# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_________________

# FORM 10-K

FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

# (Mark One)

| |  | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
fiscal year ended December 31, 2006
| |  | --------------------------------------------------------------------------------------------------------------------------------

OR

| |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
transition period from __________ to __________
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------

Commission file number
0-27824

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

|Delaware                                                       | 33-0684451                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|
|(Address of principal executive offices)                       | (Zip Code)                          

Registrants
telephone number, including area code: (914) 332-4100

Securities registered
pursuant to section 12(b) of the Act: Common Stock, par value $.01 per share

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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.  YES    NO

Indicate
by check mark if the  registrant  is not  required  to file  reports  pursuant to Section
13 or Section  15(d) of the Act.  YES    NO

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 twelve
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  
  NO

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.).
Large Accelerated Filer  
  Accelerated Filer  Non-Accelerated Filer



Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.) YES    NO

The
aggregate market value of the Common Stock of the Registrant held by non-affiliates of the
Registrant on June 30, 2006, based on the closing price of the Common Stock as reported by
the Nasdaq Capital Market on such date, was approximately $4,645,410.

The
number of shares of the Registrants Common Stock outstanding as of December 31,
2006, was 18,934,182 shares.

DOCUMENTS INCORPORATED
BY REFERENCE

Portions
of the Registrants definitive proxy statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days
after the end of our fiscal year, for our Annual Meeting of Shareholders, presently
scheduled to be held on May 24, 2007, are incorporated by reference into Part III of this
Form 10-K.

---

# SPAR GROUP, INC. ANNUAL REPORT ON
FORM 10-K

|        |                                                                         |     
|------- | ----------------------------------------------------------------------- | ----
|        | INDEX                                                                   |     
|       
|        | PART I                                                                  |     
|       
|        |                                                                         | Page
|Item 1  | Business                                                                | 2   
|Item 1A | Risk Factors                                                            | 10  
|Item 1B | Unresolved Staff Comments                                               | 15  
|Item 2  | Properties                                                              | 15  
|Item 3  | Legal Proceedings                                                       | 16  
|Item 4  | Submission of Matters to a Vote of Security Holders                     | 17  
|       
|        | PART II                                                                 |     
|       
|Item 5  | Market for Registrant's Common Equity, Related Shareholder Matters and  |     
|        | Issuer Purchases of Equity Securities                                   | 18  
|Item 6  | Selected Financial Data                                                 | 20  
|Item 7  | Management's Discussion and Analysis of Financial Condition and Results |     
|        | of Operations                                                           | 21  
|Item 7A | Quantitative and Qualitative Disclosures about Market Risk              | 29  
|Item 8  | Financial Statements and Supplementary Data                             | 30  
|Item 9  | Changes in and Disagreements with Accountants on Accounting and         |     
|        | Financial Disclosure                                                    | 30  
|Item 9A | Controls and Procedures                                                 | 30  
|Item 9B | Other Information                                                       | 30  
|       
|        | PART III                                                                |     
|       
|Item 10 | Directors, Executive Officers and Corporate Governance                  | 31  
|Item 11 | Executive Compensation                                                  | 31  
|Item 12 | Security Ownership of Certain Beneficial Owners and Management          | 31  
|Item 13 | Certain Relationships and Related Transactions                          | 31  
|Item 14 | Principal Accountant Fees and Services                                  | 31  
|       
|        | PART IV                                                                 |     
|       
|Item 15 | Exhibits and Financial Statement Schedules                              | 32  
|        | Signatures                                                              | 39  

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# PART I

Statements
contained in this Annual Report on Form 10-K of SPAR Group, Inc. (SGRP, and
together with its subsidiaries, the SPAR Group or the Company),
include forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act (collectively, the Securities
Laws, including, in particular and without limitation, the statements contained in
the discussions under the headings Business, Risk Factors and
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause the Companys actual results,
performance and achievements, whether expressed or implied by such forward-looking
statements, to not occur or be realized or to be less than expected. Such forward-looking
statements generally are based upon the Companys best estimates of future results,
performance or achievement, current conditions and the most recent results of operations.
Forward-looking statements may be identified by the use of forward-looking terminology
such as may, will, expect, intend,
believe, estimate, anticipate, continue or
similar terms, variations of those terms or the negative of those terms. You should
carefully consider such risks, uncertainties and other information, disclosures and
discussions containing cautionary statements or identifying important factors that could
cause actual results to differ materially from those provided in the forward-looking
statements.

Although
the Company believes that its plans, intentions and expectations reflected in or suggested
by such forward-looking statements are reasonable, it cannot assure that such plans,
intentions or expectations will be achieved in whole or in part. You should carefully
review the risk factors described below (see Item 1A  Risk Factors) and any other
cautionary statements contained in this Annual Report on Form 10-K. All forward-looking
statements attributable to the Company or persons acting on its behalf are expressly
qualified by all such risk factors and other cautionary statements. The Company undertakes
no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by law.

# Item 1. Business.

# GENERAL

The
SPAR Group, Inc., a Delaware corporation (SGRP), and its subsidiaries
(together with SGRP, the SPAR Group or the Company), is a supplier
of merchandising and other marketing services throughout the United States and
internationally. Today the Company operates in 12 countries whose population represents
approximately 48% of the total world population. The Companys operations are
currently divided into two divisions: the Domestic Merchandising Services Division and the
International Merchandising Services Division. The Domestic Merchandising Services
Division provides merchandising and marketing services, in-store event staffing, product
sampling, Radio Frequency Identification (RFID) services, technology services
and marketing research to manufacturers and retailers in the United States. The various
services are primarily performed in mass merchandisers, electronics store chains, drug
store chains and convenience and grocery stores. The International Merchandising Services
Division was established in July 2000 and through its subsidiaries, the Company currently
provides similar merchandising and marketing services in Japan, Canada, Turkey, South
Africa, India, Romania, China, Lithuania, Latvia, Australia and New Zealand. The Company
continues to focus on expanding its merchandising and marketing services business
throughout the world.

# Continuing Operations

Domestic Merchandising
Services Division

The
Companys Domestic Merchandising Services Division provides nationwide merchandising
and other marketing services primarily on behalf of consumer product manufacturers and
retailers at mass merchandisers, electronics store chains, drug store chains and grocery
stores. Included in its clients are home entertainment, general merchandise, health and
beauty care, consumer goods and food products companies in the United States.

Merchandising
services primarily consist of regularly scheduled dedicated routed services and special
projects provided at the store level for a specific retailer or single or multiple
manufacturers primarily under single or multi-year contracts or agreements. Services also
include stand-alone large-scale implementations. These services may include sales
enhancing activities such as ensuring that client products authorized for distribution are
in stock and on the shelf, adding new products that are approved for distribution but not
presently on the shelf, setting category shelves in accordance with

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approved store schematics, ensuring
that shelf tags are in place, checking for the overall salability of client products and
setting new and promotional items and placing and/or removing point of purchase and other
related media advertising. Specific in-store services can be initiated by retailers or
manufacturers, and include new store openings, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. The Company also
provides in-store event staffing services, RFID services, technology services and
marketing research services.

International
Merchandising Services Division

In
July 2000, the Company established its International Merchandising Services Division,
operating through its wholly owned subsidiary, SPAR Group International, Inc.
(SGI), to focus on expanding its merchandising and marketing services business
worldwide. The Company has expanded its international business as follows:

|Date Established |  | Percent Ownership in Subsidiaries |  | Location             | 
|---------------- |  | --------------------------------- |  | -------------------- | 
|May 2001         |  | 50%                               |  | Osaka, Japan         | 
|June 2003        |  | 100%                              |  | Toronto, Canada      | 
|July 2003        |  | 51%                               |  | Istanbul, Turkey     | 
|April 2004       |  | 51%                               |  | Durban, South Africa | 
|April 2004       |  | 51%                               |  | New Delhi, India     | 
|December 2004    |  | 51%                               |  | Bucharest, Romania   | 
|February 2005    |  | 50%                               |  | Hong Kong, China     | 
|September 2005   |  | 51%                               |  | Siauliai, Lithuania  | 
|April 2006       |  | 51%                               |  | Melbourne, Australia | 

# Discontinued Operations

Incentive Marketing
Division

As
part of a strategic realignment in the fourth quarter of 2001, the Company made the
decision to divest its Incentive Marketing Division, operating through its subsidiary,
SPAR Performance Group, Inc. (SPGI). The Company explored various alternatives
for the sale of SPGI and subsequently sold the business to SPGIs employees through
the establishment of an employee stock ownership plan on June 30, 2002. In December of
2003, SPGI changed its name to STIMULYS, Inc.

Technology Division

In
October 2002, the Company dissolved its Technology Division, which it had established in
March 2000 for the purpose of marketing its proprietary Internet-based computer software.

# INDUSTRY OVERVIEW

Domestic Merchandising
Services Division

According
to industry estimates over two billion dollars is spent annually on domestic retail
merchandising and marketing services. The merchandising and marketing services industry
includes manufacturers, retailers, food brokers, and professional service merchandising
companies. The Company believes there is a continuing trend for major retailers and
manufacturers to move increasingly toward third parties to handle in-store merchandising.
The Company also believes that its merchandising and marketing services bring added value
to retailers, manufacturers and other businesses. Retail merchandising and marketing
services enhance sales by making a product more visible and available to consumers. These
services primarily include placing orders, shelf maintenance, display placement,
reconfiguring products on store shelves, replenishing products and providing in-store
event staffing services. The Company provides other marketing services such as test market
research, mystery shopping, and promotion planning and analysis.

The
Company believes merchandising and marketing services previously undertaken by retailers
and manufacturers have been increasingly outsourced to third parties. Historically,
retailers staffed their stores as needed to ensure inventory levels, the advantageous
display of new items on shelves, and the maintenance of shelf schematics. In an effort to
improve their margins, retailers decreased their own store personnel and increased their
reliance on manufacturers to perform such services. Initially, manufacturers attempted to
satisfy the need for merchandising and marketing services in retail stores by utilizing
their own sales representatives. Retailers also used their employees to

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merchandise their stores. However,
both the manufacturers and the retailers discovered that using their own sales
representatives and employees for this purpose was expensive and inefficient. Therefore,
manufacturers and retailers have increasingly outsourced the merchandising and marketing
services to third parties capable of operating at a lower cost by (among other things)
serving multiple manufacturers simultaneously.

Another
significant trend impacting the merchandising segment is the tendency of consumers to make
product purchase decisions once inside the store. Accordingly, merchandising and marketing
services and in-store product promotions have proliferated and diversified. Retailers are
continually re-merchandising and re-modeling entire stores in an effort to respond to new
product developments and changes in consumer preferences. The Company estimates that these
activities have increased in frequency over the last five years, such that most stores are
re-merchandised or remodeled approximately every twenty-four months. Both retailers and
manufacturers are seeking third parties to help them meet the increased demand for these
labor-intensive services.

In
addition, the consolidation of many retailers has created opportunities for third party
merchandisers when an acquired retailers stores are converted to the format of the
acquiring retailer. In many cases stores are completely remodeled and re-merchandised
after a consolidation.

International
Merchandising Services Division

The
Company believes another current trend in business is globalization. As companies expand
into foreign markets they will need assistance in merchandising or marketing their
products. As evidenced in the United States, retailer and manufacturer sponsored
merchandising and marketing programs are both expensive and inefficient. The Company also
believes that the difficulties encountered by these programs are only exacerbated by the
logistics of operating in foreign markets. This environment has created an opportunity for
the Company to exploit its Internet-based technology and business model that are
successful in the United States.

In
July 2000, the Company established its International Merchandising Services Division to
cultivate foreign markets, modify the necessary systems and implement the Companys
business model worldwide by expanding its merchandising and marketing services business
off shore. The Company formed an International Merchandising Services Division task force
consisting of members of the Companys information technology, operations and finance
groups to evaluate and develop foreign markets. In 2001, the Company established its
Japanese subsidiary to provide the latest in-store merchandising and marketing services to
the Japanese market. Subsequently, the Company translated several of its proprietary
Internet-based logistical, communications and reporting software applications into
Japanese and successfully implemented its software and business systems in Japan. Since
2003, the Company has expanded its international presence to Canada, Turkey, South Africa,
India, Romania, China, Lithuania, Latvia, Australia, and New Zealand. Today the Company
operates in 12 countries whose population represents approximately 48% of the total world
population.

Key
to the Companys international strategy is the translation of several of its
proprietary Internet-based logistical, communications and reporting software applications
into the native language of any market the Company enters. As a result of this requirement
for market penetration, the Company has developed translation software that can quickly
convert its proprietary software into various languages. Through its computer facilities
in Auburn Hills, Michigan, the Company provides worldwide access to its proprietary
logistical, communications and reporting software. In addition, the Company maintains
personnel in Greece and Australia to assist in its international efforts. The Company is
actively pursuing expansion into various other markets.

Financial Information
About Geographic and Business Segments

The
Company operates both domestically and internationally in the two distinct
geographic/business segments described above. Certain financial information regarding the
Companys geographic and business segments, which includes net revenues and operating
(loss) income for each of the years ended December 31, 2006, December 31, 2005, and
December 31, 2004, and total assets as of December 31, 2006 and December 31, 2005 is
provided in Note 12 to the Companys Consolidated Financial Statements, below.

# BUSINESS STRATEGY

As
the marketing services industry continues to grow, consolidate and expand both in the
United States and internationally, large retailers and manufacturers are increasingly
outsourcing their merchandising and marketing service needs to third-party providers. The
Company believes that offering marketing services on a national and global basis will

-4-

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provide it with a competitive
advantage. Moreover, the Company believes that successful use of and continuous
improvements to a sophisticated technology infrastructure, including its proprietary
Internet-based software, is key to providing clients with a high level of client service
while maintaining efficient, low cost operations. The Companys objective is to
become an international retail merchandising and marketing service provider by pursuing
its operating and growth strategy, as described below.

Increased
Sales Efforts:

The
Company is seeking to increase revenues by increasing sales to its current clients, as
well as, establishing long-term relationships with new clients, many of which currently
use other merchandising companies for various reasons. The Company believes its
technology, field implementation and other competitive advantages will allow it to capture
a larger share of this market over time. However, there can be no assurance that any
increased sales will be achieved.

New
Products:

The
Company is seeking to increase revenues through the internal development and
implementation of new products and services that add value to its clients retail
merchandising related activities, some of which have been identified and are currently
being tested for feasibility and market acceptance. However, there can be no assurance
that any new products of value will be developed or that any such new product can be
successfully marketed.

Acquisitions:

The
Company is seeking to acquire businesses or enter into partnerships, joint ventures or
other arrangements with companies that offer similar merchandising or marketing services
both in the United States and worldwide. The Company believes that increasing its industry
expertise, adding product segments, and increasing its geographic breadth will allow it to
service its clients more efficiently and cost effectively. As part of its acquisition
strategy, the Company is actively exploring a number of potential acquisitions,
predominately in its core merchandising and marketing service businesses. Through such
acquisitions, the Company may realize additional operating and revenue synergies and may
leverage existing relationships with manufacturers, retailers and other businesses to
create cross-selling opportunities. However, there can be no assurance that any of the
acquisitions will occur or whether, if completed, the integration of the acquired
businesses will be successful or the anticipated efficiencies and cross-selling
opportunities will occur.

Leverage
and Improve Technology:

The
Company believes that providing merchandising and marketing services in a timely, accurate
and efficient manner, as well as delivering timely, accurate and useful reports to its
clients, are key components that are and will continue to be critical to the
Companys success. The Company has developed Internet-based logistic deployment,
communications, and reporting systems that improve the productivity of its merchandising
specialists and provide timely data to its clients. The Companys merchandising
specialists use hand-held computers, personal computers or laptop computers to report the
status of each store or client product they service. Merchandising specialists report on a
variety of issues such as store conditions, status of client products (e.g. out of stocks,
inventory, display placement) or they may scan and process new orders for certain
products. This information is reported, analyzed and displayed in a variety of reports
that can be accessed by both the Company and its clients via the Internet. These reports
can depict the status of merchandising projects in real time.

Through
the Companys automated labor tracking system, its merchandising specialists
communicate work assignment completion information via the Internet, cellular telephone or
landlines, enabling the Company to report hours and other completion information for each
work assignment on a daily basis and providing the Company with daily, detailed tracking
of work completion. This technology allows the Company to schedule its merchandising
specialists more efficiently, quickly quantify the benefits of its services to clients,
rapidly respond to clients needs and rapidly implement programs. The Company
believes that its technological capabilities provide it with a competitive advantage in
the marketplace.

The
Company intends to continue to utilize computer (including hand-held computers), Internet,
cellular telephone and other technology to enhance its efficiency and ability to provide
real-time data to its clients, as well as, maximize the speed of communication, and
logistical deployment of its merchandising specialists. Industry sources indicate that
clients are increasingly relying on merchandising and marketing service providers to
supply rapid, value-added information regarding the results of merchandising and marketing
expenditures on sales and profits. The Company

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(together with certain of its
affiliates) has developed and owns proprietary Internet-based software technology that
allows it to utilize the Internet to communicate with its field management, schedule its
store-specific field operations more efficiently, receive information and incorporate the
data immediately, quantify the benefits of its services to clients faster, respond to
clients needs quickly and implement client programs rapidly. The Company has
successfully modified and is currently utilizing certain of its software applications in
connection with its international ventures. The Company believes that it can continue to
improve, modify and adapt its technology to support merchandising and other marketing
services for additional clients and projects in the United States and in foreign markets.
The Company also believes that its proprietary Internet-based software technology gives it
a competitive advantage in the marketplace.

Improve
Operating Efficiencies:

The
Company will continue to seek greater operating efficiencies. The Company believes that
its existing field force and technology infrastructure can support additional clients and
revenue in the Domestic Merchandising Services Division.

# DESCRIPTION OF SERVICES

The
Company currently provides a broad array of merchandising and marketing services to some
of the worlds leading companies, both domestically and internationally. The Company
believes its full-line capabilities provide fully integrated solutions that distinguish
the Company from its competitors. These capabilities include the ability to develop plans
at one centralized division headquarter location, effect chain wide execution, implement
rapid, coordinated responses to its clients needs and report on a real time Internet
enhanced basis. The Company also believes its international presence, industry-leading
technology, centralized decision-making ability, local follow-through, ability to recruit,
train and supervise merchandisers, ability to perform large-scale initiatives on short
notice, and strong retailer relationships provide the Company with a significant advantage
over local, regional or other competitors.

