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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

For the Quarterly Period Ended September 28, 2002
Commission File Number: 333-57209

OUTSOURCING SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	33-0597491 (I.R.S. Employer Identification No.)
25 Commerce Drive, Allendale, NJ (Address of principal executive offices)	07401 (Zip Code)

(201) 785-1333
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

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 ý No o

Number of shares of common stock, $.001 par value, outstanding as of the close of business on September 28, 2002: 3,348,970 shares.

OUTSOURCING SERVICES GROUP, INC.
INDEX TO FORM 10-Q

		Page
PART I.	Financial Information
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 28, 2002 (unaudited) and December 31, 2001	3
	Condensed Consolidated Statements of Operations for the Three- and Nine-Month Periods Ended September 28, 2002 and September 29, 2001 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2002 and September 29, 2001 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 4.	Controls and Procedures	25
PART II.	Other Information	26
Item 1.	Legal Proceedings	26
Item 2.	Changes in Securities	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits and Reports on Form 8-K	26
CERTIFICATION		27
SIGNATURES		27
EXHIBITS		28

OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 28, 2002 (UNAUDITED)
AND DECEMBER 31, 2001
(Dollars in thousands, except per share data)

				September 28, 2002			December 31, 2001
				(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash			$	1,759		$	3,627
	Short-term investments				256			251
	Accounts receivable, net of allowances of $1,325 and $1,447				43,891			31,397
	Income tax receivable				1,646			—
	Other receivables				1,459			1,956
	Inventories, net				32,192			28,449
	Prepaid expenses and other current assets				2,897			1,557
	Deferred income taxes, current				3,108			3,108

		Total current assets			87,208			70,345
PROPERTY AND EQUIPMENT, net					59,134			58,263
GOODWILL AND OTHER INTANGIBLES, net					99,674			99,691
DEFERRED INCOME TAXES, non-current					2,852			2,852
DEFERRED FINANCING COSTS, net					2,900			4,453
ENVIRONMENTAL INSURANCE RECEIVABLE					350			350
DUE FROM CCL					7,126			7,126
OTHER ASSETS					1,860			274

		TOTAL ASSETS		$	261,104		$	243,354

LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable			$	39,293		$	28,184
	Accrued expenses				17,104			21,327
	Accrued restructuring and other				834			—
	Income taxes payable				—			399
	Other current liabilities				381			85

		Total current liabilities			57,612			49,995
ENVIRONMENTAL CONTINGENCIES AND OTHER LIABILITIES					12,603			11,658
LONG-TERM DEBT					174,950			162,869

		Total liabilities			245,165			224,522
REDEEMABLE SERIES A PREFERRED STOCK, $.001 par value; 3,750 shares authorized, issued and outstanding					375			375
REDEEMABLE SERIES B PREFERRED STOCK, $.001 par value; 26,250 shares authorized, issued and outstanding					4,882			4,724
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
	Common stock, $.001 par value; 6,000,000 shares authorized; 3,348,970 shares issued and outstanding as of September 28, 2002 and 3,373,265 as of December 31, 2001				3			3
	Common stock warrants				663			663
	Additional paid-in capital				29,826			30,189
	Notes receivable from stockholders				(658	)		(830	)
	Accumulated deficit				(17,304	)		(14,528	)
	Accumulated other comprehensive loss				(1,848	)		(1,764	)

		Total stockholders' equity			10,682			13,733

			TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY	$	261,104		$	243,354

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE- AND NINE-MONTH PERIODS ENDED
SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (Unaudited)
(Dollars in thousands, except for per share data)

		Three Months Ended						Nine Months Ended
		September 28, 2002			September 29, 2001			September 28, 2002			September 29, 2001
NET REVENUES		$	86,168		$	85,463		$	253,643		$	249,506
COST OF GOODS SOLD			75,095			71,011			220,484			210,553

GROSS PROFIT			11,073			14,452			33,159			38,953
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			8,617			8,835			22,181			24,265
RESTRUCTURING AND OTHER CHARGES			672			—			2,116			—

INCOME FROM OPERATIONS			1,784			5,617			8,862			14,688
INTEREST EXPENSE, NET			4,511			4,346			12,972			13,193

(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES			(2,727	)		1,271			(4,110	)		1,495
(BENEFIT) PROVISION FOR INCOME TAXES			(1,989	)		1,016			(1,520	)		1,195

NET (LOSS) INCOME			(738	)		255			(2,590	)		300
ACCRETION AND DIVIDENDS ON PREFERRED STOCK			(62	)		(62	)		(186	)		(186	)

NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS			(800	)		193			(2,776	)		114

OTHER COMPREHENSIVE LOSS			(769	)		(699	)		(84	)		(887	)

COMPREHENSIVE LOSS		$	(1,507	)	$	(444	)	$	(2,674	)	$	(587	)

EARNINGS (LOSS) PER SHARE: NET INCOME (LOSS) PER SHARE
	Basic	$	(0.22	)	$	0.08		$	(0.77	)	$	0.09
	Diluted		(0.22	)		0.07			(0.77	)		0.08
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE
	Basic	$	(0.24	)	$	0.06		$	(0.83	)	$	0.03
	Diluted		(0.24	)		0.05			(0.83	)		0.03
WEIGHTED AVERAGE COMMON SHARES
	Basic		3,361,060			3,373,637			3,361,060			3,373,637
	Diluted		3,361,060			3,691,646			3,361,060			3,691,646

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (Unaudited)
(Dollars in thousands)

				September 28, 2002			September 29, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net (loss) income			$	(2,590	)	$	300
	Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
		Depreciation and amortization			7,025			10,226
		Amortization of deferred financing costs			1,379			1,171
		Provision for doubtful accounts			630			329
		Deferred income taxes			—			28
	Change in operating assets and liabilities:
		Accounts receivables			(13,124	)		4,129
		Other receivables			497			(133	)
		Inventories			(3,743	)		2,053
		Prepaid expenses and other current assets			(1,340	)		(981	)
		Other assets			(1,586	)		381
		Accounts payable			11,109			2,442
		Income taxes payable/(receivable)			(2,045	)		118
		Accrued expenses and other liabilities			(2,808	)		(816	)
		Accrued restructuring and other			834			—

			Net cash (used in) provided by operating activities		(5,762	)		19,247

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures					(8,652	)		(6,053	)
Short-term investments					(5	)		(13	)
Sale of property, plant and equipment					582			(35	)
Acquisition of Norwich, net of cash acquired					—			(800	)
Acquisition of Dermal, net of cash acquired					—			(3,517	)
Acquisition of Ivers-Lee, net of cash acquired					—			(2,290	)

