expenses	91.5		90.0			90.8		89.8
Income from operations			8.5		10.0			9.2		10.2
Other income (expense), net			(*	)	*			(0.1	)	(0.1	)
Interest income			*		0.1			*		0.1
Interest expense			(*	)	(0.1	)		(0.1	)	(0.1	)
Income before elimination of minority partners' interest and income taxes			8.5		10.0			9.0		10.1
Elimination of minority partners' interest			0.4		0.1			0.4		0.2
Income before provision for income taxes			8.1		9.9			8.6		10.0
Provision for income taxes			2.8		3.4			3.0		3.5
Net income			5.3	%	6.5	%		5.6	%	6.5	%
____________
(1) As a percentage of restaurant sales.
*	Less than 1/10 of one percent of total revenues

16