The
Companys operations are currently divided into two divisions: the Domestic
Merchandising Services Division and the International Merchandising Services Division. The
Domestic Merchandising Services Division provides merchandising and marketing services,
in-store event staffing, product sampling, RFID services, technology services and
marketing research to manufacturers and retailers in the United States. The various
services are primarily performed in mass merchandisers, electronics store chains, drug
store chains, convenience and grocery stores. The International Merchandising Services
Division established in July 2000, currently provides similar merchandising and marketing
services through subsidiaries in Japan, Canada, Turkey, South Africa, India, Romania,
China, Lithuania, Latvia, Australia and New Zealand. Today the Company operates in 12
countries whose population represents approximately 48% of the total world population.

Domestic Merchandising
Services Division

The
Company provides a broad array of merchandising and marketing services on a national,
regional, and local basis to manufacturers, distributors and retailers in the United
States. The Company provides its merchandising and marketing services primarily on behalf
of retailers and consumer product manufacturers and distributors at mass merchandiser,
electronic, drug and retail grocery chains. The Company currently provides three principal
types of merchandising and marketing services: syndicated services, dedicated services and
project services.

Syndicated
Services

Syndicated
services consist of regularly scheduled, routed merchandising and marketing services
provided at the retail store level for various manufacturers and distributors. These
services are performed for multiple manufacturers and distributors, including, in some
cases, manufacturers and distributors whose products are in the same product category.
Syndicated services may include activities such as:

| |  |  | Reordering
and replenishment of products
| | - |  | ----------------------------------------

| |  |  | Ensuring
that the clients' products authorized for distribution are in stock and on the shelf
| | - |  | ---------------------------------------------------------------------------------------------

| |  |  | Adding
new products that are approved for distribution but not yet present on the shelf
| | - |  | ---------------------------------------------------------------------------------------

| |  |  | Designing
and implementing store planogram schematics
| | - |  | -----------------------------------------------------

| |  |  | Setting
product category shelves in accordance with approved store schematics
| | - |  | -----------------------------------------------------------------------------

| |  |  | Ensuring
that product shelf tags are in place
| | - |  | ---------------------------------------------

| |  |  | Checking
for overall salability of the clients' products
| | - |  | --------------------------------------------------------

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| |  |  | Placing
new product and promotional items in prominent positions
| | - |  | ----------------------------------------------------------------

Dedicated
Services

Dedicated
services consist of merchandising and marketing services, generally as described above,
which are performed for a specific retailer or manufacturer by a dedicated organization,
including a management team working exclusively for that retailer or manufacturer. These
services include many of the above activities detailed in syndicated services, as well as,
new store set-ups, store remodels and fixture installations. These services are primarily
based on agreed-upon rates and fixed management fees.

Project
Services

Project
services consist primarily of specific in-store services initiated by retailers and
manufacturers, such as new store openings, new product launches, special seasonal or
promotional merchandising, focused product support, product recalls, in-store product
demonstrations and in-store product sampling. The Company also performs other project
services, such as new store sets and existing store resets, re-merchandising, remodels and
category implementations, under annual or stand-alone project contracts or agreements.

In-Store
Event Staffing Services

In
February of 2003, the Company began to provide in-store event staffing services such as
product demonstrations and samplings when it acquired the business and certain assets of a
regional company that specialized in providing product samplings, other in-store events
and other merchandising and marketing services in Texas and Oklahoma. In December of 2003,
the Company expanded this business through the acquisition of the business and certain
assets of another regional company that specialized in providing similar services in
Louisiana and neighboring areas. The Company continues to provide in-store product
samplings in those geographic areas, and is beginning to provide certain in-store product
demonstrations to national chains in other target markets nationwide. The Company has also
developed additional product offerings in an effort to expand this segment of its
business.

Other
Marketing Services

Other
marketing services performed by the Company include:

| | Test
Market Research - Testing promotion alternatives, new products and advertising
campaigns, as well as packaging, pricing, and location changes, at the store level.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Mystery
Shopping - Calling anonymously on retail outlets (e.g. stores, restaurants, banks) to
check on distribution or display of a brand and to evaluate products, service of
personnel, conditions of store, etc.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Data
Collection - Gathering sales and other information systematically for analysis and
interpretation.
| | -------------------------------------------------------------------------------------------------------

| | RFID
 Utilizing technology to track merchandiser performance, product inventory at store
level as well as other related merchandising and marketing applications.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

International
Merchandising Services Division

The
Company believes another current trend in business is globalization. As companies expand
into foreign markets they will need assistance in marketing their products. As evidenced
in the United States, retailer and manufacturer sponsored merchandising programs are both
expensive and inefficient. The Company also believes that the difficulties encountered by
these programs are only exacerbated by the logistics of operating in foreign markets. This
environment has created an opportunity for the Company to exploit its Internet-based
technology and business model that are successful in the United States.

In
July 2000, the Company established its International Merchandising Services Division to
cultivate foreign markets, modify the necessary systems and implement the Companys
business model worldwide by expanding its merchandising and marketing services business
off shore. The Company formed an International Merchandising Services Division task force
consisting of members of the Companys information technology, operations and finance
groups to evaluate and develop foreign markets. In 2001, the Company established its
Japanese subsidiary to provide the latest in-store merchandising and marketing services to
the Japanese market. Subsequently, the Company translated several of its

-7-

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proprietary Internet-based
logistical, communications and reporting software applications into Japanese and
successfully implemented its software and business systems in Japan. Since 2003, the
Company has expanded its international presence to Canada, Turkey, South Africa, India,
Romania, China, Lithuania, Latvia, Australia, and New Zealand. Today the Company operates
in 12 countries whose population represents approximately 48% of the total world
population.

Key
to the Companys international strategy is the translation of several of its
proprietary Internet-based logistical, communications and reporting software applications
into the native language of any market the Company enters. As a result of this strategy
for market penetration, the Company has developed translation software that can quickly
convert its proprietary software into various languages. Through its computer facilities
in Auburn Hills, Michigan, the Company provides worldwide access to its proprietary
logistical, communications and reporting software. In addition, the Company maintains
personnel in Greece and Australia to assist in its international efforts. The Company is
actively pursuing expansion into various other markets.

# SALES AND MARKETING

Domestic Merchandising
Services Division

The
Companys sales efforts within its Domestic Merchandising Services Division are
structured to develop new business in national, regional and local markets. The
Companys corporate business development team directs its efforts toward the senior
management of prospective clients. Sales strategies developed at the Companys
headquarters are communicated to the Companys sales force for execution. The sales
force, located nationwide, work from both Company and home offices. In addition, the
Companys corporate account executives play an important role in the Companys
new business development efforts within its existing manufacturer, distributor and
retailer client base.

As
part of the retailer consolidation, retailers are centralizing most administrative
functions, including operations, procurement and category management. In response to this
centralization and the growing importance of large retailers, many manufacturers have
reorganized their selling organizations around a retailer team concept that focuses on a
particular retailer. The Company has responded to this emerging trend and currently has
retailer teams in place at select retailers.

The
Companys business development process includes a due diligence period to determine
the objectives of the prospective client, the work required to satisfy those objectives
and the market value of such work to be performed. The Company employs a formal cost
development and proposal process that determines the cost of each element of work required
to achieve the prospective clients objectives. These costs, together with an
analysis of market rates, are used in the development of a formal quotation that is then
reviewed at various levels within the organization. The pricing of this internal proposal
must meet the Companys objectives for profitability, which are established as part
of the business planning process. After approval of this quotation, a detailed proposal is
presented to and approved by the prospective client.

International
Merchandising Services Division

The
Companys marketing efforts within its International Merchandising Services Division
are three fold. First, the Company endeavors to develop new markets through acquisitions.
The Companys international acquisition team, whose primary focus is to seek out and
develop acquisitions throughout the world, consists of personnel located in the United
States, Greece and Australia. Personnel from information technology, field operations,
client services and finance support the international acquisition team. Second, the
Company offers global merchandising solutions to clients that have worldwide distribution.
This effort is spearheaded out of the Companys headquarters in the United States.
Third, the Company develops local markets through various subsidiaries throughout the
world.

-8-

---

# CLIENTS

Domestic Merchandising
Services Division

In
its Domestic Merchandising Services Division, the Company currently represents numerous
manufacturers and /or retail clients in a wide range of retail chains and stores in the
United States, including:

| |  |  | Mass
Merchandisers
| | - |  | ------------------

| |  |  | Electronics
| | - |  | -----------

| |  |  | Drug
| | - |  | ----

| |  |  | Grocery
| | - |  | -------

| |  |  | Other
retail outlets (such as discount stores, home centers, etc.)
| | - |  | ------------------------------------------------------------------

The
Company also provides event staffing, RFID, research and other marketing services to
retailers and the consumer packaged goods industry.

One
client accounted for 11%, 15%, and 12% of the Companys domestic net revenues for the
years ended December 31, 2006, 2005, and 2004, respectively. This client accounted for
approximately 10% of the Companys accounts receivable at December 31, 2006 and 2005,
respectively.

In
addition, approximately 8%, 11%, and 14% of the Companys net revenues for the years
ended December 31, 2006, 2005, and 2004, respectively, resulted from merchandising
services performed for manufacturers and others in stores operated by a leading mass
merchandising chain. These clients accounted for approximately 4% and 8% of the
Companys accounts receivable at December 31, 2006 and 2005, respectively.

Also,
approximately 11% and 12% of the Companys net revenues for the years ended December
31, 2006 and 2005, respectively, resulted from merchandising services performed for
manufacturers and others in stores operated by a leading electronics chain. These clients
accounted for 7% and 8% of Companys accounts receivable at December 31, 2006 and
2005, respectively.

International
Merchandising Services Division

The
Company believes that potential clients for its International Merchandising Services
Division have similar profiles to its domestic clients. The Company is currently operating
in Japan, Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia,
Australia and New Zealand. The Company is actively pursuing expansion into Europe, Asia,
South America and other markets.

# COMPETITION

The
marketing services industry is highly competitive. The Companys competition in the
Domestic and International Merchandising Services Divisions arises from a number of large
enterprises, many of which are national or international in scope. The Company also
competes with a large number of relatively small enterprises with specific client, channel
or geographic coverage, as well as with the internal marketing and merchandising
operations of its clients and prospective clients. The Company believes that the principal
competitive factors within its industry include development and deployment of technology,
breadth and quality of client services, cost, and the ability to execute specific client
priorities rapidly and consistently over a wide geographic area. The Company believes that
its current structure favorably addresses these factors and establishes it as a leader in
the mass merchandiser, electronics and chain drug store channels of trade. The Company
also believes it has the ability to execute major national and international in-store
initiatives and develop and administer national and international retailer programs.
Finally, the Company believes that, through the use and continuing improvement of its
proprietary Internet software, other technological efficiencies and various cost controls,
the Company will remain competitive in its pricing and services.

-9-

---

# TRADEMARKS

The
Company has numerous registered trademarks. Although the Company believes its trademarks
may have value, the Company believes its services are sold primarily based on breadth and
quality of service, cost, and the ability to execute specific client priorities rapidly,
efficiently and consistently over a wide geographic area. See Industry
Overview and Competition.

# EMPLOYEES

Worldwide
the Company utilized a labor force of approximately 8,300 people. Today the Company
operates in 12 countries whose population represents approximately 48% of the total world
population.

As
of December 31, 2006, the Companys Domestic Merchandising Services Division utilized
a labor force of approximately 5,200 people. There were 156 full-time employees and 13
part-time employees of the Company. Of the 156 full-time Company employees, 146 employees
were engaged in office operations, 5 were engaged in field operations and 5 were engaged
in sales. The Companys Domestic Merchandising Services Division utilized the
services of its affiliate, SPAR Management Services, Inc. (SMSI), to schedule
and supervise its field force of merchandising specialists, which consists of independent
contractors furnished by SPAR Marketing Services, Inc. (SMS), another
affiliate of the Company (see Item 13  Certain Relationships and Related
Transactions, below) as well as the Companys field employees. SMS and SMSI furnished
approximately 5,000 merchandising specialists (all of whom are independent contractors of
SMS) and 51 field managers (all of whom were full-time employees of SMSI), respectively.

As
of December 31, 2006, the Companys International Merchandising Services
Divisions labor force consisted of approximately 3,100 people. There were 59
full-time and 8 part-time employees engaged in operations and 53 full-time employees
engaged in sales. The International Divisions field force consisted of 246 field
management employees and approximately 2,800 merchandising specialists of which
approximately 2,200 were Company employees and approximately 600 were independent
contractors.

The
Company currently utilizes certain of its Domestic Merchandising Services Divisions
employees, as well as, the services of certain employees of its affiliates, SMSI and SPAR
Infotech, Inc. (SIT), to support the International Merchandising Services
Division. However, dedicated employees will be added to that division as the need arises.
The Companys affiliate, SIT, also provides programming and other assistance to the
Companys various divisions (see Item 13  Certain Relationships and
Related Transactions, below).

The
Company, SMS, SMSI and SIT consider their relations with their respective employees and
independent contractors to be good.

# Item 1A. Risk Factors

There
are various risks associated with the Companys growth and operating strategy. The
risk factors presented below are the ones that the Company currently considers material
based on best estimates and includes forward-looking statements within the
meaning of the Securities Laws. Forward-looking statements involve known and unknown
risks, uncertainties and other factors that could cause the Companys actual results,
performance and achievements, whether expressed or implied by such forward-looking
statements, to not occur or be realized or to be less than expected. Additional risks may
be facing the Company, the industry, or the economy in general, whether domestically or
internationally. The Company may not be aware of some risks and may currently consider
other risks immaterial, but any risk may develop at any time into actual events that
adversely affect the Company. There also may be risks that a particular investor would
view differently from the Company, and current analysis may be wrong. The Company
expressly disclaims any obligation to update or revise any forward-looking statements or
any of these risks in whole or in part, whether as a result of new information, future
events or otherwise, except as required by law.

You
should carefully consider each of the risks described below before deciding to invest in
the Companys common stock. If any of the following risks develops into actual
events, or any other risks arise and develop into actual events, the Companys
business, financial condition or results of operations could be negatively affected, the
market price of the Companys common stock could decline and you may lose all or part
of your investment.

-10-

---

# Dependency on Largest
Client and Large Retail Chains

As
discussed above in Clients, the Company does a significant amount of business with one
client and performs a significant amount of services in a leading mass merchandising chain
and a leading electronics chain. The loss of this client, the loss of the ability to
provide merchandising and marketing services in those chains, or the failure to attract
new large clients could significantly decrease the Companys revenues and such
decreased revenues could have a material adverse effect on the Companys business,
results of operations and financial condition.

# Dependence on Trend
Toward Outsourcing

The
business and growth of the Company depends in large part on the continued trend toward
outsourcing of merchandising and marketing services, which the Company believes has
resulted from the consolidation of retailers and manufacturers, as well as the desire to
seek outsourcing specialists and reduce fixed operation expenses. There can be no
assurance that this trend in outsourcing will continue, as companies may elect to perform
such services internally. A significant change in the direction of this trend generally,
or a trend in the retail, manufacturing or business services industry not to use, or to
reduce the use of, outsourced marketing services such as those provided by the Company,
could significantly decrease the Companys revenues and such decreased revenues could
have a material adverse effect on the Companys business, results of operations and
financial condition or the desired increases in the Companys business, revenues and
profits.

# Failure to Successfully
Compete

The
merchandising and marketing services industry is highly competitive and the Company has
competitors that are larger (or part of larger holding companies) and may be better
financed. In addition, the Company competes with: (i) a large number of relatively small
enterprises with specific client, channel or geographic coverage; (ii) the internal
merchandising and marketing operations of its clients and prospective clients; (iii)
independent brokers; and (iv) smaller regional providers. Remaining competitive in the
highly competitive merchandising and marketing services industry requires that the Company
monitor and respond to trends in all industry sectors. There can be no assurance that the
Company will be able to anticipate and respond successfully to such trends in a timely
manner. If the Company is unable to successfully compete, it could have a material adverse
effect on the Companys business, results of operations and financial condition or
the desired increases in the Companys business, revenues and profits.

If
certain competitors were to combine into integrated merchandising and marketing services
companies, or additional merchandising and marketing service companies were to enter into
this market, or existing participants in this industry were to become more competitive, it
could have a material adverse effect on the Companys business, results of operations
and financial condition or the desired increases in the Companys business, revenues
and profits.

# Risks of Continuing
Losses and Financial Covenant Violations

The
Company has not been profitable in three of the last five years (see Item 6. Selected
Financial Data). In addition, during this period the Company has violated the covenants of
its Credit Facility with Webster Business Credit Corporation (see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations, Liquidity and Capital Resources).

There
can be no assurances that in the future the Company: will be profitable, will not violate
covenants of its current or future Credit Facilities, its lenders would waive any
violations of such covenants, the Company will continue to have adequate lines of credit,
or will continue to have sufficient availability under its lines of credit. Accordingly,
continued losses or marginal profitability by the Company, as well as any failure to
maintain sufficient availability or lines of credit from the Companys lenders, could
have a material adverse effect on the Companys business, results of operations and
financial condition.

# Variability of Operating
Results and Uncertainty in Client Revenue

The
Company has experienced and, in the future, may experience fluctuations in quarterly
operating results. Factors that may cause the Companys quarterly operating results
to vary from time to time and may result in reduced revenue and profits include: (i) the
number of active client projects; (ii) seasonality of client products; (iii) client
delays, changes and cancellations in projects; (iv) the timing requirements of client
projects; (v) the completion of major client projects; (vi) the timing of new engagements;
(vii) the timing of personnel cost increases; and (viii) the loss of major clients. In
particular, the timing of revenues is difficult to forecast for the home entertainment
industry because timing is

-11-

---

dependent on the commercial success
of particular product releases. In the event that a particular release is not widely
accepted by the public, the Companys revenue could be significantly reduced. In
addition, the Company is subject to revenue or profit uncertainties resulting from factors
such as unprofitable client work and the failure of clients to pay. The Company attempts
to mitigate these risks by dealing primarily with large credit-worthy clients, by entering
into written or oral agreements with its clients and by using project budgeting systems.
These revenue fluctuations could materially and adversely affect the Companys
business, results of operations and financial condition or the desired increases in the
Companys business, revenues and profits.