			Net cash used in investing activities		(8,075	)		(12,708	)

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (Unaudited) (Continued)
(Dollars in thousands)

			September 28, 2002			September 29, 2001
CASH FLOWS FROM FINANCING ACTIVTIES:
Net borrowings (paydowns) on revolving loans			$	12,081		$	(1,779	)
Dividends on preferred stock				(28	)		(28	)
Increase in deferred financing costs				—			(350	)
Repurchase and cancellation of stock				(179	)		(993	)

		Net cash provided by (used in) financing activities		11,874			(3,150	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH				95			(111	)

NET (DECREASE) INCREASE IN CASH				(1,868	)		3,278
CASH, beginning of period				3,627			3,801

CASH, end of period			$	1,759		$	7,079

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the nine month period:
	Interest		$	13,721		$	14,801

	U.S. Income taxes		$	43		$	714

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Accretion attributable to preferred stock			$	158		$	158

Acquisition of Norwich for note payable				—		$	10,000

The Company acquired all net assets of Norwich (June 2001) and Dermal (September 2001) In conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired			$	—		$	12,555
Intangible assets acquired				—			4,249
Cash paid for capital stock				—			—
Cash paid for assets				—			(4,317	)

Liabilities assumed			$	—		$	12,487

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001

(Unaudited)

1. Basis of Presentation

The interim condensed consolidated financial statements included herein have been prepared by Outsourcing Services Group, Inc. ("OSG" or the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, the management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the financial statements and related notes to the Company's 2001 Annual Report on Form 10-K, as filed with the SEC.

OSG consists of the following subsidiaries, Aerosol Services Company, Inc. ("ASC"), Piedmont Laboratories, Inc. ("Piedmont"), Kolmar Laboratories, Inc. ("Kolmar"), Acupac Packaging, Inc. ("Acupac"), Precision Packaging and Services, Inc. ("Precision"), OSG Ivers-Lee Inc. ("Ivers-Lee") and OSG Norwich Pharmaceutical, Inc. ("Norwich"). References to the "Kolmar Group" include Kolmar, Kolmar's wholly-owned subsidiaries, Kolmar de Mexico, S.A. de CV and Kolmar Canada Inc. ("Kolmar Canada"). Unless the context otherwise requires, references to Kolmar include references to the Kolmar Group.

In the opinion of management, the condensed consolidated financial statements included herein reflect adjustments consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position of the Company as of September 28, 2002 and the results of its operations for the three-and nine-month periods ended September 28, 2002 and September 29, 2001 and its cash flows for the nine-month periods ended September 28, 2002 and September 29, 2001. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.

2. New Accounting Pronouncements

On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, was approved by the Financial Accounting Standards Board (FASB). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. In addition, goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001.

On June 29, 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of other intangible assets related to non-compete agreements were $37,000 and $113,000 for the three-and nine-months ended September 28, 2002. Amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of this statement on January 1, 2002. Amortization expense related to goodwill was $1,588,000 and $4,730,000 for the three-and nine-month period ended September 29, 2001. In addition, the Company has completed the first step of the transitional goodwill impairment test, the results indicate that the Consumer Products Division will

need further evaluation. Goodwill at the Consumer Products Division is $51,216,000. There is no goodwill impairment for the other reporting units.

The proforma table below represents what the net (loss) income would have been in all periods presented exclusive of goodwill amortization.

	Three Months Ended					Nine Months Ended
	September 28, 2002			September 29, 2001		September 28, 2002			September 29, 2001
Goodwill amortization	$	—		$	1,588	$	—		$	4,730
Noncompete amortization		37			—		113			—
Net (loss) income	$	(738	)	$	1,843	$	(2,590	)	$	5,030

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective January 1, 2003. The Company does not believe that the adoption of this pronouncement will have a material impact on their results of operations, financial position or cash flows.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective January 1, 2002. The adoption of this pronouncement did not have a material impact on their results of operations, financial position or cash flows.

In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment are effective for fiscal years beginning after May 15, 2002. Commencing January 1, 2003, the Company will classify debt extinguishment costs within income from operations and will reclassify previously reported debt extinguishments as such. The provisions of SFAS No. 145 related to lease modification are effective for transactions occurring after May 15, 2002. The Company does not expect the provisions of SFAS No. 145 related to lease modification to have a material impact on its financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in as Restructuring)". The principal difference between SFAS No. 146 and EITF No. 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002. The Company does not expect the provisions of SFAS No. 146 to have a material impact on its financial position or results of operations.

3. Goodwill and Other Intangibles

Goodwill and Other Intangibles consisted of the following at September 28, 2002 and December 31, 2001:

	September 28, 2002			December 31, 2001
	(in thousands)
Goodwill, net	$	99,037		$	98,992
Noncompete agreement		750			750
Less accumulated amortization on noncompete		(113	)		(51	)

	$	99,674		$	99,691

4. Inventories

Inventories consisted of the following at September 28, 2002 and December 31, 2001:

	September 28, 2002			December 31, 2001
	(in thousands)
Raw Material	$	24,103		$	21,022
Work-in-process		4,142			4,030
Finished goods		6,685			5,737

		34,930			30,789
Less reserve for excess and obsolete inventories		(2,738	)		(2,340	)

	$	32,192		$	28,449

5. Contingencies

Environmental Regulation and Compliance

The Company's operations and properties are subject to extensive federal, state, local and foreign environmental laws and regulations concerning, among other things, emissions to air, discharges to water, the remediation of contaminated soil and groundwater, and the generation, handling, storage, transportation, treatment and disposal of waste and other materials (collectively, "Environmental Laws"). Violations of Environmental Laws can result in civil or criminal penalties or in cease and desist or other orders against the Company. In addition, the Company may be required to spend material amounts to comply with Environmental Laws, and may be liable with respect to contamination of sites currently or formerly owned or operated by the Company or with respect to the off-site disposal of hazardous substances. Based upon the Company's experience to date, as well as certain indemnification agreements obtained in connection with the ASC Acquisition, Kolmar Acquisition and the Norwich Acquisition, and certain insurance coverages, the Company believes that the future cost of compliance with existing Environmental Laws and its liability for identified environmental claims will not have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.

Certain environmental laws, such as the Federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), and analogous state laws, impose liability for the investigation and remediation of hazardous substances released into the environment. Courts have interpreted CERCLA to impose strict, and in some circumstances, joint and several liability on all potentially responsible parties ("PRPs") at a site if the harm is indivisible, which means that one PRP could be held liable for the entire cost of cleanup at a site where multiple parties contributed to the contamination. Under CERCLA and analogous state laws, the Company may incur liability for contamination at properties presently or formerly owned or operated by the Company or its subsidiaries or predecessors (including contamination caused by the Company's predecessors or prior owners or operators of such sites), or at properties where such entities sent waste for off-site treatment or disposal.

