from here you can grab a patch that let you play in 640x480 without black frames
http://simeon-carstens.com/privat/outcast/patch.exe
It doesn't patch the game exe so you need to launch it before the game
How to use it:
- Set OC1, OC2, OC3.exe to windows 98 compatibility
- launch patch.exe
- A dialog will ask you to press OK when the game menu appears
- Press ok and then star the game
- Enjoy :-)

On Windows 7 64bit I got it working but it crashed out on death. It may also crash out on taking a portal or loading a game while already in a game but I haven't played enough to try either of those.

Apart from the aforementioned crashes, using the "patch" also changes the look of the HUD somewhat, but not badly.
I prefer to play the game with black borders instead of constantly being afraid of crashes. But, as Eclipse said, the so-called patch doesn't actually change any files permanently, so you can safely try it out and just delete it again if you don't like it.
You have to set all three exe-files not only to Windows 98 compatibility, but also to run with administrator rights. Though, I've heard it still doesn't work on every computer.

Run as admin - I'll try that, thanks.

It works for me on Win 7 x64.
But if you use the patch remember to set the compatibility of the three executables to windows 98 or it will crash, as Syrion said, if you're not logged in as administrator user you'll probably need to set administrator rights as well

Are we talking about the exes in the main folder or the ones in the data/exe folder? I applied it to the ones in the main folder, but I overlooked the others.

the ones in the main folder, you did it right, sorry to hear it still doesn't work for you :\

How does it change the HUD? It looks exactly the same to me, maybe the patch isnt working as i cant see a difference. Still in a black boarder
Im on x64 Win7

Be Sure to choose the bigger resolution ;) The patch works on my computer, but it crashes everytime you die or sometimes it crashes when u go trough a portal :(
I'm going back to the original version without the patch