Failure to Develop New
Products

A
key element of the Companys growth strategy is the development and sale of new
products. While several new products are under current development, there can be no
assurance that the Company will be able to successfully develop and market new products.
The Companys inability or failure to devise useful merchandising or marketing
products or to complete the development or implementation of a particular product for use
on a large scale, or the failure of such products to achieve market acceptance, could
adversely affect the Companys ability to achieve a significant part of its growth
strategy and the absence of such growth could have a material adverse effect on the
Companys business, results of operations and financial condition or the desired
increases in the Companys business, revenues and profits.

Inability to Identify,
Acquire and Successfully Integrate Acquisitions

Another
key component of the Companys growth strategy is the acquisition of businesses
across the United States and worldwide that offer similar merchandising or marketing
services. The successful implementation of this strategy depends upon the Companys
ability to identify suitable acquisition candidates, acquire such businesses on acceptable
terms, finance the acquisition and integrate their operations successfully with those of
the Company. There can be no assurance that such candidates will be available or, if such
candidates are available, that the price will be attractive or that the Company will be
able to identify, acquire, finance or integrate such businesses successfully. In addition,
in pursuing such acquisition opportunities, the Company may compete with other entities
with similar growth strategies, these competitors may be larger and have greater financial
and other resources than the Company. Competition for these acquisition targets could also
result in increased prices of acquisition targets and/or a diminished pool of companies
available for acquisition.

The
successful integration of these acquisitions also may involve a number of additional
risks, including: (i) the inability to retain the clients of the acquired business; (ii)
the lingering effects of poor client relations or service performance by the acquired
business, which also may taint the Companys existing businesses; (iii) the inability
to retain the desirable management, key personnel and other employees of the acquired
business; (iv) the inability to fully realize the desired efficiencies and economies of
scale; (v) the inability to establish, implement or police the Companys existing
standards, controls, procedures and policies on the acquired business; (vi) diversion of
management attention; and (vii) exposure to client, employee and other legal claims for
activities of the acquired business prior to acquisition. In addition, any acquired
business could perform significantly worse than expected.

The
inability to identify, acquire, finance and successfully integrate such merchandising or
marketing services business could have a material adverse effect on the Companys
growth strategy and could limit the Companys ability to significantly increase its
revenues and profits.

Uncertainty of Financing
for, and Dilution Resulting from, Future Acquisitions

The
timing, size and success of acquisition efforts and any associated capital commitments
cannot be readily predicted. Future acquisitions may be financed by issuing shares of the
Companys Common Stock, cash, or a combination of Common Stock and cash. If the
Companys Common Stock does not maintain a sufficient market value, or if potential
acquisition candidates are otherwise unwilling to accept the Companys Common Stock
as part of the consideration for the sale of their businesses, the Company may be required
to obtain additional capital through debt or equity financings. To the extent the
Companys Common Stock is used for all or a portion of the consideration to be paid
for future acquisitions, dilution may be experienced by existing stockholders. In
addition, there can be no assurance that the Company will be able to obtain the additional
financing it may need for its acquisitions on terms that the Company deems acceptable.
Failure to obtain such capital would materially adversely affect the Companys
ability to execute its growth strategy.

-12-

---

Reliance on the Internet
and Third Party Vendors

The
Company relies on the Internet for the scheduling, coordination and reporting of its
merchandising and marketing services. The Internet has experienced, and is expected to
continue to experience, significant growth in the numbers of users and amount of traffic
as well as increased attacks by hackers and other saboteurs. To the extent that the
Internet continues to experience increased numbers of users, frequency of use or increased
bandwidth requirements of users, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on the Internet by
this continued growth or that the performance or reliability of the Internet will not be
adversely affected. Furthermore, the Internet has experienced a variety of outages and
other delays as a result of accidental and intentional damage to portions of its
infrastructure, and could face such outages and delays in the future of similar or greater
effect. The Company relies on third-party vendors to provide its Internet access and other
services used in its business, and the Company has no control over such third-party
providers. Any protracted disruption or material slowdown in Internet or other services
could increase the Companys costs of operation and reduce efficiency and
performance, which could have a material adverse effect on the Companys business,
results of operations and financial condition or the desired increases in the
Companys business, revenues and profits.

Economic and Retail
Uncertainty

The
markets in which the Company operates are cyclical and subject to the effects of economic
downturns. The current political, social and economic conditions, including the impact of
terrorism on consumer and business behavior, make it difficult for the Company, its
vendors and its clients to accurately forecast and plan future business activities.
Substantially all of the Companys key clients are either retailers or those seeking
to do product merchandising at retailers. Should the retail industry experience a
significant economic downturn, the resultant reduction in product sales could
significantly decrease the Companys revenues. The Company also has risks associated
with its clients changing their business plans and/or reducing their marketing budgets in
response to economic conditions, which could also significantly decrease the
Companys revenues. Such revenue decreases could have a material adverse effect on
the Companys business, results of operations and financial condition or the desired
increases in the Companys business, revenues and profits.

Significant Stockholders:
Voting Control and Market Illiquidity

Mr.
Robert G. Brown, founder, director, Chairman, President and Chief Executive
          Officer of the Company, beneficially owns approximately 46% of the
          Companys outstanding Common Stock, and Mr. William H. Bartels, founder,
          director,and Vice Chairman of the Company beneficially owns
          approximately 28% of the Companys outstanding Common Stock. These
          stockholders have, should they choose to act together, and under certain
          circumstances Mr. Brown acting alone has, the ability to control all matters
          requiring stockholder approval, including the election of directors and the
          approval of mergers and other business combination transactions.

In
addition, although the Company Common Stock is quoted on the Nasdaq Capital Market, the
trading volume in such stock may be limited and an investment in the Companys
securities may be illiquid because the founders own a significant amount of the
Companys stock.

Dependence Upon and
Potential Conflicts in Services Provided by Affiliates

The
success of the Companys domestic business is dependent upon the successful execution
of its field services by SPAR Marketing Services, Inc. (SMS), and SPAR
Management Services, Inc. (SMSI), as well as the programming services provided
by SPAR Infotech, Inc. (SIT), each of which is an affiliate, but not a
subsidiary, of the Company, and none of which is consolidated in the Companys
financial statements. SMS provides substantially all of the merchandising specialists used
by the Company in conducting its domestic business (83% of domestic field expense in
2006), and SMSI provides substantially all of the domestic field management services (88%
of domestic field management in 2006) used by the Company in conducting its business.
These services provided to the Company by SMS and SMSI are on a cost-plus basis pursuant
to contracts that are cancelable on 60 days notice prior to December 31 of each year,
commencing in 1997, or with 180 days notice at any other time. SIT provides substantially
all of the Internet programming services and other computer programming needs used by the
Company in conducting its business (see Item 13  Certain Relationships and
Related Transactions, below), which are provided to the Company by SIT on an hourly charge
basis pursuant to a contract that is cancelable on 30 days notice. The Company has
determined that the services provided by SMS, SMSI and SIT are at rates favorable to the
Company.

-13-

---

SMS,
SMSI and SIT (collectively, the SPAR Affiliates) are owned solely by Mr.
Robert G. Brown, founder, director, Chairman, President and Chief Executive Officer of the
Company, and Mr. William H. Bartels, founder, director, and Vice Chairman of the
Company, each of whom are also directors and executive officers of each of the SPAR
Affiliates (see Item 13  Certain Relationships and Related Transactions,
below). In the event of any dispute in the business relationships between the Company and
one or more of the SPAR Affiliates, it is possible that Messrs. Brown and Bartels may have
one or more conflicts of interest with respect to those relationships and could cause one
or more of the SPAR Affiliates to renegotiate or cancel their contracts with the Company
or otherwise act in a way that is not in the Companys best interests.

While
the Companys relationships with SMS, SMSI and SIT are excellent, there can be no
assurance that the Company could (if necessary under the circumstances) replace the field
merchandising specialists and management currently provided by SMS and SMSI, respectively,
or replace the Internet and other computer programming services provided by SIT, in
sufficient time to perform its client obligations or at such favorable rates in the event
the SPAR Affiliates no longer performed those services. Any cancellation, other
nonperformance or material pricing increase under those affiliate contracts could have a
material adverse effect on the Companys business, results of operations and
financial condition or the desired increases in the Companys business, revenues and
profits.

The Company has not paid
and does not intend to pay cash Dividends

The
Company has not paid dividends in the past, intends to retain any earnings or other cash
resources to finance the expansion of its business and for general corporate purposes, and
does not intend to pay dividends in the future. In addition, the Companys Credit
Facility with Webster Business Credit Corporation (Webster) (see Note 5 to the
Consolidated Financial Statements  Lines of Credit) restricts the payment of
dividends without Websters prior consent.

Risks Associated with
International Subsidiaries

While
the Company endeavors to limit its exposure for claims and losses in any international
subsidiary through contractual provisions, insurance and use of single purpose entities
for such ventures, there can be no assurance that the Company will not be held liable for
the claims against and losses of a particular international subsidiary under applicable
local law or local interpretation of any subsidiary agreements or insurance provisions. If
any such claims and losses should occur, be material in amount and be successfully
asserted against the Company, such claims and losses could have a material adverse effect
on the Companys business, results of operations and financial condition or the
desired increases in the Companys business, revenues and profits.

Risks Associated with
Foreign Currency

The
Company also has foreign currency exposure associated with its international subsidiaries.
In 2006, these exposures are primarily concentrated in the Canadian Dollar, Japanese Yen,
South African Rand and Australian Dollar.

Risks Associated with
International Business

The
Companys expansion strategy includes expansion into various countries around the
world. While the Company endeavors to limit its exposure by entering only countries where
the political, social and economic environments are conducive to doing business, there can
be no assurances that the respective business environments will remain favorable. In the
future, the Companys international operations and sales may be affected by the
following risks, which may adversely affect United States companies doing business in
foreign countries:

| |  |  | Political
and economic risks, including political instability;
| | - |  | --------------------------------------------------------------

| |  |  | Various
forms of protectionist trade legislation that currently exist, or have been proposed;
| | - |  | ---------------------------------------------------------------------------------------------

| |  |  | Expenses
associated with customizing products;
| | - |  | ----------------------------------------------

| |  |  | Local
laws and business practices that favor local competition;
| | - |  | ---------------------------------------------------------------

| |  |  | Dependence
on local vendors;
| | - |  | ----------------------------

| |  |  | Multiple,
conflicting and changing governmental laws and regulations;
| | - |  | ---------------------------------------------------------------------

| |  |  | Potentially
adverse tax consequences;
| | - |  | -------------------------------------

| |  |  | Local
accounting principles, practices and procedures and limited familiarity with US GAAP;
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | Foreign
currency exchange rate fluctuations;
| | - |  | --------------------------------------------

| |  |  | Communication
barriers, including those arising from language, culture, custom and times zones; and
| | - |  | ---------------------------------------------------------------------------------------------------

-14-

---

| |  |  | Supervisory
challenges arising from distance, physical absences and such communication barriers.
| | - |  | ------------------------------------------------------------------------------------------------

# Item 1B. Unresolved
Staff Comments

Not
applicable.

# Item 2. Properties.

The
Company does not own any real property. The Company leases certain office space and
storage facilities for its corporate headquarters, divisions and subsidiaries under
various operating leases, which expire at various dates during thenext five years.
These leases generally require the Company to pay minimum rents, subject to periodic
adjustments, plus other charges, including utilities, real estate taxes and common area
maintenance. The Company believes that its relationships with its landlords generally to
be good. However, as these leased facilities generally are used for offices and storage,
the Company believes that other leased spaces could be readily found and utilized on
similar terms should the need arise.

The
Company maintains its corporate headquarters in approximately 6,400 square feet of leased
office space located in Tarrytown, New York, under an operating lease with a term expiring
in May 31, 2009.

The
Company maintains its data processing center and warehouse at its regional office in
Auburn Hills, Michigan, under an operating lease expiring in December 31, 2011.

The
Company believes that its existing facilities are adequate for its current business.
However, new facilities may be added should the need arise in the future.

-15-

---

The
following is a list of the locations where the Company maintains leased facilities for the
listed offices and countries:

|Location         |  | Office Use                    |  | Approximate Square Footage | 
|---------------- |  | ----------------------------- |  | -------------------------- | 
|Domestic:        |  |                               |  |                            | 
|                 | 
|Tarrytown, NY    |  | Corporate Headquarters        |  | 6,400                      | 
|Auburn Hills, MI |  | Regional Office and Warehouse |  | 25,700                     | 
|                 | 
|International:   |  |                               |  |                            | 
|                 | 
|Canada           |  |                               |  |                            | 
|Toronto, Ontario |  | Headquarters                  |  | 4,100                      | 
|                 | 
|Japan            |  |                               |  |                            | 
|Osaka            |  | Headquarters                  |  | 1,700                      | 
|Tokyo            |  | Regional Office               |  | 1,500                      | 
|Nagoya           |  | Regional Office               |  | 700                        | 
|                 | 
|Turkey           |  |                               |  |                            | 
|Istanbul         |  | Headquarters                  |  | 3,000                      | 
|                 | 
|South Africa     |  |                               |  |                            | 
|Durban           |  | Headquarters                  |  | 2,800                      | 
|Port Elizabeth   |  | Regional Office               |  | 3,000                      | 
|Epping           |  | Regional Office               |  | 650                        | 
|                 | 
|India            |  |                               |  |                            | 
|New Delhi        |  | Headquarters                  |  | 1,280                      | 
|Mumbai           |  | Regional Office               |  | 500                        | 
|                 | 
|Romania          |  |                               |  |                            | 
|Bucharest        |  | Headquarters                  |  | 770                        | 
|                 | 
|China            |  |                               |  |                            | 
|Shanghai         |  | Headquarters                  |  | 400                        | 
|Beijing          |  | Regional Office               |  | 250                        | 
|Guangzhou        |  | Regional Office               |  | 400                        | 
|Shenzhen         |  | Regional Office               |  | 300                        | 
|                 | 
|Lithuania        |  |                               |  |                            | 
|Siauliai         |  | Headquarters                  |  | 1,150                      | 
|                 | 
|Australia        |  |                               |  |                            | 
|Melbourne        |  | Headquarters                  |  | 3,380                      | 

# Item 3. Legal Proceedings

Safeway
Inc. (Safeway) filed a Complaint against PIA Merchandising Co., Inc.
(PIA Co.), a wholly owned subsidiary of SPAR Group, Inc. (SGRP),
Pivotal Sales Company (Pivotal), a wholly owned subsidiary of PIA Co., and
SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001. Safeway claims,
as subsequently amended, alleged causes of action for breach of contract and breach of
implied contract. PIA Co. and Pivotal filed cross-claims against Safeway on or about March
11, 2002, and amended them on or about October 15, 2002, alleging causes of action by PIA
Co. and Pivotal against Safeway for breach of contract, interference with economic
relationship, unfair trade practices and unjust enrichment. Trial commenced in March 2006.

-16-

---

On
May 26, 2006, the jury in this case returned a verdict resulting in a net award of
$1,307,700 to Pivotal, a SGRP subsidiary. This net award is to be paid by Safeway and
resulted from separate jury findings that awarded damages to those SGRP subsidiaries on
certain claims and damages to Safeway on other claims. In particular, the jury awarded
damages to Pivotal of $5,760,879 for Safeways interference with Pivotals
contractual relationships with third party manufacturers and also awarded $782,400 to
Pivotal and PIA for Safeways breach of contract with those SGRP subsidiaries. The
jury awarded damages to Safeway of $5,235,579 for breach of contract by SGRP and those
SGRP subsidiaries. Judgment was entered in favor of Pivotal in September 2006 for
$1,307,700. Both parties have filed appeals. Pivotal/SGRP is seeking to have
Safeways judgment overturned. Safeway has asked for a new trial on the judgment
found against them. The appellate process is expected to take fourteen to twenty four
months to complete. The Company has recorded both the $1.3 million settlement award and
approximately $1.2 million of related legal expenses as a net favorable impact to other
income of approximately $100,000 for the year ended December 31, 2006.

In
addition to the above, the Company is a party to various other legal actions and
administrative proceedings arising in the normal course of business. In the opinion of
Companys management, disposition of these other matters are not anticipated to have
a material adverse effect on the financial position, results of operations or cash flows
of the Company.

# Item 4.  Submission of
Matters to a Vote of Security Holders.

None.

-17-

---

# PART II

# Item 5. Market for
Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
EquitySecurities.

# Price Range of Common
Stock

The
following table sets forth the reported high and low sales prices of the Common Stock for
the quarters indicated as reported on the Nasdaq Capital Market.

|               | 2006 |  | 2005 |     
|-------------- | ---- |  | ---- | ----
|
|First Quarter  |      |  | $    | 1.36
|Second Quarter |      |  |      | 1.40
|Third Quarter  |      |  |      | 1.13
|Fourth Quarter |      |  |      | 1.35

As
of December 31, 2006, there were approximately 1,300 beneficial shareholders of the
Companys Common Stock.

# Dividends

The
Company has never declared or paid any cash dividends on its capital stock and does not
anticipate paying cash dividends on its Common Stock in the foreseeable future. The
Company currently intends to retain future earnings to finance its operations and fund the
growth of the business. Any payment of future dividends will be at the discretion of the
Board of Directors of the Company and will depend upon, among other things, the
Companys earnings, financial condition, capital requirements, level of indebtedness,
contractual restrictions in respect to the payment of dividends and other factors that the
Companys Board of Directors deems relevant.

The
Companys Credit Facility with Webster Business Credit Corporation (see Note 5 to the
Consolidated Financial Statements  Lines of Credit) restricts the payment of
dividends without Websters prior consent.

# Issuer Purchases of
Equity Securities

During
the fiscal year ended December 31, 2006, SGRP did not repurchase any of its equity
securities.

# Corporation Performance

The
following graph shows a comparison of cumulative total returns for SGRPs Common
Stock, the Nasdaq Stock Market (U.S. Companies) Index and the Nasdaq Stocks (SIC 7380-7389
U.S. Companies) Miscellaneous Business Services Index, Russell 2000 and S&P
Advertising for the period during which SGRPs Common Stock has been registered under
Section 12 of the Securities Exchange Act of 1934, as amended (the Exchange
Act). The graph assumes that the value of an investment in Common Stock and in each
such index was $100 on December 31, 2001, and that all dividends have been reinvested.

-18-

---

The
comparison in the graph below is based on historical data and is not intended to forecast
the possible future performance of SGRPs Common Stock.