In that regard, ASC's operations are located within the boundaries of the Puente Valley Operable Unit ("OU") of the San Gabriel Valley Superfund Site. Prior to the Company's purchase of ASC, the U.S. Environmental Protection Agency ("EPA") identified ASC as one of more than five hundred PRPs for the Puente Valley OU. Subsequently, ASC and forty-three other PRPs entered into a consent agreement to fund certain investigatory work, which work was completed in 1997. To date, the EPA has not finally determined the remedial work that will be required at the site; however, the EPA has issued estimates for the remedial alternatives it is considering which range from approximately $28 million to $51 million. In connection with the Company's purchase of ASC, the sellers (who currently own the property on which ASC operates) agreed to indemnify the Company with respect to the Puente Valley OU proceeding and certain other environmental matters. Certain of the Company's leases with the sellers also provide for offsets to the Company's rental obligations in the event that the Company incurs liability for such an indemnified matter. Based on this indemnity, the lease off-set rights, recent EPA cost estimates of the proposed cleanup alternatives and certain preliminary estimates of ASC's share of liability, the Company believes, although there can be no assurance, that ASC's liability at this site will not be material. In addition, prior to the Company's merger with Aerosol Services Holding

Corporation ("ASHC"), the Los Angeles Regional Water Quality Control Board ("RWQCB") requested that ASC conduct certain soil and groundwater investigation and remediation on its property. ASC has conducted the requested investigations, the RWQCB has approved ASC's remediation plan, and remediation began in 2001.

Although there can be no assurance, the Company does not believe that the costs of remediation will be material. This remediation is also the subject of the above-referenced indemnity.

Also, in regard to CERCLA, Kolmar and a former affiliate, Wickhen Products ("Wickhen"), have been identified as the two principal PRPs at the Carroll & Dubies Superfund site in Port Jervis, New York. At the Caroll & Dubies site, the remediation work and the final post-remediation facility inspection was completed in December 1999. Final clean-up costs of $6.7 million were incurred and funded through insurance. Post-remediation monitoring, expected to last through 2005, commenced in year 2000 and is expected to cost $350,000, which the Company has accrued. The entire project has been, and will continue to be, fully indemnified by CCL Industries Inc ("CCL"). Another site formerly operated by a Kolmar affiliate is currently undergoing remediation under the direction of a state agency. Based on the advice of outside counsel, the Company maintained an accrual of $9,000,000 as of September 28, 2002 for this site where Kolmar may have liability for contamination caused by former operations, although it has not yet been identified as a PRP and would have specific indemnification rights for this site from CCL. The Company believes, based on a file review by an independent consultant, that the accrual would be sufficient to fund all likely remediation costs at the site.

In November 2000, the Company was served notice of a claim asserted against Kolmar by the State of New York ("State"). The claim asserts that Kolmar is a PRP for remediation costs incurred by the State in connection with the cleanup of the Orange County Landfill, located in New York State. Kolmar's records indicate it did generate some waste that was transported to the landfill, between 1979 and 1992. The State alleges that to date it has incurred over $13 million in response costs for the landfill. Approximately thirty-five other PRPs have also been contacted by the State; management believes there are hundreds of other candidate PRPs not yet served notices. The Company established a reserve for off-site waste disposal which is inclusive of the Orange County landfill site. In addition, Kolmar has certain indemnification rights ($250,000 deductible) against CCL for this claim. At September 28, 2002 the reserve was at $691,000.

Piedmont's owned facility in Gainesville, Georgia is listed on the State of Georgia's Hazardous Site Inventory ("HSI") of environmentally impacted sites due to the detection of chlorinated solvents in the groundwater beneath the facility. The Company is continuing with the remediation and groundwater monitoring and testing which will continue through 2003.

The Company also faces risks relating to federal and state environmental regulation of Volatile Organic Compounds ("VOCs"). Legislation requires reductions in the use of these propellants could materially adversely affect the Company's business if the industry does not develop propellant technology and product formulations to meet such future standards. The EPA and various state regulations, in particular California and New York, have mandated reductions in VOCs in various aerosol products. Management believes that all of the Company's products meet the current regulatory standards, and management further believes, although there can be no assurance, that propellant technology and product formulations will be developed that meet the future standards.

6. Senior Secured Credit Facility

As of September 28, 2002, the Company had $60.0 million in revolving loans outstanding with a syndicate of banks led by BT Commercial Corporation, bearing an interest rate at Prime plus 0.75%. On October 30, 2002, the Company completed a refinancing of their Senior Secured Credit Facility with Foothill Capital Corporation, as the arranger and administrative agent. See Note 8. The new agreement contains certain covenants which among other things, require minimum levels for earnings and certain financial ratios and also places restrictions on capital expenditures. The new covenants are in effect for September 28, 2002 and the Company was in compliance with such covenants.

7. Restructuring and Other Charges

In February 2002, the Company formalized its plan to restructure its business processes, practices and organization to streamline functions and remain competitive. The restructuring includes some position eliminations, the elimination of duplicate or overlapping functions, and in some cases, redeployment and retraining. Management believes that these changes will reduce the Company's overall employee population by less than four percent.

Management believes that full implementation will occur during the course of 2002. Employees affected by job elimination will be offered severance benefits to help with the transition, as well as assistance to prepare for their job search. Management is committed to ensuring the Company's ongoing success by creating a stronger, more capable business, which will benefit the vast majority of the Company's employees.

The Company recorded pre-tax restructuring and other charges for consulting, legal fees, recruiting and severance costs in the amount of $1.1 million, in February 2002, and have incurred charges to date of $2.1 million. The table below reflects the charges incurred as of September 28, 2002.

			Cash Payments
	Accrued Restructuring and Other		Cash Payments									Liability at September 28, 2002
	Accrued Restructuring and Other		(1^ST QTR)			(2^nd QTR)			(3^rd QTR)			Liability at September 28, 2002
Employee separation	$	1,160	$	(12	)	$	(114	)	$	(200	)	$	834
Implementation costs		956		(52	)		(376	)		(528	)		—

Ending Balance	$	2,116	$	(64	)	$	(490	)	$	(728	)	$	834

8. Subsequent Events

On October 3, 2002, the Company announced the closing of a facility located in Corona, California, and a member of the Kolmar group. As a result of the closing, the majority of the Corona production will move to other Kolmar and OSG facilities. The Company's goal is to meet all customer service needs with no disruption in service to their businesses. The closure process will begin during the fourth quarter of 2002 and is expected to be completed by March 31, 2003. OSG is committed to creating a stronger, more capable business that remains competitive while maintaining superior service levels throughout Kolmar and OSG.

On October 29, 2002, after receiving the consent of the requisite majority of noteholders, OSG and U.S. Bank National Association (formerly First Trust National Association), as trustee, entered into a supplemental indenture to the Indenture dated March 3, 1998, to clarify and revise the definition of permitted indebtedness. See Exhibit 4.1 filed with Form 8K dated October 29, 2002.

credit agreement, $0.3 million in accrued interest and fees and $3.5 million in estimated transaction fees for the new agreement, of which $0.9 million were paid in advance and $1.6 million at closing. In addition, the Company will write-off $0.8 million in unamortized deferred financing costs. The New Agreement contains $40.0 million in revolving loans bearing an interest rate of (1) the Prime Lending Rate (defined as the rate which Wells Fargo announces as its prime lending rate from time to time), plus 0.50% or (2) the LIBOR rate plus 2.75%. In addition, the New Agreement contains $30.0 million in Term Loans which was fully funded bearing interest at 13.50% plus PIK margin (Paid-in-Kind). The term of the New Agreement matures January 15, 2006. The obligations of the Company's subsidiaries under the Senior Secured Credit Facility are secured by a security interest in substantially all of their assets, and the Company's obligations under its guarantee of the Senior Secured Credit Facility are secured by substantially all of its assets, excluding Norwich.

9. Business Segment Information

The Company operates multiple business segments specializing in the manufacturing and packaging of aerosol and liquid products, color cosmetics, and pharmaceutical markets. The Company is a leading provider of outsourced services including manufacturing, packaging and clinical services to the health and beauty aid and healthcare markets. The Company offers its customers a complete range of services, including product conceptualization, formulation, manufacturing, filling, packaging, clinical testing supplies, product stability and microbiological testing services. Other products manufactured and packaged by the Company include household lubricants and liquid cleaners. The Company has operating facilities in the U.S., Mexico and Canada.

During fiscal 2001, the Company reorganized its operating divisions into three operating segments whose respective members are as follows: Kolmar Division-the Kolmar Group, Consumer Products Division—ASC, Piedmont, Precision and Acupac and the Pharmaceutical Division—Ivers-Lee and Norwich.

Net revenues, income (loss) from operations, identifiable assets and depreciation and amortization by business segment for the nine- and three-month periods ended September 28, 2002, are as follows:

	Nine-Month Period
	Kolmar Division		Consumer Products Division			Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	71,816	$	150,031		$	31,796	$	—	$	253,643
Income (loss) from operations		1,212		(1,308	)		201		8,757		8,862
Identifiable assets		94,779		129,416			22,357		14,552		261,104
Depreciation and amortization		2,143		3,039			1,617		226		7,025

	Three-Month Period
	Kolmar Division		Consumer Products Division			Pharmaceutical Division			Corporate		Total
	(Dollars in thousands)
Net revenues	$	26,412	$	49,534		$	10,222		$	—	$	86,168
Income (loss) from operations		1,723		(1,544	)		(654	)		2,259		1,784
Identifiable assets		94,779		129,416			22,357			14,552		261,104
Depreciation and amortization		699		1,018			554			90		2,361

Net revenues, income from operations, identifiable assets and depreciation and amortization by business segment for the nine- and three-month periods ended September 29, 2001, are as follows:

	Nine-Month Period
	Kolmar Division		Consumer Products Division		Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	94,768	$	137,592	$	17,146	$	—	$	249,506
Income from operations		4,886		3,474		3,252		3,076		14,688
Identifiable assets		102,254		122,167		23,532		14,296		262,249
Depreciation and amortization		3,098		6,541		587		—		10,226

	Three-Month Period
	Kolmar Division		Consumer Products Division		Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	27,282	$	46,618	$	11,563	$	—	$	85,463
Income from operations		285		1,358		2,758		1,216		5,617
Identifiable assets		102,254		122,167		23,532		14,296		262,249
Depreciation and amortization		1,104		2,197		300		—		3,601

Net revenues, income (loss) from operations, identifiable assets and depreciation and amortization by geographic region for the nine-and three-month periods ended September 28, 2002, are as follows:

	Nine-Month Period
	United States		Mexico		Canada		Other(1)			Total
	(Dollars in thousands)
Net revenues	$	224,618	$	10,640	$	18,385	$	—		$	253,643
Income (loss) from operations		6,580		734		1,604		(56	)		8,862
Identifiable assets		235,857		6,424		18,870		(47	)		261,104
Depreciation and amortization		6,368		164		488		5			7,025

	Three-Month Period
	United States		Mexico		Canada		Other(1)			Total
	(Dollars in thousands)
Net revenues	$	76,060	$	3,960	$	6,148	$	—		$	86,168
Income (loss) from operations		952		289		553		(10	)		1,784
Identifiable assets		235,857		6,424		18,870		(47	)		261,104
Depreciation and amortization		2,141		51		167		2			2,361

Net revenues, income (loss) from operations, identifiable assets and depreciation and amortization by geographic region for the nine-and three-month periods ended September 29, 2001, are as follows:

	Nine-Month Period
	United States		Mexico		Canada		Other(1)			Total
	(Dollars in thousands)
Net revenues	$	218,018	$	8,541	$	22,947	$	—		$	249,506
Income (loss) from operations		12,469		70		2,160		(11	)		14,688
Identifiable assets		236,291		5,606		19,647		705			262,249
Depreciation and amortization		9,157		191		862		16			10,226

	Three-Month Period
	United States		Mexico			Canada		Other(1)			Total
	(Dollars in thousands)
Net revenues	$	77,414	$	2,856		$	5,193	$	—		$	85,463
Income (loss) from operations		5,365		(188	)		426		14			5,617
Identifiable assets		236,291		5,606			19,647		705			262,249
Depreciation and amortization		3,294		65			250		(8	)		3,601

(1): Other—Includes financial data for the Kolmar (Aust.) Pty. Limited and Kolmar Laboratories, Inc. (London)

10. Guarantor Information

The payment obligations of the Company under the Notes are guaranteed by certain of the Company's wholly-owned domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because the Company's management has determined that they would not be material to investors. The following financial information presents the condensed consolidating balance sheets as of September 28, 2002 and the consolidating combined statements of operations and cash flows for the nine-month period ended September 28, 2002, of the Guarantors, representing Kolmar, ASC, Piedmont, Acupac and Precision and the non-guarantors which consist of Kolmar Canada, Kolmar de Mexico S.A. de C.V. and Kolmar (Aust.) Pty. Limited, Kolmar Laboratories, Inc. (London), Ivers-Lee and Norwich. The financial information is intended to provide information for the Guarantor and non-guarantor operations of the Company, based on amounts derived from the financial statements of the Company for the nine-month period ended September 28, 2002.