-19-

---

# Item 6. Selected
Financial Data.

The
following selected condensed consolidated financial data sets forth, for the periods and
the dates indicated, summary financial data of the Company and its subsidiaries. The
selected financial data have been derived from the Companys consolidated financial
statements.

# SPAR Group, Inc.Condensed Consolidated Statements of Operations

(In thousands, except
per share data)

|                                                  | Year Ended December 31,
|------------------------------------------------- | -----------------------
|
|STATEMENT OF OPERATIONS DATA:                     |                        
|                                                  |                        
|Net revenues                                      |                        
|Cost of revenues                                  |                        
|                                                  |                        
|Gross profit                                      |                        
|Selling, general and administrative expenses      |                        
|Impairment charges                                |                        
|Depreciation and amortization                     |                        
|                                                  |                        
|Operating (loss) income                           |                        
|Other (income) expense                            |                        
|Interest expense                                  |                        
|                                                  |                        
|(Loss)  income before provision for income taxes  |                        
|and minority interest                             |                        
|Provision for income taxes                        |                        
|                                                  |                        
|(Loss)  income before minority interest           |                        
|Minority interest                                 |                        
|                                                  |                        
|Net (loss) income                                 |                        
|                                                  |                        
|                                                  |                        
|Basic/diluted net (loss) income per common share: |                        
|Basic/diluted net (loss) income                   |                        
|                                                  |                        
|Weighted average shares outstanding               |                        
|- basic                                           |                        
|- diluted                                         |                        
|                                                  | December 31,           
|
|
|BALANCE SHEET DATA:                               |                        
|                                                  |                        
|Working capital                                   |                        
|                                                  |                        
|Total assets                                      |                        
|                                                  |                        
|Lines of credit, current                          |                        
|                                                  |                        
|Lines of credit, long term(1)                     |                        
|                                                  |                        
|Other long-term debt                              |                        
|                                                  |                        
|Total stockholders' equity                        |                        

|(1) | Prior
to 2003, the Companys lines of credit were recorded as long-term.
|--- | ------------------------------------------------------------------------

-20-

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# Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of Operations.

Statements
contained in this Managements Discussion and Analysis of Financial Condition
and Results of Operations include forward-looking statements within the
meaning of the Securities Laws and are based on the Companys best estimates and
determinations. Forward-looking statements involve known and unknown risks, uncertainties
and other factors that could cause the Companys actual results, performance and
achievements, whether expressed or implied by such forward-looking statements, to not
occur or be realized or to be less than its plans, goals, intentions and/or expectations.
Such forward-looking statements generally are based upon the Companys best estimates
of future results, performance or achievement, current conditions and the most recent
results of operations. Forward-looking statements may be identified by the use of
forward-looking terminology such as may, will, expect,
intend, believe, estimate, anticipate,
continue or similar terms, variations of those terms or the negative of those
terms. You should carefully consider such risks, uncertainties and other information,
disclosures and discussions containing cautionary statements or identifying important
factors that could cause actual results to differ materially from those provided in the
forward-looking statements.

You
should carefully review this management discussion and analysis together with the risk
factors described above (see Item 1A  Risk Factors) and the other cautionary
statements contained in this Annual Report on Form 10-K. All forward-looking statements
attributable to the Company or persons acting on its behalf are expressly qualified by
such risk factors and other cautionary statements. Although the Company believes that its
plans, goals, intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, it cannot assure that such plans, goals,
intentions or expectations will be achieved in whole or in part. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by law.

# Overview

The
Companys operations are currently divided into two divisions: the Domestic
Merchandising Services Division and the International Merchandising Services Division. The
Domestic Merchandising Services Division provides merchandising and marketing services,
in-store event staffing, product sampling, Radio Frequency Identification
(RFID) services, technology services and marketing research to manufacturers
and retailers in the United States. The various services are primarily performed in mass
merchandisers, electronics store chains, drug store chains and convenience and grocery
stores. The International Merchandising Services Division was established in July 2000 and
currently provides similar merchandising and marketing services through subsidiaries in
Japan, Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Australia
and New Zealand. The Company continues to focus on expanding its merchandising and
marketing services business throughout the world.

In
December 2001, the Company decided to divest its Incentive Marketing Division and recorded
an estimated loss on disposal of SPAR Performance Group, Inc., now called STIMULYS, Inc.
(SPGI), of approximately $4.3 million, net of taxes, including a $1.0 million
reserve recorded for the anticipated cost to divest SPGI and any anticipated losses
through the divestiture date.

On
June 30, 2002, SPAR Incentive Marketing, Inc. (SIM), a wholly owned subsidiary
of the Company, entered into a Stock Purchase and Sale Agreement with Performance
Holdings, Inc. (PHI), a Delaware corporation headquartered in Carrollton,
Texas. Pursuant to that agreement, SIM sold all of the stock of SPGI, its subsidiary, to
PHI for $6.0 million. As a condition of the sale, PHI issued and contributed 1,000,000
shares of its common stock to Performance Holdings, Inc. Employee Stock Ownership Plan,
which became the only shareholder of PHI.

# Critical Accounting
Policies & Estimates

The
Companys critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the Note 2 to the Consolidated Financial Statements.
These policies have been consistently applied in all material respects and address such
matters as revenue recognition, depreciation methods, asset impairment recognition,
consolidation of subsidiaries and other companies, and discontinued business accounting.
While the estimates and judgments associated with the application of these policies may be
affected by different assumptions or conditions, the Company believes the estimates and
judgments associated with the reported amounts are appropriate in the circumstances. Four
critical accounting policies are consolidation of subsidiaries, revenue recognition,
allowance for doubtful accounts and sales allowances, and internal use software
development costs.

-21-

---

# Consolidation of Subsidiaries

The Company consolidates its 100%
owned subsidiaries. The Company also consolidates all of its 51% owned subsidiaries and
all of its 50% owned subsidiaries, as the Company believes it is the primary beneficiary
in accordance with Financial Accounting Standards Board Interpretation Number 46, as
revised December 2003, Consolidation of Variable Interest Entities (FIN
46(R)).

# Revenue Recognition

The Companys services are
provided to its clients under contracts or agreements. The Company bills its clients based
upon service fee and per unit fee billing arrangements. Revenues under service fee billing
arrangements are recognized when the service is performed. The Companys per unit fee
arrangements provide for fees to be earned based on the retail sales of a clients
products to consumers. The Company recognizes per unit fees in the period such amounts
become determinable and are reported to the Company.

# Allowance for Doubtful
Accounts and Sales Allowances

The Company continually monitors the
validity of its accounts receivable based upon current client credit information and
financial condition. Balances that are deemed to be uncollectible after the Company has
attempted reasonable collection efforts are written off through a charge to the bad debt
allowance and a credit to accounts receivable. Accounts receivable balances, net of any
applicable reserves or allowances, are stated at the amount that management expects to
collect from the outstanding balances. The Company provides for probable uncollectible
amounts through a charge to earnings and a credit to bad debt allowance based in part on
managements assessment of the current status of individual accounts. Based on
managements assessment, the Company established an allowance for doubtful accounts
of $400,000, $616,000 and $761,000 at December 31, 2006, 2005 and 2004, respectively. Bad
debt and sales allowance expenses were $84,000, $38,000, and $366,000 in 2006, 2005, and
2004, respectively.

# Internal Use Software
Development Costs

In accordance with SOP 98-1,
Accounting for the Costs of Computer
Software Developed or Obtained for Internal
Use, the Company capitalizes certain costs associated with its internally developed
software. Specifically, the Company capitalizes the costs of materials and services
incurred in developing or obtaining internal use software. These costs include (but are
not limited to) the cost to purchase software, the cost to write program code, payroll and
related benefits and travel expenses for those employees who are directly involved with
and who devote time to the Companys software development projects. Capitalized
software development costs are amortized over three years.

The Company capitalized $280,000,
$346,000, and $559,000 of costs related to software developed for internal use in 2006,
2005, and 2004, respectively, and amortized capitalized software of approximately
$371,000, $516,000 and $638,000 for the years ended December 31, 2006, 2005, and 2004,
respectively.

In 2004, the Company recorded an
impairment charge against capitalized software costs due to the loss of certain clients
during the year totaling approximately $442,000 (see Note 3  Impairment Charges).

-22-

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# Results of operations

The
following table sets forth selected financial data and such data as a percentage of net
revenues for the years indicated (in millions).

|                                              | Year Ended December 31,
|--------------------------------------------- | -----------------------
|                                              | 2006                   
|Net revenues                                  |                        
|Cost of revenues                              |                        
|Selling, general & administrative expenses    |                        
|Impairment charges                            |                        
|Depreciation  & amortization                  |                        
|Other (expense) income                        |                        
|                                              |                        
|(Loss) income before income tax provision and |                        
|minority interest                             |                        
|Provision for income taxes                    |                        
|                                              |                        
|(Loss) income before minority interest        |                        
|Minority interest                             |                        
|                                              |                        
|Net (loss) income                             |                        
|                                              |                        

-23-

---

# Results from continuing
operations for the twelve months ended December 31, 2006, compared to twelve months ended >December 31, 2005

# Net Revenues

Net
revenues for the twelve months ended December 31, 2006, were $57.3 million, compared to
$51.6 million for the twelve months ended December 31, 2005, an increase of $5.7 million.
International net revenues totaled $23.2 million for 2006 increasing 56.1% from $14.9
million in 2005. The increase in international net revenues of $8.3 million was primarily
due to additional revenues from international subsidiaries that began operations in 2006
totaling $4.5 million (primarily Australia $3.9 million, Lithuania $442,000 and China
$112,000), increased net revenues from subsidiaries with operations continuing from 2005
totaling $3.5 million (primarily Japan $2.3 million, India $0.8 million, Turkey $0.2
million, Romania $0.2 million and Canada $0.1 million) and the inclusion of the Japanese
subsidiarys calendar year fourth quarter 2005 net revenues totaling $1.3 million as
a result of the change in the year end reporting for Japan, offset by a decrease in South
Africa net revenues totaling $1.0 million, due to the loss of a major client in 2005.
Domestic net revenues totaled $34.1 million in 2006 compared to $36.7 million in 2005. The
decrease in domestic net revenues of $2.6 million is primarily the result of lower project
work and per unit fee billings, partially offset by revenue from new clients in 2006.
Included in domestic revenue is $770,000 from the termination of a customer service
agreement in 2006.

# Cost of Revenues

Cost
of revenues consists of in-store labor and field management wages, related benefits,
travel and other direct labor-related expenses. Cost of revenues was 65.4% of net revenues
for the twelve months ended December 31, 2006, compared to 61.9% for the twelve months
ended December 31, 2005. Domestic cost of revenues was 66.2% and 62.9% of net revenues for
the twelve months ended December 31, 2006, and 2005, respectively. The increase was
primarily attributable to the change in the mix of business, with higher cost project
revenues accounting for a greater portion of revenues in the twelve months ended December
31, 2006, as well as a decrease in per unit fee revenues that did not have a proportionate
decrease in cost compared to the prior year. As discussed above under Critical Accounting
Policies/Revenue Recognition, the Companys revenue consists of per unit fee revenue,
which is earned when the clients product is sold to the consumer at retail, not when
the services are performed. Retail sales of client products are influenced by numerous
factors including consumer tastes and preferences, and not solely by the merchandising and
marketing service performed. In any given period, the cost of per unit fee revenues may
not be directly proportionate to the per unit fee revenue. Internationally, the cost of
revenues as a percentage of net revenues was 64.1% and 59.6% for the twelve months ended
December 31, 2006, and 2005, respectively. The international cost of revenues percentage
increase was primarily attributable to an increase in competitive pricing pressures in
Canada and higher cost revenues in Japan accounting for a greater portion of revenue in
the twelve months ended December 31, 2006, compared to the prior year.

Approximately
84% of the Companys domestic cost of revenue in both the twelve months ended
December 31, 2006 and 2005, resulted from in-store independent contractor and field
management services purchased from the Companys affiliates, SPAR Marketing Services,
Inc. (SMS), and SPAR Management Services, Inc. (SMSI),
respectively. (See Item 13  Certain Relationships and Related Transactions, below)

# Operating Expenses

Operating
expenses consist of selling, general and administrative expenses, depreciation and
amortization. Selling, general and administrative expenses include corporate overhead,
project management, information technology, executive compensation, human resource, legal
and accounting expenses. The following table sets forth the operating expenses for the
years indicated (in millions):

|                                   | Year Ended December 31,
|---------------------------------- | -----------------------
|                                   | 2006                   
|Selling, general  & administrative |                        
|Depreciation and amortization      |                        
|                                   |                        
|                                   |                        
|Total operating expenses           |                        
|                                   |                        

-24-

---

Selling,
general and administrative expenses increased by approximately $3.1 million, or 18.8%, for
the twelve months ended December 31, 2006, to $19.8 million compared to $16.7 million for
the twelve months ended December 31, 2005. The $3.1 million increase in selling, general
and administrative expenses consisted of an increase in international selling, general and
administrative expenses totaling $3.5 million offset by a decreases in domestic selling,
general and administrative expenses of $0.4 million. International selling, general and
administrative expenses for the twelve months ended December 31, 2006, were $8.7 million
compared to $5.2 million for the prior year. The increase of approximately $3.5 million,
or 68.8%, was primarily due to $1.6 million of additional selling, general and
administrative expenses related to the new international subsidiaries in Australia $1.3
million, China $206,000 and Lithuania $139,000 which began operations in 2006, $1.3
million from increased spending in Japan, additional Japan costs of $544,000 resulting
from the additional quarter of expense due to the change in year-end reporting, and
approximately $282,000 from increased spending in corporate international business
development expenses partially offset by reduced spending in South Africa of approximately
$327,000. All other international subsidiaries contributed an increase of $117,000.
Domestic selling, general and administrative expenses totaled $11.1 million for 2006 and
were reduced $400,000 from $11.5 million in 2005.

Depreciation
and amortization charges were $746,000 for the twelve months ended December 31, 2006,
compared to $1.0 million for the twelve months ended December 31, 2005. The decrease of
approximately $285,000, or 27.6%, was due to lower purchases of property and equipment in
recent years.

# Other Income/Other
Expense

Other
income was approximately $338,000 for twelve months ended December 31, 2006 compared to
other expense of approximately $446,000 for the twelve months ended December 31, 2005.
Included in other income for 2006 was a favorable $1.3 million judgment awarded in a
lawsuit offset by the 2006 related legal expenses of approximately $1.2 million, and the
favorable settlement of another lawsuit with a vendor. Other expenses in 2005 resulted
from the reclassification of certain legal expenses to other expense from selling, general
and administrative expenses to conform to the 2006 presentation.

# Interest Expense

Interest
expense totaled approximately $237,000 for 2006 compared to interest expense of
approximately $191,000 for 2005. The increase was a result of higher debt levels and
interest rates in 2006.

# Income Taxes

The
provision for income taxes was $99,000 and $242,000 for 2006 and 2005, respectively. The
tax provisions were primarily for minimum domestic state taxes due and international tax
liabilities. There were no tax provisions for federal tax as the Company reported losses
for the twelve months ended December 31, 2006 and 2005.

# Minority Interest

Minority
interest of approximately $(101,000) and $168,000 resulted from the net operating profits
and losses of the Companys 51% owned subsidiaries and its 50% owned subsidiaries for
the twelve months ended December 31, 2006 and 2005, respectively.

# Net (Loss) Income

The
SPAR Group had a net loss of approximately $621,000 or $0.03 per share for 2006, compared
to a net income of approximately $878,000 or $0.05 per basic and diluted shares for 2005.

# Off Balance Sheet
Arrangements

None.

-25-

---

Results from continuing
operations for the twelve months ended December 31, 2005, compared to twelve months ended December 31, 2004

# Net Revenues

Net
revenues from operations for the twelve months ended December 31, 2005, were $51.6
million, compared to $51.4 million for the twelve months ended December 31, 2004, an
increase of $0.2 million. The increase of $0.2 million in net revenues consists of an
increase in international revenue of $6.7 million offset by decreases in domestic revenue
of $6.5 million or 15%. The international revenue increase of $6.7 million was primarily
attributed to increases in Japan of $3.0 million, Canada of $2.6 million, India of $1.2
million and all others of $0.2 million, partially offset by revenue decrease in South
Africa of $0.3 million. The decrease in domestic revenue is a result of the loss of
several significant clients partially offset by revenue from new clients in 2005.

# Cost of Revenues

Cost
of revenues consists of in-store labor and field management wages, related benefits,
travel and other direct labor-related expenses. Cost of revenues as a percentage of net
revenues was 61.9% for the twelve months ended December 31, 2005, compared to 65.5% for
the twelve months ended December 31, 2004. Domestic cost of revenues as a percentage of
net revenues was 62.9% and 65.8% for the twelve months ended December 31, 2005, and 2004,
respectively. The decrease in cost as a percentage of net revenues is primarily a result
of an increase in per unit fee revenues that do not have a proportionate increase in cost.
As discussed above under Critical Accounting Policies/Revenue Recognition, the
Companys revenue consists of per unit fee revenue, which is earned when the
clients product is sold to the consumer at retail, not when the services are
performed. Retail sales of client products are influenced by numerous factors including
consumer tastes and preferences, and not solely by the merchandising and marketing service
performed, in any given period, the cost of per unit fee revenues may not be directly
proportionate to the per unit fee revenue. Internationally, the cost of revenues as a
percentage of net revenues was 59.6% and 63.7% for the twelve months ended December 31,
2005, and 2004, respectively. The international cost of revenue percentage was favorably
impacted by the increase in international revenue, which enabled the Company to leverage
its infrastructure.