Condensed Consolidating Balance Sheet At September 28, 2002
(Unaudited)

	Combined Guarantors		Nonguarantors			OSG			Eliminations			Consolidated Total
	(Dollars in thousands)
ASSETS:
Current Assets:
Cash and short term investments	$	1,058	$	945		$	12		$	—		$	2,015
Accounts receivable, net		37,314		6,669			(92	)		—			43,891
Other receivables		3,540		82			(517	)		—			3,105
Inventories		27,465		4,727			—			—			32,192
Prepaid expenses and other current assets		1,594		467			3,944			—			6,005

Total current assets		70,971		12,890			3,347			—			87,208
Property and equipment, net		40,515		16,867			1,752			—			59,134
Goodwill, net		89,960		9,714			—			—			99,674
Intercompany receivable (payable)		47,713		(2,033	)		(45,680	)		—			—
Investment in subsidiaries		—		—			108,749			(108,749	)		—
Other long-term assets		8,090		(178	)		7,176			—			15,088

Total assets	$	257,249	$	37,260		$	75,344		$	(108,749	)	$	261,104

LIABILITIES:
Current Liabilities:
Accounts payable	$	33,317	$	5,196		$	780		$	—		$	39,293
Other current liabilities		12,730		4,333			1,256			—			18,319

Total current liabilities		46,047		9,529			2,036			—			57,612
Long-term debt, less current portion		59,950		10,000			105,000			—			174,950
Other liabilities		11,194		1,016			393			—			12,603
Intercompany loan		52,878		7,453			(60,331	)		—			—
Redeemable preferred stock		—		—			5,257			—			5,257
Stockholders' equity		87,180		9,262			22,989			(108,749	)		10,682

Total liabilities, redeemable preferred stock and stockholders' equity	$	257,249	$	37,260		$	75,344		$	(108,749	)	$	261,104

Condensed Consolidating Statement of Operations for the Nine-Month Period ended
September 28, 2002
(Unaudited)

	Combined Guarantors			Nonguarantors			OSG			Eliminations			Consolidated Total
	(Dollars in thousands)
Net Revenues	$	201,120		$	52,863		$	—		$	(340	)	$	253,643
Cost of goods sold		181,304			39,323			197			(340	)		220,484

Gross profit		19,816			13,540			(197	)		—			33,159
Selling, general and administrative expense		19,537			11,859			(9,215	)		—			22,181
Restructuring charge and other charges		1,856			—			260			—			2,116

Income (loss) from operations		(1,577	)		1,681			8,758			—			8,862
Interest expense, net		4,481			1,074			7,417			—			12,972

(Loss) income before provision for income taxes		(6,058	)		607			1,341			—			(4,110	)
Provision (benefit) for income taxes		(2,241	)		724			(3	)		—			(1,520	)

Net (loss) income	$	(3,817	)	$	(117	)	$	1,344		$	—		$	(2,590	)

Condensed Consolidating Statement of Cash Flows For The Nine-Month Period Ended
September 28, 2002
(Unaudited)

	Combined Guarantors			Nonguarantors			OSG			Eliminations		Consolidated Total
	(Dollars in thousands)
Cash flows from operating activities
Net income, (loss)	$	(3,817	)	$	(117	)	$	1,344		$	—	$	(2,590	)
Total adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities		(2,044	)		1,586			(2,714	)		—		(3,172	)

Net cash provided by (used in) operating activities		(5,861	)		1,469			(1,370	)		—		(5,762	)

Cash flows from investing activities
Capital expenditures		(6,674	)		(1,389	)		(589	)		—		(8,652	)
Short-term investments		(5	)		—			—			—		(5	)
Sales of property, plant or equipment, net		—			582			—			—		582

Net cash used in investing activities		(6,679	)		(807	)		(589	)		—		(8,075	)

Cash flows from financing activities
Net borrowings on revolving loan		12,081			—			—			—		12,081
Dividends on preferred stock		—			—			(28	)		—		(28	)
Repayment (borrowing) of debt due to affiliates		2,686			(2,665	)		(21	)		—		—
Repurchase/cancellation of stock		—			—			(179	)		—		(179	)
Payment of dividends		(2,700	)		—			2,700			—		—

Net cash provided by (used in) financing activities		12,067			(2,665	)		2,472			—		11,874

Effect of exchange rate changes on cash		(215	)		841			(531	)		—		95

Net increase (decrease) in cash		(688	)		(1,162	)		(18	)		—		(1,868	)
Cash, beginning of period		1,490			2,107			30			—		3,627

Cash, end of period	$	802		$	945		$	12		$	—	$	1,759

OUTSOURCING SERVICES GROUP, INC.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.

General

Outsourcing Services Group, Inc. (the "Company" or "OSG"), through its operating subsidiaries, ASC, Piedmont, Kolmar, Acupac, Precision, Ivers-Lee and Norwich is a leading provider of outsourced services including manufacturing, packaging and clinical services to the North American health and beauty aid and healthcare markets. OSG offers its customers a complete range of services, including product conceptualization, formulation, manufacturing, filling, packaging, clinical trials, stability evaluation and microbacterial testing services. It also provides ancillary services such as materials procurement, warehousing and distribution of finished goods. The Company's revenues are derived from the manufacturing and packaging of health and beauty aid products, including lipstick, face powder, eye shadow, mascara, nail enamel, skin care cream and lotion, hair spray and gel, shampoo and shaving cream and gel. Other products manufactured and packaged by the Company include household lubricants and liquid cleaners and outsourced manufacturing, packaging, clinical testing supplies, product stability and microbiological testing services for the pharmaceutical and over-the-counter drug markets.

Market Risk

A small number of customers account for a significant portion of the Company's sales. For the nine months ended September 28, 2002, Procter and Gamble, WD-40, Mary Kay, Dial Corporation and Tigi Linea Products accounted for 11.1%, 8.2%, 8.0%, 7.9% and 5.0% respectively, of the Company's revenues during this period. Although the Company believes that its overall relations with customers are good, there can be no assurance that such customers will continue to purchase the Company's services, continue with a particular product line which requires services which the Company offers or contract for the Company's services in connection with any new or successor product lines. The loss of any of the Company's major customers or a significant decrease in demand for certain products sold by such major customers, could have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.

Critical Accounting Policies

Certain of the Company's accounting policies are particularly important to the portrayal of financial position and results of operations and require judgment by management and as a result they are subject to a degree of uncertainty. In applying those policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on historical experiences and information available from other outside sources.