Approximately
87% of the Companys domestic cost of revenue in both the twelve months ended
December 31, 2005 and 2004, resulted from in-store independent contractor and field
management services purchased from the Companys affiliates, SPAR Marketing Services,
Inc. (SMS) and SPAR Management Services, Inc. (SMSI) respectively.
(See Item 13  Certain Relationships and Related Transactions, below)

# Operating Expenses

Operating
expenses include selling, general and administrative expenses, impairment charges,
depreciation and amortization. Selling, general and administrative expenses include
corporate overhead, project management, information technology, executive compensation,
human resource, legal and accounting expenses. The following table sets forth the
operating expenses for the years indicated (in millions):

|                                   | Year Ended December 31,
|---------------------------------- | -----------------------
|                                   | 2005                   
|Selling, general  & administrative |                        
|Impairment charges                 |                        
|Depreciation and amortization      |                        
|                                   |                        
|                                   |                        
|Total operating expenses           |                        
|                                   |                        

Selling,
general and administrative expenses decreased by $3.5 million, or 18%, for the twelve
months ended December 31, 2005, to $16.7 million compared to $20.2 million for the twelve
months ended December 31, 2004. Domestic selling, general and administrative expenses
totaled $12.2 million for 2005 and were reduced $5.2 million from $16.7 million in 2004.
The reduction of 31% was a result of cost reduction programs initiated in the second half
of 2004 as a result of the loss of certain large clients. The domestic cost reductions
were partially offset by increases of $1.7 million in international selling, general and
administrative expenses primarily a result of increased spending in Canada of

-26-

---

approximately $550,000, and in Japan
of approximately $500,000, with the balance attributable to Romania and China, and a full
year of operations in South Africa, Turkey, and India.

Impairment
charges were $8.1 million for 2004 (see Note 3 to the Consolidated Financial Statements
Impairment Charges). Impairment charges resulting from the loss of certain large
clients consisted of $7.6 million of goodwill impairment, $1.2 million for the impairment
of other assets partially offset by the reduction of $1.4 million (net of taxes) of other
liabilities related to the PIA Acquisition. In addition there was approximately $700,000
of goodwill impairment associated with the Canadian subsidiary.

Depreciation
and amortization charges were $1.0 million for the twelve months ended December 31, 2005,
compared to $1.4 million for the twelve months ended December 31, 2004. The decrease was a
result of reduced capitalized software.

# Other Expense/Other
Income

Other
expense was approximately $446,000 compared to other income of $754,000 for twelve months
ended December 31, 2005 and 2004, respectively. In 2005, other expense resulted from the
reclassification of certain legal expenses to other expense from selling, general and
administrative expense to conform to the 2006 presentation partially offset by release of
a reserve associated with the PIA Acquisition in July 1999. In 2004, other income
consisted of approximately $640,000 resulting from the release of specific reserves
related to the refinancing of the SPGI notes and approximately $114,000 of foreign
currency translation gains.

# Interest Expense

Interest
expense totaled approximately $191,000 for 2005 compared to interest expense of
approximately $220,000 for 2004. The decrease was a result of lower debt levels in 2005
partially offset by increased rates.

# Income Taxes

The
provision for income taxes was $242,000 and $853,000 for 2005 and 2004, respectively. The
2005 provision is primarily for state taxes. The 2004 provision consists primarily of a
valuation allowance totaling approximately $750,000 against its net deferred tax assets
and state taxes of approximately $103,000.

# Net Income (Loss)

The
SPAR Group had a net income of approximately $878,000 or $0.05 per basic and diluted share
for 2005, compared to a net loss of approximately $12.3 million or $0.65 per basic and
diluted shares for 2004.

# Off Balance Sheet
Arrangements

None.

# Liquidity and Capital
Resources

In
the twelve months ended December 31, 2006, the Company had a net loss of $621,000.

Net
cash used in operating activities for the year ended December 31, 2006 was $2.5 million,
compared to net cash provided by operating activities of $3.4 million in 2005. The change
of approximately $5.9 million in cash used in operating activities is primarily due to
decreases in net income and increases in accounts receivable and other assets.

Net
cash used in investing activities for the year ended December 31, 2006 and 2005, were
$516,000 and $628,000, respectively. The change in net cash used in investing activities
was a result of decreased purchases of property and equipment in 2006.

Net
cash provided by financing activities for the year ended December 31, 2006 was $2.3
million, compared with net cash used in financing activities of $1.9 million for the year
ended December 31, 2005. The change in cash provided by financing activities was a result
of the Companys increased borrowing on its lines of credit.

-27-

---

The
above activity resulted in a decrease in cash and cash equivalents for the twelve months
ended December 31, 2006 of $766,000.

The
Company had positive working capital of $1.6 million and $3.1 million for the twelve
months ended December 31, 2006 and 2005, respectively. The Companys current ratio
was 1.13 and 1.31 at December 31, 2006 and 2005, respectively. The decrease in working
capital and current ratio were primarily due to increases in lines of credit, accounts
payable, accrued liability due to affiliates and decreases in cash partially offset by
increases in accounts receivable and decreases in customer deposits.

In
January 2003, the Company (other than SGRPs foreign subsidiaries) and Webster
Business Credit Corporation, then known as Whitehall Business Credit Corporation (Webster),
entered into the Third Amended and Restated Revolving Credit and Security Agreement (as
amended, collectively, the Credit Facility). The Credit Facility provides for
a $7.0 million revolving line of credit. In January 2006, Webster extended the maturity
date to January 23, 2009. Borrowings are  based upon a borrowing base formula as defined
in the agreement (principally 85% of eligible domestic accounts receivable).
The Credit Facility is secured by all of the assets of the Company and its domestic
subsidiaries and has set Minimum Fixed Charge Coverage Ratio and Minimum Net Worth
covenants. The Credit Facility also limits certain expenditures, including, but not
limited to, capital expenditures and other investments.

The
basic interest rate under the Credit Facility is Websters Alternative Base
Rate plus 0.75% per annum (a total of 8.7% per annum at December 31, 2006), which
automatically changes with each change made by Webster in such Alternative Base Rate. The
Company at its option, subject to certain conditions, may elect to have portions of its
loans under the Credit Facility bear interest at various LIBOR rates plus 3.25% per annum
based on fixed periods of one, two, three or nine months. The actual average interest rate
under the Credit Facility was 8.7% per annum for the twelve months ended December 31,
2006. The Credit Facility is secured by substantially all of the assets of the Company
(other than SGRPs foreign subsidiaries and their assets).

The
domestic revolving loan balances outstanding under the Credit Facility were $4.2 million
and $2.4 million at December 31, 2006 and 2005, respectively. There were letters of credit
outstanding under the Credit Facility of approximately $453,000 and $552,000 at December
31, 2006 and 2005, respectively. As of December 31, 2006, the SPAR Group had unused
availability under the Credit Facility of $1.5 million out of the remaining maximum $2.3
million unused revolving line of credit after reducing the borrowing base by outstanding
loans and letters of credit.

Because
of the requirement to maintain a lock box arrangement with Webster and Websters
ability to invoke a subjective acceleration clause at its discretion, borrowings under the
Credit Facility are classified as current at December 31, 2006 and 2005, in accordance
with EITF 95-22, Balance Sheet Classification of Borrowings Outstanding Under Revolving
Credit Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box
Agreement.

The
Company was in violation of Fixed Charge Coverage Ratio covenant at December 31, 2006, and
in March 2007 Webster amended the Credit Facility to waive the violation, change the Fixed
Charge Coverage Ratio going forward and increase the interest rate by 0.25% per annum. The
Company expects that it will comply with the amended covenants in future periods. However,
there can be no assurances that the Company will be able to comply with the amended
covenants and that if the Company violates the amended covenants, Webster will continue to
issue such waivers in the future.

Although
Webster does not currently require any personal guarantees from SGRPs major
stockholders, Mr. Robert Brown and Mr. William Bartels, Webster has requested such
guarantees in the past. While Messrs. Brown and Bartels have issued personal guarantees in
the past there can be no assurances that if Webster requests their guarantees in the
future they will continue to issue such guarantees.

The
Japanese subsidiary SPAR FM Japan, Inc. has line of credit agreements totaling 100 million
Yen or approximately $840,000 (based upon the exchange rate at December 31, 2006). The
outstanding balances under the line of credit agreements were 70 million Yen or
approximately $588,000 at December 31, 2006 and 2005, respectively (based upon the
exchange rate at those dates). The average interest rate was 1.6% per annum for the twelve
months ended December 31, 2006. In addition, the Japan subsidiary had cash balances
totaling 97 million Yen or approximately $815,000 (based upon the exchange rate at
December 31, 2006) and 86 million Yen or approximately $723,000 (based upon the exchange
rate at December 31, 2005) at December 31, 2006 and 2005 respectively.

In
2006, the Australian subsidiary SPARFACTS Australia Pty. Ltd. entered into a revolving
line of credit arrangement with Oxford Funding Pty. Ltd. for $1.1 million (Australian) or
approximately $789,000 (based upon the exchange rate at December 31, 2006). At December
31, 2006, SPARFACTS Australia Pty. Ltd. had $429,000

-28-

---

(Australian)              or
approximately $339,000 outstanding under the line of credit (based upon the
          exchange rate at that date). The average interest rate was 10.9% per annum for
          the eight months ended December 31, 2006.

On
October 20, 2006, SPAR Canada Company, a wholly owned subsidiary, entered into a secured
credit agreement with Royal Bank of Canada providing for a Demand Operating Loan for a
maximum borrowing of $1.0 million (Canadian) or approximately $858,000 (based upon the
exchange rate at December 31, 2006). The Demand Operating Loan provides for borrowing
based upon a borrowing base formula as defined in the agreement (principally 75% of
eligible accounts receivable less certain deductions). At December 31, 2006, SPAR Canada
Company had $238,000 (Canadian) or approximately $204,000 outstanding under the line of
credit (based upon the exchange rate at December 31, 2006). The average interest rate was
7% per annum for the two months ended December 31, 2006.

The
Companys international model is to partner with local merchandising companies and
combine the partners knowledge of the local market with the Companys
proprietary software and expertise in the merchandising and marketing business. In 2001,
the Company established its first international subsidiary and has continued this
strategy. As of this filing, the Company is currently operating in Japan, Canada, Turkey,
South Africa, India, Romania, China, Lithuania, Latvia, Australia and New Zealand through
9 subsidiaries.

Certain
of the international subsidiaries are marginally profitable while others are operating at
a loss. None of these entities have excess cash reserves. In the event of continued
losses, the Company may be required to provide additional cash infusions into these
subsidiaries.

Management
believes that based upon the existing credit facilities, sources of cash availability will
be sufficient to support ongoing operations over the next twelve months. However, delays
in collection of receivables due from any of the Companys major clients, or a
significant further reduction in business from such clients, or the inability to acquire
new clients, or the Companys inability to remain profitable, or the inability to
obtain bank waivers in the event of future covenant violations could have a material
adverse effect on the Companys cash resources and its ongoing ability to fund
operations.

# Certain Contractual
Obligations

The
following table contains a summary of certain of the Companys contractual
obligations by category as of December 31, 2006 (in thousands).

|                           
|---------------------------
|
|                           
|
|                           
|                           
|Credit Facilities          
|                           
|Operating Lease Obligations
|                           
|Total                      
|                           

In
addition to the above table, at December 31, 2006, the Company had approximately $453,000
in outstanding Letters of Credit.

# Item 7A. Quantitative
and Qualitative Disclosures about Market Risk.

The
Companys accounting policies for financial instruments and disclosures relating to
financial instruments require that the Companys consolidated balance sheets include
the following financial instruments: cash and cash equivalents, accounts receivable,
accounts payable and lines of credit. The Company considers carrying amounts of current
assets and liabilities in the consolidated financial statements to approximate the fair
value for these financial instruments because of the relatively short period of time
between origination of the instruments and their expected realization. The Company
monitors the risks associated with interest rates and financial instrument positions. The
Companys investment policy objectives require the preservation and safety of the
principal, and the maximization of the return on investment based upon the safety and
liquidity objectives.

-29-

---

The
Company is exposed to market risk related to the variable interest rate on its lines of
credit. At December 31, 2006, the Companys outstanding debt totaled $5.3 million, as
noted in the table below (in thousands):

|Location      |  | Variable Interest Rate (1) |  | Local Currency Amount |   | US Dollars Equivalent (2) |           
|------------- |  | -------------------------- |  | --------------------- | - | ------------------------- | ----------
|United States |  |                            |  | 8.7                   | % |                           | 4,187 USD 
|Japan         |  |                            |  | 1.6                   | % |                           | 70,000 YEN
|Australia     |  |                            |  | 10.9                  | % |                           | 429 AUD   
|Canada        |  |                            |  | 7.0                   | % |                           | 238 CAD   
|              |  |                            |  |                      
|              |  |                            |  |                       |   |                           |           
|              |  |                            |  |                      

|(1) | Per
annum interest at December 31, 2006
|--- | ---------------------------------------

|(2) | Based
on exchange rate at December 31, 2006
|--- | -------------------------------------------

Based
on 2006 average outstanding borrowings under variable-rate debt, a one-percentage point
increase in interest rates would negatively impact annual pre-tax earnings and cash flows
by approximately $33,000.

The
Company has foreign currency exposure associated with its international subsidiaries. In
both 2006 and 2005, these exposures are primarily concentrated in the Canadian Dollar,
South African Rand, Australian Dollar and Japanese Yen. At December 31, 2006,
international assets totaled $5.6 million and international liabilities totaled $5.7
million. For 2006, international revenues totaled $23.2 million and the Companys
share of the net loss was approximately $630,000.

Investment
Portfolio

The
Company has no derivative financial instruments or derivative commodity instruments in its
cash and cash equivalents and investments. Domestically, excess cash is normally used to
pay down its revolving line of credit. Internationally, excess cash is used to fund
operations.

# Item 8. Financial
Statements and Supplementary Data.

See
Item 15 of this Annual Report on Form 10-K.

# Item 9.  Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure.

None.

# Item 9A. Controls and
Procedures.

The
Companys Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) as of the end of the period covering this report.
Based on this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by the Securities and Exchange
Commissions rules and forms.

There
were no significant changes in the Companys internal controls or in other factors
that could significantly affect these controls during the twelve months covered by this
report or from the end of the reporting period to the date of this Form 10-K.

The
Company has established a plan and has begun to document and test its domestic internal
controls over financial reporting and is currently developing a detailed plan to document
and test internal controls for its international operations as required by Section 404 of
the Sarbanes-Oxley Act of 2002.

# Item 9B. Other
Information.

None.

-30-

---

# PART III

# Item 10. Directors and
Executive Officers of the Registrant.

Reference
is made to the information set forth in our definitive proxy statement, which will be
filed with the Securities and Exchange Commission for our Annual Meeting of Shareholders,
presently scheduled to be held on May 24, 2007, pursuant to Regulation 14A not later than
120 days after the end of our fiscal year, which information is incorporated by reference
to this Annual Report on Form 10-K. Notwithstanding the foregoing, information appearing
in the sections Executive Compensation Report of the Compensation Committee
and Audit Committee Report shall not be deemed to be incorporated by reference
in this Annual Report on Form 10-K.

# Item 11. Executive
Compensation and Other Information of SPAR Group, Inc.

Reference
is made to the information set forth in our definitive proxy statement, which will be
filed with the Securities and Exchange Commission for our Annual Meeting of Shareholders,
presently scheduled to be held on May 24, 2007, pursuant to Regulation 14A not later than
120 days after the end of our fiscal year, which information is incorporated by reference
to this Annual Report on Form 10-K. Notwithstanding the foregoing, information appearing
in the sections Executive Compensation Report of the Compensation Committee
and Audit Committee Report shall not be deemed to be incorporated by reference
in this Annual Report on Form 10-K.

# Item 12.   Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Reference
is made to the information set forth in the Companys definitive proxy statement,
which will be filed with the Securities and Exchange Commission for our Annual Meeting of
Shareholders, presently scheduled to be held on May 24, 2007, pursuant to Regulation 14A
not later than 120 days after the end of the Companys most recent fiscal year, which
information is incorporated by reference to this Annual Report on Form 10-K.
Notwithstanding the foregoing, information appearing in the sections Executive
Compensation Report of the Compensation Committee and Audit Committee
Report shall not be deemed to be incorporated by reference in this Annual Report on
Form 10-K.

# Item 13. Certain
Relationships and Related Transactions, and Director Independence.

Reference
is made to the information set forth in the Companys definitive proxy statement,
which will be filed with the Securities and Exchange Commission for our Annual Meeting of
Shareholders, presently scheduled to be held on May 24, 2007, pursuant to Regulation 14A
not later than 120 days after the end of the Companys most recent fiscal year, which
information is incorporated by reference to this Annual Report on Form 10-K.
Notwithstanding the foregoing, information appearing in the sections Executive
Compensation Report of the Compensation Committee and Audit Committee
Report shall not be deemed to be incorporated by reference in this Annual Report on
Form 10-K.

# Item 14. Principal
Accountant Fees and Services.

Reference
is made to the information set forth in the Companys definitive proxy statement,
which will be filed with the Securities and Exchange Commission for our Annual Meeting of
Shareholders, presently scheduled to be held on May 24, 2007, pursuant to Regulation 14A
not later than 120 days after the end of the Companys most recent fiscal year, which
information is incorporated by reference to this Annual Report on Form 10-K.
Notwithstanding the foregoing, information appearing in the sections Executive
Compensation Report of the Compensation Committee and Audit Committee
Report shall not be deemed to be incorporated by reference in this Annual Report on
Form 10-K.

-31-

---

# PART IV

# Item 15. Exhibits and
Financial Statement Schedules.

|                                                                           |      | 
|-------------------------------------------------------------------------- | ---- | 
|1.  Index to Financial Statements filed as part of this report:            |     
|                                                                          
|Reports of Independent Registered Public Accounting Firms                  |     
|                                                                          
|- Rehmann Robson                                                           | F-1 
|                                                                          
|- Gureli Yeminli Mali Mu(0)avirlik A.(a)                                   | F-2 
|                                                                          
|- Baker Tilly Klitou and Partners S.R.L                                    | F-3 
|                                                                          
|- Nagesh Behl  & Co.                                                       | F-4 
|                                                                          
|- S. S. Kothari Mehta  & Co.                                               | F-5 
|                                                                          
|- UAB " Rezultatas "                                                       | F-6 
|                                                                          
|- Pitcher Partners                                                         | F-7 
|                                                                          
|Consolidated Balance Sheets as of December 31, 2006, and December 31, 2005 | F-8 
|                                                                          
|Consolidated Statements of Operations for the years ended                  |     
|December 31, 2006, December 31, 2005, and December 31, 2004                | F-9 
|                                                                          
|Consolidated Statements of Stockholders' Equity for the years              |     
|ended December 31, 2006, December 31, 2005, and December 31, 2004          | F-10
|                                                                          
|Consolidated Statements of Cash Flows for the years ended                  |     
|December 31, 2006, December 31, 2005, and December 31, 2004                | F-11
|                                                                          
|Notes to Consolidated Financial Statements                                 | F-12
|                                                                          
|2.  Financial Statement Schedules.                                         |      | 
|                                                                          
|Schedule II - Valuation and Qualifying Accounts for the three years        |     
|ended December 31, 2006                                                    | F-35

# 3. Exhibits.

| | ExhibitNumber |  | Description
| | ------------- |  | -----------

| | 3.1 |  | Certificate of Incorporation of SPAR Group, Inc. (referred to therein under its former
name PIA Merchandising Services, Inc.), as amended (incorporated by reference to the
Companys Registration Statement on Form S-1 (Registration No. 33-80429), as filed
with the Securities and Exchange Commission (SEC) on December 14, 1995 (the
Form S-1), and the Certificate of Amendment filed with the Secretary of State
of the State of Delaware on July 8, 1999 (which, among other things, changes the
Companys name to SPAR Group, Inc.) (incorporated by reference to Exhibit 3.1 to the
Companys Form 10-Q for the 3rd Quarter ended September 30, 1999).
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 |  | Amended and Restated By-Laws of SPAR Group, Inc., adopted on May 18, 2004 (incorporated by
reference to the Companys report on Form 8-K, as filed with the SEC on May 27,
2004).
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 |  | Amended and Restated Charter of the Audit Committee of the Board of Directors of SPAR
Group, Inc., adopted May 18, 2004 (incorporated by reference to the Companys report
on Form 8-K, as filed with the SEC on May 27, 2004).
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-32-

---

| | 3.4 |  | Charter of the Compensation Committee of the Board of Directors of SPAR Group, Inc.,
adopted on May 18, 2004 (incorporated by reference to the Companys report on Form
8-K, as filed with the SEC on May 27, 2004).
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.5 |  | Charter of the Governance Committee of the Board of Directors of SPAR Group, Inc., adopted
on May 18, 2004 (incorporated by reference to the Companys report on Form 8-K, as
filed with the SEC on May 27, 2004).
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.6 |  | SPAR Group, Inc. Statement of Policy Respecting Stockholder Communications with Directors,
adopted on May 18, 2004 (incorporated by reference to the Companys report on Form
8-K, as filed with the SEC on May 27, 2004).
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.7 |  | SPAR Group, Inc. Statement of Policy Regarding Director Qualifications and Nominations,
adopted on May 18, 2004 (incorporated by reference to the Companys report on Form
8-K, as filed with the SEC on May 27, 2004).
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.1 |  | Registration Rights Agreement entered into as of January 21, 1992, by and between RVM
Holding Corporation, RVM/PIA, a California Limited Partnership, The Riordan Foundation and
Creditanstalt-Bankverine (incorporated by reference to the Form S-1).
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 |  | 2000 Stock Option Plan, as amended through May 16, 2006 (incorporated by reference to the
Companys report on Form 10-Q for quarter ended September 30, 2006 as filed with the
SEC on November 14, 2006.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 |  | 2001 Employee Stock Purchase Plan (incorporated by reference to the Companys Proxy
Statement for the Companys Annual meeting held on August 2, 2001, as filed with the
SEC on July 12, 2001).
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 |  | 2001 Consultant Stock Purchase Plan (incorporated by reference to the Companys Proxy
Statement for the Companys Annual meeting held on August 2, 2001, as filed with the
SEC on July 12, 2001).
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 |  | Change
in Control Severance  Agreement between William H. Bartels and SPAR Group,  Inc., dated
as of March 30, 2007 (filed herewith).
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------

| | 10.5 |  | Change
in Control Severance Agreement between Kori G. Belzer and SPAR Group, Inc., dated as of
March 30, 2007 (filed herewith).
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------

| | 10.6 |  | Change
in Control  Severance  Agreement  between  Patricia Franco and SPAR Group,  Inc., dated
as of March 30, 2007 (filed herewith).
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 |  | Change
in Control  Severance  Agreement  between James R. Segreto and SPAR Group,  Inc., dated
as of March 30, 2007 (filed herewith).
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 |  | Amended and Restated Field Service Agreement dated and effective as of January 1, 2004, by
and between SPAR Marketing Services, Inc., and SPAR Marketing Force, Inc. (incorporated by
reference to the Companys quarterly report on Form 10-Q for the quarter ended March
31, 2004, as filed with the SEC on May 21, 2004).
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 |  | Amended and Restated Field Management Agreement dated and effective as of January 1, 2004,
by and between SPAR Management Services, Inc., and SPAR Marketing Force, Inc.
(incorporated by reference to the Companys quarterly report on Form 10-Q for the
quarter ended March 31, 2004, as filed with the SEC on May 21, 2004).
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 |  | Amended and Restated Programming and Support Agreement dated and effective as of January
1, 2004, by and between SPAR InfoTech, Inc., and SPAR Marketing Force, Inc. (incorporated
by reference to the Companys quarterly report on Form 10-Q for the quarter ended
March 31, 2004, as filed with the SEC on May 21, 2004).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 |  | Trademark License Agreement dated as of July 8, 1999, by and between SPAR Marketing
Services, Inc., and SPAR Trademarks, Inc. (incorporated by reference to the Companys
Form 10-K for the fiscal year ended December 31, 2002, as filed with the SEC on March 31,
2002).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-33-

---

| | 10.12 |  | Trademark License Agreement dated as of July 8, 1999, by and between SPAR Infotech, Inc.,
and SPAR Trademarks, Inc. (incorporated by reference to the Companys Form 10-K for
the fiscal year ended December 31, 2002, as filed with the SEC on March 31, 2002).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.13 |  | Master Lease Agreement by and between SPAR Marketing Services, Inc. and SPAR Marketing
Force, Inc. dated as of November 2004 relating to lease of handheld computer equipment
(incorporated by reference to the Companys Form 10-K for the fiscal year ended
December 31, 2004, as filed with the SEC on April 12, 2005).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 |  | Amended and Restated Equipment Leasing Schedule 001 to Master Lease Agreement by and
between SPAR Marketing Services, Inc., and SPAR Marketing Force, Inc., dated as of
November 1, 2004, relating to lease of handheld computer equipment (incorporated by
reference to the Companys quarterly report on Form 10-Q for quarter ended March 31,
2005, as filed with the SEC on May 18, 2005).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 |  | Amended and Restated Equipment Leasing Schedule 002 to Master Lease Agreement by and
between SPAR Marketing Services, Inc., and SPAR Marketing Force, Inc., dated as of January
4, 2005, relating to lease of handheld computer equipment (incorporated by reference to
the Companys quarterly report on Form 10-Q for quarter ended March 31, 2005, as
filed with the SEC on May 18, 2005).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 |  | Amended and Restated Equipment Leasing Schedule 003 to Master Lease Agreement by and
between SPAR Marketing Services, Inc., and SPAR Marketing Force, Inc., dated as of January
31, 2005, relating to lease of handheld computer equipment (incorporated by reference to
the Companys quarterly report on Form 10-Q for quarter ended March 31, 2005, as
filed with the SEC on May 18, 2005).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 |  | Equipment Leasing Schedule 004 to Master Lease Agreement by and between SPAR Marketing
Services, Inc., and SPAR Marketing Force, Inc., dated as of March 24, 2005, relating to
lease of handheld computer equipment (incorporated by reference to the Companys
quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on
May 18, 2005).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.18 |  | Master Lease Agreement by and between SPAR Marketing Services, Inc. and SPAR Canada
Company dated as of January 2005 relating to lease of handheld computer equipment
(incorporated by reference to the Companys Form 10-K for the fiscal year ended
December 31, 2004, as filed with the SEC on April 12, 2005).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 |  | Amended and Restated Equipment Leasing Schedule 001 to Master Lease Agreement by and
between SPAR Marketing Services, Inc., and SPAR Canada Company dated as of January 4,
2005, relating to lease of handheld computer equipment (incorporated by reference to the
Companys quarterly report on Form 10-Q for quarter ended March 31, 2005, as filed
with the SEC on May 18, 2005).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.20 |  | Joint Venture Agreement dated as of March 26, 2004, by and between Solutions Integrated
Marketing Services Ltd. and SPAR Group International, Inc., respecting the
Corporations subsidiary in India (incorporated by reference to the Companys
Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12,
2005).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.21 |  | Joint Venture Shareholders Agreement between Friedshelf 401 (Proprietary) Limited, SPAR
Group International, Inc., Derek OBrien, Brian Mason, SMD Meridian CC, Meridian
Sales & Mnrechandisign (Western Cape) CC, Retail Consumer Marketing CC, Merhold
Holding Trust in respect of SGRP Meridian (Proprietary) Limited, dated as of June 25,
2004, respecting the Corporations subsidiary in South Africa (incorporated by
reference to the Companys Form 10-K for the fiscal year ended December 31, 2004, as
filed with the SEC on April 12, 2005).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-34-

---

| | 10.22 |  | Joint Venture Agreement dated as of July 21, 2003, by and between CEO Produksiyon Tanitim
ve Arastirma Hizmetleri Ltd Sti and SPAR Group International, Inc., respecting the
Corporations subsidiary in Turkey (incorporated by reference to the Companys
Form 10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12,
2005).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.23 |  | Joint Venture Agreement dated as of May 1, 2001, by and between Paltac Corporation and
SPAR Group, Inc., respecting the Corporations subsidiary in Japan (incorporated by
reference to the Companys Form 10-K for the fiscal year ended December 31, 2004, as
filed with the SEC on April 12, 2005).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.24 |  | Agreement on Amendment dated as of August 1, 2004, by and between SPAR Group, Inc. and
SPAR FM Japan, Inc., respecting the Corporations subsidiary in Japan (incorporated
by reference to the Companys Form 10-K for the fiscal year ended December 31, 2004,
as filed with the SEC on April 12, 2005).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.25 |  | Joint Venture Agreement dated as of January 26, 2005, by and between Best Mark Investments
Holdings Ltd. and SPAR International Ltd., respecting the Corporations subsidiary in
China (incorporated by reference to the Companys Form 10-K for the fiscal year ended
December 31, 2004, as filed with the SEC on April 12, 2005).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.26 |  | Joint Venture Agreement dated as of December 14, 2004, by and between Field Insights
S.R.L. and SPAR Group International, Inc., respecting the Corporations subsidiary in
Romania (incorporated by reference to the Companys Form 10-K for the fiscal year
ended December 31, 2004, as filed with the SEC on April 12, 2005).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.27 |  | Joint Venture Agreement dated as of September 26, 2006 by and between UAB Rinkos skatinimo
sistemo and SPAR Group International, Inc., respecting the Corporations subsidiary
in Lithuania (filed herewith).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.28 |  | Joint Venture Agreement dated as of March 29, 2006 by and between FACE AND COSMETIC
TRADING SERVICES PTY LIMITED and SPAR International, Ltd., respecting the
Corporations subsidiary in Australia (filed herewith).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.29 |  | Stock Purchase and Sale Agreement by and among Performance Holdings, Inc. and SPAR
Incentive Marketing, Inc., effective as of June 30, 2002 (incorporated by reference to the
Companys Form 10-Q for the quarter ended June 30, 2002, as filed with the SEC on
August 14, 2002).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.30 |  | Revolving Credit, Guaranty and Security Agreement by and among Performance Holdings, Inc.
and SPAR Incentive Marketing, Inc., effective as of June 30, 2002 (incorporated by
reference to the Companys Form 10-Q for the quarter ended June 30, 2002, as filed
with the SEC on August 14, 2002).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.31 |  | Term Loan, Guaranty and Security Agreement by and among Performance Holdings, Inc. and
SPAR Incentive Marketing, Inc., effective as of June 30, 2002 (incorporated by reference
to the Companys Form 10-Q for the quarter ended June 30, 2002, as filed with the SEC
on August 14, 2002).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.32 |  | Promissory Note in the principal amount of $764,271.00 by STIMULYS, Inc., in favor of SPAR
Incentive Marketing, Inc., dated as of September 10, 2004 (incorporated by reference to
the Companys Form 10-K for the fiscal year ended December 31, 2004, as filed with
the SEC on April 12, 2005).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.33 |  | Payoff and Release Letter by and between STIMULYS, Inc., and SPAR Incentive Marketing,
Inc., dated as of September 10, 2004 (incorporated by reference to the Companys Form
10-K for the fiscal year ended December 31, 2004, as filed with the SEC on April 12,
2005).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-35-

---

| | 10.34 |  | Sales
Proceeds Agreement by and between STIMULYS, Inc. and SPAR Incentive Marketing,  Inc.,
dated as                 of September  10, 2004  (incorporated  by reference to the
 Company's  Form 10-K for the fiscal year                 ended December 31, 2004, as
filed with the SEC on April 12, 2005).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.35 |  | Third
Amended and Restated  Revolving Credit and Security  Agreement by and among Whitehall
Business                 Credit  Corporation  (the "Lender") with SPAR Marketing Force,
 Inc., SPAR Group,  Inc., SPAR, Inc.,                 SPAR/Burgoyne  Retail Services,
 Inc., SPAR Incentive Marketing,  Inc., SPAR Trademarks,  Inc., SPAR
                Marketing, Inc. (DE), SPAR Marketing,  Inc. (NV), SPAR Acquisition,
 Inc., SPAR Group International,                 Inc., SPAR Technology Group, Inc.,
SPAR/PIA Retail Services,  Inc., Retail Resources,  Inc., Pivotal                 Field
 Services  Inc., PIA  Merchandising  Co.,  Inc.,  Pacific Indoor Display Co. and Pivotal
Sales                 Company  (collectively,  the "Existing  Borrowers"),  dated as of
January 24, 2003  (incorporated by                 reference to the Company's  Form 10-K
for the fiscal year ended December 31, 2002, as filed with the                 SEC on
March 31, 2003).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.36 |  | Waiver And Amendment No. 3 To Third Amended And Restated Revolving Credit And Security
Agreement entered into as of March 26, 2004 (incorporated by reference to the
Companys report on Form 8-K, as filed with the SEC on May 26, 2004).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.37 |  | Joinder, Waiver And Amendment No. 4 To Third Amended And Restated Revolving Credit And
Security Agreement entered into as of May 17, 2004 (incorporated by reference to the
Companys report on Form 8-K, as filed with the SEC on May 26, 2004).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.38 |  | Waiver and Amendment to Third Amended and Restated Revolving Credit and Security Agreement
by and among the Lender and the Borrowers dated as of January 2004 (incorporated by
reference to the Companys report on Form 10-K/A for the year ended December 31,
2003, as filed with the SEC on June 28, 2004).
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.39 |  | Waiver and Amendment No. 5 to Third Amended and Restated Revolving Credit and Security
Agreement among Webster Business Credit Corporation, SPAR Group, Inc., and certain of its
subsidiaries dated as of August 20, 2004 (incorporated by reference to the Companys
quarterly report of the quarter ended June 30, 2004, as filed with the SEC on August 23,
2004).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.40 |  | Waiver and Amendment No. 6 to Third Amended and Restated Revolving Credit and Security
Agreement among Webster Business Credit Corporation, SPAR Group, Inc., and certain of its
subsidiaries dated as of November 12, 2004 (incorporated by reference to the
Companys quarterly report for the quarter ended September 30, 2004, as filed with
the SEC on November 17, 2004).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.41 |  | Waiver to the Third Amended and Restated Revolving Credit and Security Agreement among
Webster Business Credit Corporation, SPAR Group, Inc., and certain of its subsidiaries
dated as of March 31, 2004 (incorporated by reference to the Companys Form 10-K for
the fiscal year ended December 31, 2004, as filed with the SEC on April 12, 2005).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.42 |  | Waiver to the Third Amended and Restated Revolving Credit and Security Agreement among
Webster Business Credit Corporation, SPAR Group, Inc., and certain of its subsidiaries
dated as of March 31, 2005 (incorporated by reference to the Companys quarterly
report on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18,
2005).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.43 |  | Waiver to the Third Amended and Restated Revolving Credit and Security Agreement among
Webster Business Credit Corporation, SPAR Group, Inc., and certain of its subsidiaries
dated as of May 11, 2005 (incorporated by reference to the Companys quarterly report
on Form 10-Q for quarter ended March 31, 2005, as filed with the SEC on May 18, 2005).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.44 |  | Waiver to the Third Amended and Restated Revolving Credit and Security Agreement among
Webster Business Credit Corporation, SPAR Group, Inc., and certain of its subsidiaries
dated as of August 10, 2005, with respect to the fiscal quarter ended June 30, 2005
(incorporated by reference to the Companys quarterly report on Form 10-Q for quarter
ended June 30, 2005, as filed with the SEC on August 15, 2005).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-36-