The Company believes the following critical accounting policies affect the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Inventories—Inventories are valued at the lower of cost or market using the first-in, first-out method. The Company provides estimates for allowances for slow-moving and obsolete inventory based on current assessments about future demands, market conditions and related management initiatives.

Deferred Financing Costs—The Company's deferred financing costs are capitalized with respect to obtaining long-term debt financing including legal expenses and bank fees. These costs are amortized over the repayment term of the related debt on a straight-line basis.

Goodwill—On June 29, 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of other intangible assets related to non-compete agreements were $37,000 and $113,000 for the three-and nine-months ended September 28, 2002. Amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of this statement on January 1, 2002. Amortization expense related to goodwill was $1,588,000 and $4,730,000 for the three-and nine-month periods ended September 29, 2001. In addition, the Company has completed the first step of the transitional goodwill impairment test, the results indicate that the Consumer Products Division will need further evaluation. Goodwill at the Consumer Products Division is $51,216,000. There is no goodwill impairment for the other reporting units.

Long-Lived Assets—The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Long-lived assets are reviewed for events or changes in circumstances which would indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying value of long-lived assets on an undiscounted cash flow basis to determine whether or not an impairment to such value has occurred.

Revenue Recognition—The Company manufacturers and packages products based on written agreements with customers specifying price, units and shipping terms. Revenue is generally recognized as products are shipped to customers. When customers, under the terms of specific orders, request that the Company manufacture and invoice goods on a bill and hold basis, the Company recognizes revenue at the time the manufacturing process is complete.

Translation of Foreign Currencies—Foreign subsidiary financial statements are translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translations. The balance sheets of foreign affiliates are translated into U.S. dollars at the exchange rates in effect on the last day of the reporting period. The statements of operations of foreign affiliates are translated into U.S. dollars at the average exchange rate effective for the entire period. The differences from historical exchange rates are reflected in stockholders' equity as an adjustment for foreign currency translations.

Results Of Operations

The following table sets forth the Company's statements of operations, certain data for the periods indicated and the percentage relationship of each item to net revenues (dollars in thousands):

	For the Three Months Ended September 28, 2002					For the Three Months Ended September 29, 2001
Net revenues	$	86,168		100.0	%	$	85,463		100.0	%
Cost of goods sold		75,095		87.1	%		71,011		83.1	%
Selling, general and administrative expenses		8,617		10.0	%		8,835		10.3	%
Restructuring and other charges		672		0.8	%		—		—
Income from operations		1,784		2.1	%		5,617		6.6	%
Interest expense, net		4,511		5.2	%		4,346		5.1	%
Net (loss) income		(738	)	(0.9	)%		255		0.3	%
Net cash (used in) provided by operating activities		(579	)	—			7,765		—
Net cash used in investing activities		(3,512	)	—			(6,264	)	—
Net cash provided by financing activities		4,162		—			1,458		—
Capital expenditures		3,511		4.1	%		2,740		3.2	%
Adjusted EBITDA		4,786		5.6	%		9,482		11.1	%

For the three months ended September 28, 2002 compared to the three months ended September 29, 2001.

Net Revenue. Net revenues of $86.2 million for the three-months ended September 28, 2002 increased approximately $0.7 million, or 0.8% from the prior 2001 period. The increase in sales of $0.7 million was primarily attributable to the Consumer Products Division's increased volume of $2.9 million over the prior 2001 period, offset by the Kolmar Division and the Pharmaceutical Division which sustained volume loss of $0.9 million and $1.3 million, respectively. Kolmar is still experiencing volume loss from the prior year, however, Kolmar has rebounded from second quarter losses when compared to prior year. The Pharmaceutical Division experienced volume loss of $1.3 million related to decline in excess volume for Procter & Gamble offset by volume increases from a major customer. The Consumer Products Division continues to exceed prior year sales due to increases from its major customers and a new product line.

Cost of Goods Sold. Cost of goods sold increased by approximately $4.1 million, or 5.8% to $75.1 million for the three-months ended September 28, 2002 from $71.0 million from the prior 2001 period. Cost of goods sold for the Kolmar Division decreased $1.1 million as a result of the decreased sales volume from the prior 2001 period, in which direct labor and manufacturing overhead decreased $0.3 million, collectively, all profit was lost in net revenue decline. Cost of goods sold for the Consumer Products Division increased $4.6 million partially as a result of positive sales volume when compared to the prior 2001 period, as well as increases in direct labor and manufacturing overhead, mainly at the Precision plant which is experiencing labor inefficiencies in the start-up of new product lines and excess lab expenses at the Piedmont plant. Cost of goods sold for the Pharmaceutical Division increased $0.5 million with increases in depreciation and lab expenses. As a percentage of net revenues, total cost of goods sold increased to 87.1% for the three-months ended September 28, 2002 from 83.1% from the prior 2001 period. The increase is due to the product mix change in the Consumer Products Division which carry higher costs to produce.

SG&A Expenses. Selling, general and administrative expenses ("SG&A") decreased approximately $0.2 million or 2.5% to $8.6 million for the three-months ended September 28, 2002 from $8.8 million from the prior 2001 period. The decrease in SG&A was due to a decrease in amortization of goodwill of $1.6 million due to the implementation of SFAS No. 142 and reductions in research and development offset by increased insurance and corporate expenses of $2.1 million.

Restructuring and Other Charges. In the first quarter 2002, the Company formalized its plan to restructure its business processes, practices and organization to streamline functions and remain competitive. For the three-months ended September 28, 2002, the Company incurred charges of $0.7 million related to recruiting costs, training, legal and consulting fees.

Adjusted EBITDA. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) is included herein as it is a basis upon which the Company assesses its ability to service indebtedness. Adjusted EBITDA is not intended to represent cash flows from operations as defined by U.S. Generally Accepted Accounting Principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. For the three-months ended September 28, 2002, adjusted EBITDA represents the sum of income from operations and depreciation and amortization and excludes (i) the impact of the restructuring charge of $0.7 million and (ii) and other income adjustments of $0.1 million. Adjusted EBITDA decreased approximately $4.7 million or 49.5% to $4.8 million for the three-months ended September 28, 2002 from $9.5 million from the prior 2001 period. The Kolmar and Pharmaceutical Division's are down principally due to planned volume declines, the Consumer Products Division down due to production inefficiencies and manufacturing overhead. Overall, the Company has also been impacted with increased insurance and administrative costs.

Interest Expense. Interest expense increased $0.2 million, or 3.8% to $4.5 million for the three-months ended September 28, 2002 from $4.3 million from the prior 2001 period, due to interest rate increases from prior year due to increase in the interest rate spread of 0.50% as a result of

Amendment No. 6, as well as an interest accrual of $0.2 million on the $10.0 million note payable attributable to the Norwich acquisition.

The following table sets forth the Company's statements of operations, certain data for the periods indicated and the percentage relationship of each item to net revenues (dollars in thousands):

	For the Nine Months Ended September 28, 2002					For the Nine Months Ended September 29, 2001
Net revenues	$	253,643		100.0	%	$	249,506		100.0	%
Cost of goods sold		220,484		86.9	%		210,553		84.4	%
Selling, general and administrative expenses		22,181		8.7	%		24,265		9.7	%
Restructuring and other charges		2,116		0.8	%		—		—
Income from operations		8,862		3.5	%		14,688		5.9	%
Interest expense, net		12,972		5.1	%		13,193		5.3	%
Net (loss) income		(2,590	)	(1.0	)%		300		0.1	%
Net cash (used in) provided by operating activities		(5,762	)	—			19,247		—
Net cash used in investing activities		(8,075	)	—			(12,708	)	—
Net cash provided by (used in) financing activities		11,874		—			(3,150	)	—
Capital expenditures		8,652		3.4	%		6,053		2.4	%
Adjusted EBITDA		16,688		6.6	%		24,924		10.0	%

For the nine months ended September 28, 2002 compared to the nine months ended September 29, 2001.

Net Revenues. Net revenues of $253.6 million for the nine-months ended September 28, 2002 increased approximately $4.1 million, or 1.7% from the prior 2001 period. Excluding the incremental sales related to the acquisition of Norwich of $14.2, sales decreased $10.1 million from the prior 2001 period. The decrease in sales of $10.1 million was primarily attributable to the Kolmar Division volume loss of $22.9 million offset by the Consumer Products Division's increased volume of $12.4 million and the Pharmaceutical Division (Ivers-Lee) of $0.4 million. Kolmar's year-to-date volume decline appears larger than normal due to an unusually large customer volume that was required in the prior year. However, during the second and third quarters, Kolmar has experienced a return to more normal volume. The Consumer Products Division continues to exceed prior year sales due to increases from its major customers and a new product line. Ivers-Lee also experienced significant increased volume from one of its major customers as well.

Cost of Goods Sold. Cost of goods sold increased by approximately $9.9 million, or 4.7% to $220.5 million for the nine-months ended September 28, 2002 from $210.6 million from the prior 2001 period. Excluding incremental costs related to the acquisition of Norwich of $10.5 million, cost of goods sold decreased $0.6 million. Cost of goods sold for the Kolmar Division decreased $18.8 million as a result of the decreased sales volume from the prior 2001 period, in which total material, labor and manufacturing overhead decreased $12.8 million, $3.5 million and $2.5 million, respectively. Reductions in labor and manufacturing overhead at Kolmar helped offset volume declines. Cost of goods sold for the Consumer Products Division increased $17.6 million partially as a result of positive sales volume when compared to the prior 2001 period, as well as increases in direct labor, manufacturing support and lab expenses increased $8.9 million, collectively, mainly at the Precision and Piedmont plants. The Pharmaceutical Division excluding Norwich increased slightly by $0.6 million. As a percentage of net revenues, total cost of goods sold increased to 86.9% for the nine-months ended September 28, 2002 from 84.4% from the prior 2001 period. The increase is due principally to product mix change and cost overruns in the Consumer Products Division.

SG&A Expenses. Selling, general and administrative expenses ("SG&A") decreased approximately $2.1 million or 8.6% to $22.2 million for the nine-months ended September 28, 2002 from $24.3 million from the prior 2001 period. Excluding incremental costs of $2.1 million related to the acquisition of Norwich and exclusive of the management fee, SG&A decreased $4.2 million. Exclusive of Norwich,

the decrease in SG&A was due to a decrease in amortization of goodwill of $4.7 million due to the implementation of SFAS No. 142, the net gain on the sale of the building and land located in Australia of $1.4 million, offset by increased insurance and corporate expenses.

Restructuring and Other Charges. In the first quarter 2002, the Company formalized its plan to restructure its business processes, practices and organization to streamline functions and remain competitive. The Company recorded a restructuring charge of $1.1 million related to severance costs. For the nine-months ended September 28, 2002, the Company incurred other charges of $1.0 million related to recruiting costs, training, legal and consulting fees which resulted in restructuring expenses of $2.1 for the nine-months ended September 28, 2002.

Adjusted EBITDA. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) included herein as it is a basis upon which the Company assesses its ability to service indebtedness. Adjusted EBITDA is not intended to represent cash flows from operations as defined by U.S. Generally Accepted Accounting Principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. For the nine-months ended September 28, 2002, adjusted EBITDA represents the sum of income from operations and depreciation and amortization and excludes (i) the impact of the restructuring charge of $2.1 million and (ii) the impact of a foreign currency translation loss of $0.1 million associated with its Mexican operations and (iii) the gain on the sale of Australia of $1.4 million. Adjusted EBITDA decreased approximately $8.2 million or 33.0% to $16.7 million for the nine-months ended September 28, 2002 from $24.9 million from the prior 2001 period. Kolmar is down principally due to volume declines, Consumer is down due to production inefficiencies and manufacturing overhead. Overall, the Company has also been impacted with increased insurance and administrative costs.

Interest Expense. Interest expense decreased $0.2 million, or 1.7% to $13.0 million for the nine-months ended September 28, 2002 from $13.2 million from the prior 2001 period, due to interest rate reductions from prior year offset by interest accrual of $0.6 million on the $10.0 million note payable attributable to the Norwich acquisition.

Liquidity and Capital Resources

As of September 28, 2002, OSG had cash and cash equivalents of $2.0 million, working capital of $29.6 million, long-term debt of $175.0 million and $9.2 million available under the senior secured credit facility. Cash used in operating activities was $5.8 million for the nine-months ended September 28, 2002 and cash provided by operating activities was $19.2 million for the nine-months ended September 29, 2001. Net cash used in investing activities was $8.1 million and $12.7 million for the nine-months ended September 28, 2002 and September 29, 2001, respectively. Net cash provided by financing activities was $11.9 million for the nine-months ended September 28, 2002 and cash used in financing activities was $3.2 million for the nine-months ended September 29, 2001.

The Company believes that significant opportunities exist in the markets for each of its product lines and services, and continued investment in its marketing and sales capabilities and product development will enhance its opportunities for long-term growth and profitability. While the Company's primary goal is to grow through its existing markets and product lines, from time to time the Company will examine opportunities for strategic acquisition or divestiture. The Company historically has financed its acquisitions through a combination of borrowings under bank credit facilities, seller provided financing, internally generated cash flows and the issuance of equity and debt securities and anticipates that it may from time to time issue additional debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired businesses or assets. There can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated acquisition cost.