---

| | 10.45 |  | Waiver to the Third Amended and Restated Revolving Credit and Security Agreement
among
Webster Business Credit Corporation, SPAR Group, Inc., and certain of its subsidiaries dated as of November 10, 2005, with respect to the fiscal quarter ended September 30, 2005
(incorporated by reference to the Companys quarterly report on Form 10-Q for quarter
ended September 30, 2005, as filed with the SEC on November 14, 2005).
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.46 |  | Amendment
No. 7 to the Third Amended and Restated  Revolving Credit and Security  Agreement dated
as                 of January 18, 2006, by and among,  SPAR Marketing Force,  Inc., SPAR,
 Inc.,  SPAR/Burgoyne  Retail                 Services,  Inc., the  Registrant,  SPAR
Incentive  Marketing,  Inc.,  SPAR  Trademarks,  Inc.,  SPAR                 Marketing,
 Inc. (DE), SPAR Marketing,  Inc. (NV), SPAR  Acquisition,  Inc., SPAR Technology  Group,
                Inc.,  SPAR/PIA Retail Services,  Inc., Retail Resources,  Inc.,  Pivotal
Field Services,  Inc., PIA                 Merchandising  Co.,  Inc.,  Pacific Indoor
 Display,  Inc.,  Pivotal Sales  Company,  SPAR All Store                 Marketing
 Services,  Inc., and SPAR Bert Fife,  Inc., each as a "Borrower" and  collectively as
the                 "Borrowers"  thereunder,  and Webster  Business  Credit  Corporation
 (formerly  known as  Whitehall                 Business Credit Corporation), as the
"Lender" thereunder (incorporated by reference to the Company's                 report on
the Form 8-K, as filed with the SEC on January 26, 2006).
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.47 |  | Consent, Joinder, Release and Amendment Agreement dated as of October 31, 2003, by and
among the Lender, the Existing Borrowers and SPAR All Store Marketing, Inc., as a Borrower
(incorporated by reference to the Companys Form 10-K for the fiscal year ended
December 31, 2003, as filed with the SEC on March 31, 2004).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.48 |  | Waiver And Amendment No. 8 To Third Amended And Restated Revolving Credit And Security Agreement
among
Webster Business Credit Corporation, SPAR Group, Inc., and certain of its subsidiaries
dated as of March 28, 2007 with respect to the fiscal year ended December 31, 2006 (as filed herewith).
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.49 |  | Confirmation of
 Credit Facilities Letter by Royal Bank of Canada in favor of SPAR Canada
Company dated as of October 17, 2006 (filed herewith).
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.50 |  | General Security Agreement by SPAR Canada Company in favor of Royal Bank of Canada dated
as of October 20, 2006 (filed herewith).
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------

| | 14.1 |  | Code of Ethical Conduct for the Directors, Senior Executives and Employees, of SPAR Group,
Inc., dated May 1, 2004 (incorporated by reference to the Companys Form 8-K, as
filed with the SEC on May 5, 2004).
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 14.2 |  | Statement of Policy Regarding Personal Securities Transaction in Company Stock and
Non-Public Information, as amended and restated on May 1, 2004 (incorporated by reference
to the Companys Form 8-K, as filed with the SEC on May 5, 2004).
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 21.1 |  | List
of Subsidiaries.
| | ---- |  | ---------------------

| | 23.1 |  | Consent
of Rehmann Robson.
| | ---- |  | --------------------------

| | 23.2 |  | Consent
of Gureli Yeminli Mali Musavirlik A.S.
| | ---- |  | ----------------------------------------------

| | 23.3 |  | Consent
of Baker Tilly Klitou and Partners S.R.L.
| | ---- |  | -------------------------------------------------

| | 23.4 |  | Consent
of Nagesh Behl & Co.
| | ---- |  | ----------------------------

| | 23.5 |  | Consent
of S. S. Kothari Mehta  & Co.
| | ---- |  | -------------------------------------

| | 23.6 |  | Consent
of UAB Rezultatas
| | ---- |  | ---------------------------

| | 23.7 |  | Consent of Pitcher Partners.
| | ---- |  | ----------------------------

| | 31.1 |  | Certification of the CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, and filed herewith.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

-37-

---

| | 31.2 |  | Certification of the CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, and filed herewith.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.1 |  | Certification of the CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, and filed herewith.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 |  | Certification of the CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, and filed herewith.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

-38-

---

# SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this amendment to the report to be signed on its behalf by the undersigned, thereunto duly
authorized.

| |                                                   
| | --------------------------------------------------
| | SPAR Group, Inc.                                  
|
|
| | By: /s/ Robert G. Brown                           
| | Robert G. Brown                                   
| | President, Chief Executive Officer and Chairman of
| | the Board                                         
|
| | Date: April 2, 2007                               

Pursuant to the requirements of the
Securities Exchange Act of 1934, this amendment to the report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated.

|                       |                                                                     
|---------------------- | --------------------------------------------------------------------
|SIGNATURE              | TITLE                                                               
|                      
|/s/ Robert G. Brown    | President, Chief Executive Officer, Director,                       
|Robert G. Brown        | and Chairman of the Board                                           
|Date: April 2, 2007    |                                                                     
|                      
|/s/ William H. Bartels | Vice Chairman and Director                                          
|William H. Bartels    
|Date: April 2, 2007    |                                                                     
|                      
|/s/ Robert O. Aders    | Director                                                            
|Robert O. Aders        |                                                                     
|Date: April 2, 2007    |                                                                     
|                      
|/s/ Jack W. Partridge  | Director                                                            
|Jack W. Partridge      |                                                                     
|Date: April 2, 2007    |                                                                     
|                      
|/s/ Jerry B. Gilbert   | Director                                                            
|Jerry B. Gilbert       |                                                                     
|Date: April 2, 2007    |                                                                     
|                      
|/s/ Lorrence T. Kellar | Director                                                            
|Lorrence T. Kellar    
|Date: April 2, 2007    |                                                                     
|                      
|/s/ C. Manly Molpus    | Director                                                            
|C. Manly Molpus        |                                                                     
|Date: April 2, 2007    |                                                                     
|                      
|/s/ Charles Cimitile   | Chief Financial Officer,                                            
|Charles Cimitile       | Treasurer and Secretary (Principal Financial and Accounting Officer)
|Date: April 2, 2007    |                                                                     

-39-

---

Report of Independent
Registered Public Accounting Firm

Board of Directors and
Stockholders
SPAR Group, Inc. and Subsidiaries
Tarrytown, New York

We have audited the accompanying consolidated
balance sheets of SPAR Group, Inc. and Subsidiaries as of December 31, 2006 and 2005, and
the related consolidated statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended December 31, 2006. Our audits also
included the financial statement schedule for these years as listed in the index at Item
15. These consolidated financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits. We did not audit the
financial statements of SPARFACTS Australia PTY LTD.; UAB SPAR RSS Baltic; SPAR
Merchandising Romania, Ltd.; SPAR Turkey, Ltd. (SPAR Alan Pazarlama Hizmetleri Limited
Sirketi); or SPAR Solutions India Private Limited as of and for the year ended
December 31, 2006. These statements reflect total assets constituting 15.6% of
consolidated total assets as of December 31, 2006, and total revenues constituting 12.2%
of total consolidated revenue for the year then ended. Such financial statements were
audited by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for SPARFACTS Australia PTY LTD.; UAB SPAR
RSS Baltic; SPAR Merchandising Romania, Ltd.; SPAR Turkey, Ltd. (SPAR Alan Pazarlama
Hizmetleri Limited Sirketi); and SPAR Solutions India Private Limited for 2006, is
based solely on the reports of the other auditors. We did not audit the financial
statements of SPAR Merchandising Romania, Ltd.; SPAR Turkey, Ltd. (SPAR Alan Pazarlama
Hizmetleri Limited Sirketi); or SPAR Solutions India Private Limited as of and for
the year ended December 31, 2005. These statements reflect total assets constituting 4.9%
of consolidated total assets as of December 31, 2005, and total revenues constituting 2.7%
of total consolidated revenue for the year then ended. Such financial statements were
audited by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for SPAR Merchandising Romania, Ltd.; SPAR
Turkey, Ltd. (SPAR Alan Pazarlama Hizmetleri Limited Sirketi); and SPAR Solutions
India Private Limited for 2005, is based solely on the reports of the other auditors.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, based on our audits
and the reports of the other auditors for 2006 and 2005, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of SPAR Group, Inc. and Subsidiaries as of December 31, 2006 and 2005,
and the consolidated results of their operations and their cash flows for the for each of
the three years in the period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial schedule for
those years, when considered in relation to the consolidated financial statements taken as
a whole presents fairly, in all material respects, the information set forth therein.

| |  | /s/ Rehmann
Robson
| |  | ------------------

Troy, Michigan
March 30, 2007

F-1

---

Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Stockholders
SPAR Alan Pazarlama Hizmetleri Limited Sirketi
Istanbul, Turkey

We have audited the accompanying balance
sheets of Spar Alan Pazarlama Hizmetleri Limited Sirketi (the Company) as
at December 31, 2006 and 2005 and the related statement of operations and
stockholders equity for the years then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2006 and 2005 and the result of its operations
for the years then ended in conformity with U.S. generally accepted accounting principles.

| |  | /s/  Güreli
Yeminli Mali Müoavirlik A.S.
| |  | ----------------------------------------

Istanbul, Turkey
February 14, 2007

F-2

---

Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Stockholders
SPAR Merchandising Romania S.R.L.
Bucharest, Romania

We  have  audited  the  accompanying
 balance  sheet of Spar Merchandising Romania SRL (the Company) as of 31
December 2006 and 2005, and the related statements of income, shareholders equity,
and cash flows for the period from 20 April 2005 to 31 December 2005 and for the year
ended 31 December 2006. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversite Board. (United States) Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of 31 December 2006, and 31 December 2005, and the results of
its operations and its cash flows for the period from 20 April 2005 to 31 December 2005
and for the year ended 31 December 2006 in conformity with accounting principles generally
accepted in the United States of America.

| |  | /s/ Baker
Tilly Klitou and Partners S.R.L.
| |  | ------------------------------------------

Bucharest, Romania
March 21, 2007

F-3

---

Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Stockholders
SPAR Solutions Merchandising Private Limited
New Delhi, India

We have audited the accompanying balance
sheets of SPAR Solutions Merchandising Private Limited, a company incorporated under the
laws of India, as at 31st December, 2006 and 2005 and the related statements of income,
stockholders equity and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with generally accepted auditing standards in the Public Company Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An
audit also includes examination on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the management, as well as evaluating
the overall financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of SPAR Solutions Merchandising Private Limited as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in United States.

| |  | /s/ Nagesh
Behl & Co.
| |  | ---------------------

New Delhi, India
February 22, 2007

F-4

---

Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Stockholders
SPAR Solutions Merchandising Private Limited
New Delhi, India

We have audited the attached balance
sheets of SPAR Solutions Merchandising Private Limited, a company incorporated in India,
as at 31st December, 2005 and 2004 and also the Statements of Income, Changes in
shareholders equity and Cash Flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis for our
opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the company as at 31st December 2005 and 2004, and the results of its
operations and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.

| |  | /s/  S.
S. Kothari Mehta  & Co.
| |  | -------------------------------

New Delhi, India
March 30, 2006

F-5

---

Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Stockholders 
UAB SPAR RRS
BALTIC 
Vilnius, Lithuania

We have audited the accompanying
balance sheet of UAB SPAR RSS BALTIC as of December 31, 2006, and related
statements of income, stockholders equity and cash flow for the year then ended.
These financial statements are the responsibility of the Companys management. Our
responsibility is to express as opinion on these financial statements based on our audit.

We conducted our audit in accordance
with generally accepted auditing standards promulgated by the Public Company Accounting
Oversight Board. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provide
a reasonable basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of UAB SPAR RSS BALTIC as of December 31, 2006, and the results of
its operations for the year then ended in conformity with U.S. generally accepted
accounting principles.

| |  | /s/  UAB
Rezultatas
| |  | ---------------------

Vilnius, Lithuania
19 February 2007

F-6

---

Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Stockholders 
SPARFACTS 
Melbourne, Australia

We have audited the accompanying balance
sheet of SPARFACTS Pty Ltd (the Company) as of December 31, 2006, and the
related statements of operations, stockholders equity, and cash flows for the period
from March 30, 2006 to December 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as at December 31, 2006, and the results of its operations and its
cash flows for the period from March 30, 2006, to December 31, 2006, in conformity with
U.S. generally accepted accounting principles.

| |  | /s/ Pitcher
Partners
| |  | --------------------

Melbourne, Australia
March 15, 2007

F-7

---

# SPAR Group, Inc. and
Subsidiaries

# Consolidated Balance Sheets

(In thousands,
except share and per share data)

|                                                  | December 31, | 
|------------------------------------------------- | ------------ | 
|
|Assets                                            |              | 
|Current assets:                                   |              | 
|Cash and cash equivalents                         |              | 
|Accounts receivable, net                          |              | 
|Prepaid expenses and other current assets         |              | 
|                                                  |              | 
|Total current assets                              |              | 
|                                                  |              | 
|Property and equipment, net                       |              | 
|Goodwill                                          |              | 
|Other assets                                      |              | 
|                                                  |              | 
|Total assets                                      |              | 
|                                                  |              | 
|                                                  |              | 
|Liabilities and stockholders' equity              |              | 
|Current liabilities:                              |              | 
|Accounts payable                                  |              | 
|Accrued expenses and other current liabilities    |              | 
|Accrued expenses due to affiliates                |              | 
|Restructuring charges                             |              | 
|Customer deposits                                 |              | 
|Lines of credit                                   |              | 
|                                                  |              | 
|Total current liabilities                         |              | 
|                                                  |              | 
|Minority interest and other long-term liabilities |              | 
|                                                  |              | 
|Total liabilities                                 |              | 
|                                                  |              | 
|Commitments and contingencies (Note 7)            |              | 
|                                                  |              | 
|Stockholders' equity:                             |              | 
|Preferred stock, $.01 par value:                  |              | 
|Authorized shares - 3,000,000                     |              | 
|Issued and outstanding shares - none              |              | 
|Common stock, $.01 par value:                     |              | 
|Authorized shares - 47,000,000                    |              | 
|Issued and outstanding shares -                   |              | 
|18,934,182 - 2006                                 |              | 
|18,916,847 - 2005                                 |              | 
|Treasury stock                                    |              | 
|Accumulated other comprehensive gain (loss)       |              | 
|Additional paid-in capital                        |              | 
|Accumulated deficit                               |              | 
|                                                  |              | 
|Total stockholders' equity                        |              | 
|                                                  |              | 
|Total liabilities and stockholders' equity        |              | 
|                                                  |              | 

See accompanying notes.

F-8

---

# SPAR Group, Inc. and
Subsidiaries

# Consolidated
Statements of Operations

(In thousands,
except per share data)

|                                                    | Year Ended December 31, | 
|--------------------------------------------------- | ----------------------- | 
|
|                                                    |                         | 
|Net revenues                                        |                         | 
|Cost of revenues                                    |                         | 
|                                                    |                         | 
|Gross profit                                        |                         | 
|                                                    |                         | 
|Selling, general and administrative expenses        |                         | 
|Impairment charges                                  |                         | 
|Depreciation and amortization                       |                         | 
|                                                    |                         | 
|Operating (loss) income                             |                         | 
|                                                    |                         | 
|Interest expense                                    |                         | 
|Other (income) expense                              |                         | 
|                                                    |                         | 
|(Loss) income before provision for income taxes and |                         | 
|minority interest                                   |                         | 
|Provision for income taxes                          |                         | 
|                                                    |                         | 
|(Loss) income before minority interest              |                         | 
|Minority interest                                   |                         | 
|                                                    |                         | 
|Net (loss) income                                   |                         | 
|                                                    |                         | 
|                                                    |                         | 
|Basic/diluted net (loss) income per common share:   |                         | 
|                                                    |                         | 
|Net (loss) income - basic/diluted                   |                         | 
|                                                    |                         | 
|                                                    |                         | 
|Weighted average common shares - basic              |                         | 
|                                                    |                         | 
|                                                    |                         | 
|Weighted average common shares - diluted            |                         | 
|                                                    |                         | 

See accompanying notes.

F-9

---

# SPAR Group, Inc. and
Subsidiaries

# Consolidated
Statements of Stockholders Equity

(In thousands)

|                                     | Common Stock | 
|------------------------------------ | ------------ | 
|
|Balance at January 1, 2004           |              | 
|                                     |              | 
|Stock options exercised and employee |              | 
|stock purchase plan purchases        |              | 
|Issuance of stock options to non-    |              | 
|employees for services               |              | 
|Comprehensive loss:                  |              | 
|Foreign currency translation loss    |              | 
|Net loss                             |              | 
|                                     |              | 
|Comprehensive loss                   |              | 
|                                     |              | 
|Balance at December 31, 2004         |              | 
|                                     |              | 
|Stock options exercised and employee |              | 
|stock purchase plan purchases        |              | 
|Issuance of stock options to non-    |              | 
|employees for services               |              | 
|Comprehensive gain:                  |              | 
|Foreign currency translation gain    |              | 
|Net income                           |              | 
|                                     |              | 
|Comprehensive gain                   |              | 
|                                     |              | 
|Balance at December 31, 2005         |              | 
|                                     |              | 
|Stock options exercised and employee |              | 
|stock purchase plan purchases        |              | 
|Issuance of stock options to non-    |              | 
|employees for services               |              | 
|Issuance of stock options to         |              | 
|employees for services               |              | 
|Comprehensive loss:                  |              | 
|Foreign currency translation loss    |              | 
|Net loss                             |              | 
|                                     |              | 
|Comprehensive loss                   |              | 
|                                     |              | 
|                                     |              | 
|Balance at December 31, 2006         |              | 
|                                     |              | 

See accompanying notes.

F-10

---

# SPAR Group, Inc. and
Subsidiaries

# Consolidated
Statements of Cash Flows

(In thousands)

|                                                         | Year Ended December 31, | 
|-------------------------------------------------------- | ----------------------- | 
|
|                                                         |                         | 
|Operating activities                                     |                         | 
|Net (loss) income                                        |                         | 
|Adjustments to reconcile net income (loss) to net cash   |                         | 
|provided by operating activities                         |                         | 
|Impairment charges                                       |                         | 
|Minority interest earnings in subsidiaries               |                         | 
|Deferred tax asset adjustments                           |                         | 
|Depreciation                                             |                         | 
|Issuance of stock options for service                    |                         | 
|Changes in operating assets and liabilities:             |                         | 
|Accounts receivable                                      |                         | 
|Prepaid expenses and other assets                        |                         | 
|Accounts payable, accrued expenses, other current        |                         | 
|liabilities and customer deposits                        |                         | 
|Accrued expenses due to affiliates                       |                         | 
|Restructuring charges                                    |                         | 
|                                                         |                         | 
|Net cash (used in) provided by operating activities      |                         | 
|Investing activities                                     |                         | 
|Purchases of property and equipment                      |                         | 
|Deposit related to acquisition                           |                         | 
|Acquisition of businesses                                |                         | 
|                                                         |                         | 
|Net cash used in investing activities                    |                         | 
|Financing activities                                     |                         | 
|Net borrowings (payments) on lines of credit             |                         | 
|Other long-term liabilities                              |                         | 
|Proceeds from employee stock purchase plan and exercised |                         | 
|options                                                  |                         | 
|                                                         |                         | 
|Net cash provided by (used in) financing activities      |                         | 
|Translation (loss) gain                                  |                         | 
|Net change in cash and cash equivalents                  |                         | 
|Cash and cash equivalents at beginning of year           |                         | 
|                                                         |                         | 
|Cash and cash equivalents at end of year                 |                         | 
|                                                         |                         | 
|Supplemental disclosure of cash flows information        |                         | 
|Interest paid                                            |                         | 
|                                                         |                         | 
|Income taxes paid                                        |                         | 
|                                                         |                         | 

See accompanying notes.

F-11

---

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated
Financial Statements 
December 31, 2006

# 1. Business and
Organization

The SPAR Group, Inc., a Delaware
corporation (SGRP), and its subsidiaries (together with SGRP, the SPAR
Group or the Company), is a supplier of merchandising and other
marketing services throughout the United States and internationally. The Company also
provides in-store event staffing, product sampling, Radio Frequency Identification
(RFID) services, technology services and marketing research services.