On October 30, 2002, the Company completed a refinancing of their Senior Secured Credit Facility with Foothill Capital Corporation, as the arranger and administrative agent ("New Agreement"). The New Agreement contains $40.0 million in revolving loans bearing an interest rate of (1) the Prime Lending Rate (defined as the rate which Wells Fargo announces as its prime lending rate from time to time), plus 0.50% or (2) the LIBOR rate plus 2.75%. In addition, the New Agreement contains $30.0 million in Term Loans which was fully funded bearing interest at 13.50% plus PIK margin (Paid-in-Kind). The term of the New Agreement matures January 15, 2006. The New Agreement contains certain covenants which among other things, require minimum levels for earnings and certain financial ratios and also places restrictions on capital expenditures. The new covenants are in effect for September 28, 2002 and the Company was in compliance with such covenants.

As a result of the most recent refinancing and the indebtedness incurred to consummate acquisitions, the Company remains highly leveraged. The Company's ability to pay principal and interest on its indebtedness will depend upon the future operating performance of its subsidiaries and will require a substantial portion of the Company's cash flow from operations. The obligations of the Company's subsidiaries under the Senior Secured Credit Facility are secured by a security interest in substantially all of their assets, and the Company's obligations under its guarantee of the Senior Secured Credit Facility are secured by substantially all of its assets, excluding Norwich.

The Company believes that cash on hand, cash flow from operations and available borrowings under the Senior Secured Credit Facility will be sufficient to meet the Company's presently anticipated working capital and capital expenditure needs through fiscal 2003.

The Company's capital expenditures will be primarily for replacements and modernization of existing assets and new customer requirements and is expected to be below historical levels.

The following table outlines the Company's obligations and commitments for future payments concerning debt and contingencies:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(In thousands)
Senior Subordinated Notes	$	105,000		—		—	$	105,000		—
Senior Secured Credit Facility(b)		59,950		—	$	59,950		—		—
P&G Note(a)		10,000		—		—		10,000		—
Operating Leases		19,858	$	3,437		8,297		4,229	$	3,895

Total Obligations	$	194,808	$	3,437	$	68,247	$	119,229	$	3,895

(a): Does not include accrued interest of $1.0 million which is included in Other Long-Term Liabilities and will be paid with the P&G Note due June 2006.
(b): Subsequent to September 28, 2002, the Company completed its refinancing and the future payouts of the new agreement will be reflected in the 4^th Quarter report.

New Accounting Pronouncements

On June 29, 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of other intangible assets related to non-compete agreements were $37,000 and $113,000 for the three-and nine-months ended September 28, 2002. Amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of this statement on January 1, 2002. Amortization expense related to goodwill was $1,588,000 and $4,730,000 for the three-and nine-month periods ended September 29, 2001. In addition, the Company has completed the first step of the transitional goodwill impairment test, the results indicate that the Consumer Products Division will need further evaluation. Goodwill at the Consumer Products Division is $51,216,000. There is no goodwill impairment for the other reporting units.

Certain Trends and Uncertainties

Historically, the Company has grown its business through acquisitions and investments in its operations. While the Company's primary goal is to grow through its existing markets and product lines, from time to time the Company will examine opportunities for strategic acquisition or divestiture. The impact of these decisions on future profitability cannot be predicted with any certainty. The Company's commitment to growth may increase its vulnerability to unforeseen downturns in its markets and shifts in competitive conditions. However, the Company believes that significant opportunities exist in the markets for each of its product lines and services, and continued investment in its marketing and sales capabilities and product development will enhance its opportunities for long term growth and profitability.

Forward Looking Statements

Certain statements and information contained or incorporated by reference in this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act, which represent the Company's expectations or beliefs, including but not limited to, statements concerning industry performance, the Company's operations, performance, financial condition, growth and acquisition strategies, margins and growth in sales of the Company's products and services. For this purpose, any statements contained in this Form 10-Q and the Company's Form 10-K, that are not statements of historical fact may be deemed to be forward-looking statements. Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "intends," "may," "will," "should," or "anticipates," or the negative therefore, other variations thereon or comparable terminology, or by discussions of strategy. No assurances can be given that the future results covered by the forward-looking statements will be achieved. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general and economic business conditions, both domestic and foreign; industry and market capacity; fashion industry changes; wage rates; existing government regulations and changes in, or failure to comply with, government regulations; liabilities and other claims asserted against the Company; competition; the loss of any significant customers; change in operating strategy or development plans; the ability to attract or retain qualified personnel; the significant indebtedness of the Company; the availability and terms of capital to fund the expansion of the Company's business; and other factors referenced in this Form 10-Q and the Company's Form 10-K, copies of which may be obtained from the Company without cost.

Item 4. Controls and Procedures.

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II
Other Information

Item 1.		Legal Proceedings
		See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 4, "Contingencies".
Item 2.		Changes in Securities
		None.
Item 3.		Defaults Upon Senior Securities
		None.
Item 4.		Submission of Matters to a Vote of Security Holders
		None.
Item 5.		Other Information
		None.
Item 6.		Exhibits and Reports on Form 8-K
(a)		Exhibit Index
99.1		Certification of Chief Executive Officer
99.2		Certification of Chief Financial Officer

Item Number		Exhibit		Page
11.		Statement of computation of basic and diluted net loss per share		28


(b)		Reports on Form 8-K

i): Disposition of Corona facility dated October 11, 2002
ii): Announcement of Completion of Refinancing dated October 29, 2002

CERTIFICATION

Each of the undersigned hereby certifies in his capacity as an officer of Outsourcing Services Group, Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the period ended September 29, 2002 fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

SIGNATURES

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

	OUTSOURCING SERVICES GROUP, INC.


Dated: November 12, 2002	By:	/s/ JOSEPH HEALY Joseph Healy Chief Executive Officer, President and Director (Principal Executive Officer)


Dated: November 12, 2002	By:	/s/ PERRY MORGAN Perry Morgan Chief Financial Officer, Vice President And Secretary (Principal and Accounting Officer)

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INDEX TO FORM 10–Q
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet At September 28, 2002 (Unaudited)
Condensed Consolidating Statement of Operations for the Nine-Month Period ended September 28, 2002 (Unaudited)
Condensed Consolidating Statement of Cash Flows For The Nine-Month Period Ended September 28, 2002 (Unaudited)

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.

Item 4. Controls and Procedures.

PART II Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
CERTIFICATION
SIGNATURES

OUTSOURCING SERVICES GROUP INC 10-Q