Today the Company operates in 12
countries whose population represents approximately 48% of the total world population. The
Companys operations are currently divided into two divisions: the Domestic
Merchandising Services Division and the International Merchandising Services Division. The
Domestic Merchandising Services Division provides merchandising and marketing services,
in-store event staffing, product sampling, Radio Frequency Identification
(RFID) services, technology services and marketing research to manufacturers
and retailers in the United States. The various services are primarily performed in mass
merchandisers, electronics store chains, drug store chains and convenience and grocery
stores. The International Merchandising Services Division was established in July 2000 and
through its subsidiaries, the Company currently provides similar merchandising and
marketing services in Japan, Canada, Turkey, South Africa, India, Romania, China,
Lithuania, Latvia, Australia, and New Zealand. The Company continues to focus on expanding
its merchandising and marketing services business throughout the world.

# Domestic Merchandising
Services Division

The Companys Domestic
Merchandising Services Division provides nationwide merchandising and other marketing
services primarily on behalf of consumer product manufacturers and retailers at mass
merchandisers, electronics store chains, drug store chains and grocery stores. Included in
its clients are home entertainment, general merchandise, health and beauty care, consumer
goods and food products companies in the United States.

Merchandising services primarily
consist of regularly scheduled dedicated routed services and special projects provided at
the store level for a specific retailer or single or multiple manufacturers primarily
under single or multi-year contracts or agreements. Services also include stand-alone
large-scale implementations. These services may include sales enhancing activities such as
ensuring that client products authorized for distribution are in stock and on the shelf,
adding new products that are approved for distribution but not presently on the shelf,
setting category shelves in accordance with approved store schematics, ensuring that shelf
tags are in place, checking for the overall salability of client products and setting new
and promotional items and placing and/or removing point of purchase and other related
media advertising. Specific in-store services can be initiated by retailers or
manufacturers, and include new store openings, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. The Company also
provides in-store event staffing services, RFID services, technology services and
marketing research services.

F-12

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 1. Business and
Organization (continued)

# International
Merchandising Services Division

In July 2000, the Company established
its International Merchandising Services Division, operating through a wholly owned
subsidiary, SPAR Group International, Inc. (SGI), to focus on expanding its
merchandising and marketing services business worldwide. The Company has expanded its
international business as follows:

|               |  |     
|-------------- |  | ----
|May 2001       |  | 50% 
|June 2003      |  | 100%
|July 2003      |  | 51% 
|April 2004     |  | 51% 
|April 2004     |  | 51% 
|December 2004  |  | 51% 
|February 2005  |  | 50% 
|September 2005 |  | 51% 
|April 2006     |  | 51% 

# Discontinued Operations
 Incentive Marketing Division

In the fourth  quarter of 2001,  the
Company made the decision to divest its  interest in SPAR  Performance  Group, Inc.
("SPGI").

On June 30, 2002, SPAR Incentive
Marketing, Inc. (SIM), a wholly-owned subsidiary of the Company, entered into
a Stock Purchase and Sale Agreement with Performance Holdings, Inc. (PHI), a
Delaware corporation headquartered in Carrollton, Texas. Pursuant to that agreement, SIM
sold all of the stock of SPGI, its subsidiary, to PHI for $6.0 million. As a condition of
the sale, PHI issued and contributed 1,000,000 shares of its common stock to Performance
Holdings, Inc. Employee Stock Ownership Plan, which became the only shareholder of PHI.

The $6.0 million sales price was
evidenced by two Term Loans, an Initial Term Loan totaling $2.5 million and an Additional
Term Loan totaling $3.5 million (collectively the Term Loans). The Term Loans
were guarantied by SPGI and secured by pledges of all assets of PHI and SPGI. The Term
Loans had interest rates of 12% per annum through December 31, 2003. On January 1, 2004
the interest rate changed to 8.9% per annum. Because the collection of the notes depended
on the future operations of PHI, the $6.0 million notes were fully reserved.

Also in connection with the sale, the
Company agreed to provide a discretionary revolving line of credit to SPGI not to exceed
$2.0 million (the SPGI Revolver) through September 30, 2005. The SPGI Revolver
was secured by a pledge of all the assets of SPGI and was guarantied by SPGIs
parent, Performance Holdings, Inc. The SPGI Revolver provided for advances in excess of
the borrowing base through September 30, 2003. As of October 1, 2003, the SPGI Revolver
was adjusted, as per the agreement, to include a borrowing base calculation (principally
85% of eligible accounts receivable). In September

F-13

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 1. Business and
Organization (continued)

2003, SPGI requested and the Company
agreed to provide advances of up to $1.0 million in excess of the borrowing base through
September 30, 2004. In December of 2003, SPGI changed its name to STIMULYS, Inc
(STIMULYS). On April 30, 2004, as a result of various defaults by STIMULYS,
the Company amended the discretionary line of credit by eliminating advances in excess of
STIMULYS borrowing base and reducing the maximum amount of the revolving line to the
greater of $1.0 million or the borrowing base. Under the SPGI Revolver terms, STIMULYS was
required to deposit all of its cash receipts to the Companys lock box.

On September 10, 2004, the Company
terminated the SPGI Revolver and the Term Loans in consideration for a new Promissory Note
totaling $764,271 (which represented the amount outstanding under the SPGI Revolver at
that time) and in the event of a change in control of STIMULYS, a share in the net
proceeds resulting from such change in control,. SPAR also released its security interest
in any collateral previously pledged by STIMULYS. The first payment due under the
Promissory Note was received on October 29, 2004. Due to the collection risk associated
with the Promissory Note, the Company has established a reserve for the remaining amount
due, including interest of approximately $355,000 at December 31, 2004. As a result of the
termination of the SPGI Revolver, the reserve for collection of advances and accrued
interest under the SPGI Revolver previously established by the Company totaling
approximately $984,000 was no longer required. The release of this reserve, net of the new
reserve required for the Promissory Note, resulted in Other Income totaling approximately
$640,000 for 2004.

# 2. Summary of
Significant Accounting Policies

# Principles of Consolidation

The Company consolidates its 100%
owned subsidiaries. The Company also consolidates all of its 51% owned subsidiaries and
all of its 50% owned subsidiaries as the Company believes it is the primary beneficiary in
accordance with Financial Accounting Standards Board Interpretation Number 46, as revised
December 2003, Consolidation of Variable Interest Entities (FIN 46(R)).

In  2004,  due  to  the  amendment
 of a  royalty  agreement between the Company and its 50% owned Japanese subsidiary, the
Company has determined that in accordance with FIN 46(R) it is the primary beneficiary of
the Japanese subsidiary, and has consolidated the Japanese financial results for 2006,
2005 and 2004 in accordance with the provisions of FIN 46(R). Prior to 2004 the
investment in the Japanese subsidiary was accounted for using the equity method.

In 2006, the Japanese subsidiary
changed its fiscal year from September 30 to December 31. Therefore for the year ended
December 31, 2006, the Company consolidated fifteen months of operations (October 1, 2005
through December 31, 2006) for the Japanese subsidiary. For the year ended December 31,
2005, the Company consolidated the results of operations for the twelve month period ended
September 30, 2005. In 2004, as a result of the change in the accounting treatment, the
Company consolidated the results of operations for the nine months ended September 30,
2004.

All significant intercompany accounts
and transactions have been eliminated.

# Cash Equivalents

The Company considers all highly
liquid short-term investments with maturities of three months or less at the time of
acquisition to be cash equivalents. Cash equivalents are stated at cost, which
approximates fair value.

F-14

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 2. Summary of
Significant Accounting Policies (continued)

# Revenue Recognition

The Companys services are
provided to its clients under contracts or agreements. The Company bills its clients based
upon service fee or per unit fee arrangements. Revenues under service fee arrangements are
recognized when the service is performed. The Companys per unit fee arrangements
provide for fees to be earned based on the retail sales of a clients products to
consumers. The Company recognizes per unit fees in the period such amounts become
determinable and are reported to the Company.

# Unbilled Accounts
Receivable

Unbilled accounts receivable
represent services performed but not billed and are included as accounts receivable.

# Doubtful Accounts, Sales
Allowances and Credit Risks

The Company continually monitors the
validity of its accounts receivable based upon current client credit information and
financial condition. Balances that are deemed to be uncollectible after the Company has
attempted reasonable collection efforts are written off through a charge to the bad debt
allowance and a credit to accounts receivable. Accounts receivable balances, net of any
applicable reserves or allowances, are stated at the amount that management expects to
collect from the outstanding balances. The Company provides for probable uncollectible
amounts through a charge to earnings and a credit to bad debt allowance based in part on
managements assessment of the current status of individual accounts. Based on
managements assessment, the Company established an allowance for doubtful accounts
of $400,000, $616,000 and $761,000 at December 31, 2006, 2005 and 2004, respectively. Bad
debt and sales allowance expenses were $84,000, $38,000, and $366,000 in 2006, 2005, and
2004, respectively.

# Property and Equipment

Property and equipment, including
leasehold improvements, are stated at cost. Depreciation is calculated on a straight-line
basis over estimated useful lives of the related assets, which range from three to seven
years. Leasehold improvements are depreciated over the shorter of their estimated useful
lives or lease term, using the straight-line method.

# Internal Use Software
Development Costs

In accordance with SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for InternalUse, the Company capitalizes certain costs associated with its internally developed
software. Specifically, the Company capitalizes the costs of materials and services
incurred in developing or obtaining internal use software. These costs include (but are
not limited to) the cost to purchase software, the cost to write program code, payroll and
related benefits and travel expenses for those employees who are directly involved with
and who devote time to the Companys software development projects. Capitalized
software development costs are amortized over three years.

The Company capitalized $280,000,
$346,000, and $559,000 of costs related to software developed for internal use in 2006,
2005, and 2004, respectively, and amortized capitalized software of approximately
$371,000, $516,000 and $638,000 for the years ended December 31, 2006, 2005, and 2004,
respectively.

In 2004, the Company recorded an
impairment charge against capitalized software costs due to the loss of certain clients
during the year totaling approximately $442,000 (see Note 3  Impairment Charges).

F-15

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 2. Summary of
Significant Accounting Policies (continued)

# Impairment of Long-Lived
Assets

The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that an
assets carrying amount may be higher than its fair value. If an asset is considered
to be impaired, the impairment charge recognized is the excess of the assets
carrying value over the assets fair value (see Note 3  Impairment Charges).

# Fair Value of Financial
Instruments

The Companys balance sheets
include the following financial instruments: accounts receivable, accounts payable and
lines of credit. The Company considers the carrying amounts of current assets and
liabilities in the financial statements to approximate the fair value for these financial
instruments, because of the relatively short period of time between origination of the
instruments and their expected realization or payment. The carrying amount of the lines of
credit approximates fair value because the obligations bear interest at a floating rate.

# Excess Cash

The Companys domestic cash
balances are generally utilized to pay its bank line of credit. International cash
balances are maintained in liquid cash accounts and are utilized to fund daily operations.

# Major Clients - Domestic

One client accounted for 11%, 15%,
and 12% of the Companys net revenues for the years ended December 31, 2006, 2005,
and 2004, respectively. This client accounted for approximately 10% of the Companys
accounts receivable at both December 31, 2006 and 2005, respectively.

In addition, approximately 8%, 11%,
and 14% of the Companys net revenues for the years ended December 31, 2006, 2005,
and 2004, respectively, resulted from merchandising and marketing services performed for
manufacturers and others in stores operated by a leading mass merchandising chain. These
clients accounted for approximately 4% and 8% of the Companys accounts receivable at
December 31, 2006 and 2005, respectively.

Also, approximately 11% and 12% of
the Companys net revenues for the years ended December 31, 2006 and 2005,
respectively, resulted from merchandising and marketing services performed for
manufacturers and others in stores operated by a leading electronics chain. These clients
accounted for 7% and 8% of the Companys accounts receivable at December 31, 2006 and
2005, respectively.

# Foreign Currency Rate
Fluctuations

The Company has foreign currency
exposure associated with its international subsidiaries. In both 2006 and 2005, these
exposures are primarily concentrated in the Canadian Dollar, South African Rand,
Australian Dollar and Japanese Yen. At December 31, 2006, international assets totaled
$5.6 million and international liabilities totaled $5.7 million. For 2006, international
revenues totaled $23.2 million and the Companys share of the net loss was
approximately $630,000.

F-16

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 2. Summary of
Significant Accounting Policies (continued)

# Interest Rate Fluctuations

The Company is exposed to market risk
related to the variable interest rate on its lines of credit. At December 31, 2006, the
Companys outstanding debt totaled $5.3 million, as noted in the table below (in
thousands):

|              |  |       | 
|------------- |  | ----- | 
|United States |  | 8.7%  | 
|Japan         |  | 1.6%  | 
|Australia     |  | 10.9% | 
|Canada        |  | 7.0%  | 
|              |  |       | 
|              |  |       | 
|              |  |       | 

|(1) | Per
annum interest at December 31, 2006
|--- | ---------------------------------------

|(2) | Based
on exchange rate at December 31, 2006
|--- | -------------------------------------------

Based on 2006 average outstanding
borrowings under variable-rate debt, a one-percentage point increase in interest rates
would negatively impact annual pre-tax earnings and cash flows by approximately $33,000.

# Income Taxes

Deferred tax assets and liabilities
represent the future tax return consequences of certain timing differences that will
either be taxable or deductible when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses that are available to offset
future taxable income and tax credits that are available to offset future income taxes. In
the event the future consequences of differences between the financial reporting basis and
the tax basis of the Companys assets and liabilities result in a net deferred tax
asset, an evaluation is required of the probability of being able to realize the future
benefits indicated by such asset. A valuation allowance is provided when it is more likely
than not that some portion or the entire deferred tax asset will not be realized.

# Stock-Based Compensation

As of January 1, 2006, SFAS No.
123(R) became effective and applicable to the Companys accounting for its employee
options. The Company had previously followed APB No. 25 and related interpretations when
accounting for such options. Under APB No. 25 no compensation expense was recognized by
the Company when employee stock options were granted, as the exercise price of the
Companys employee stock options equaled the market price of the underlying stock on
the date of grant. Under SFAS No. 123(R), compensation expense is now recognized in the
Companys financial statements when employee stock options are granted. Share-based
compensation cost is measured on the grant date, based on the fair value of the award
calculated at that date, and is recognized over the employees requisite service
period, which generally is the options vesting period. Fair value is calculated
using the Black-Scholes option pricing model. Until an option is vested, the fair value of
the option continues to be updated through the vesting date. The options granted have a
ten (10) year life and vest over four-year periods at a rate of 25% per year, beginning on
the first anniversary of the date of grant.

The fair value of each option grant
is estimated based on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: dividend yield of 0% for all years; volatility
factor of expected market price of common stock of 138%, 145%, and 150% for 2006, 2005,
and

F-17

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 2. Summary of
Significant Accounting Policies (continued)

2004, respectively; risk-free
interest rate of 4.67%, 4.37%, and 4.23% for 2006, 2005, and 2004, respectively; and
expected lives of six years.

Share-based compensation expense
related to employee stock option grants totaled approximately $314,000 for the twelve
months ended December 31, 2006 and the impact on basic and diluted earnings per share was
approximately $0.02.

In 2005 and 2004, under the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148, no compensation cost has been recognized for the
stock option grants to Company employees. Compensation cost for the Companys option
grants to Company employees has been determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the Companys net income (loss) and
pro forma net income (loss) per share from continuing operations would have been
reduced to the adjusted amounts indicated below (in thousands, except per share data):

|                                                                  | Year Ended December 31,
|----------------------------------------------------------------- | -----------------------
|                                                                  |                        
|
|                                                                  |                        
|
|Net income (loss), as reported                                    |                        
|Stock based employee compensation expense                         |                        
|under the fair market value method                                |                        
|                                                                  |                        
|Pro forma net income (loss)                                       |                        
|                                                                  |                        
|Basic and diluted net income (loss) per share, 
      as reported |                        
|Basic and diluted net income (loss) per share, pro forma          |                        

# Net (Loss) Income Per
Share

Basic net (loss) income per share
amounts are based upon the weighted average number of common shares outstanding. Diluted
net (loss) income per share amounts are based upon the weighted average number of common
and potential common shares outstanding except for periods in which such potential common
shares are anti-dilutive. Potential common shares outstanding include stock options and
are calculated using the treasury stock method.

# Use of Estimates

The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the amounts disclosed for contingent assets
and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting year. Actual results could differ from those
estimates.

# Goodwill

The Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, in
the first quarter of 2002. Therefore, goodwill is no longer amortized but is subject to
annual impairment tests in accordance with that Statement. At June 30, 2004, the Company
performed the required impairment test discussed in FAS 142. The Company calculated the
fair value of each business

F-18

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 2. Summary of
Significant Accounting Policies (continued)

unit for which goodwill was recorded
to determine if there was an impairment. The fair value of each unit was based upon the
estimate of the discounted cash flow generated by the respective business unit. As a
result of these calculations, it was determined that there were impairments to the
goodwill associated with the PIA Acquisition on July 8, 1999 and acquisition of the
Companys Canadian subsidiary in June 2003. Therefore, the Company recorded an
impairment charge of approximately $8.4 million (see Note 3 - Impairment Charges).

Changes to goodwill for the years
ended December 31, 2006, 2005, and 2004 were as follows (in thousands):

|                      | 2006 |      | 2005 |      | 2004 |         
|--------------------- | ---- | ---- | ---- | ---- | ---- | --------
|Beginning of the year |      | $798 |      | $798 |      | $ 8,749 
|Impairment charges    |      | -    |      | -    |      | (8,350  
|Acquisitions          |      | -    |      | -    |      | 399     
|                      |      |      |      |      |      |         
|End of the year       |      | $798 |      | $798 |      | $    798
|                      |      |      |      |      |      |         

# Translation of Foreign
Currencies

The financial statements of the
foreign entities consolidated into SPAR Group, Inc. consolidated financial statements were
translated into United States dollar equivalents at exchange rates as follows: balance
sheet accounts for assets and liabilities were converted at year-end rates, equity at
historical rates and income statement accounts at average exchange rates for the year. The
resulting translation gains and losses are reflected in accumulated other comprehensive
gain or losses in the statement of stockholders equity. Foreign currency transaction
gains and losses are reflected in net earnings.

# Recently Issued
Accounting Standards

On September 15, 2006, the FSAB
issued SFAS No. 157, Fair Value Measurements, which provides for enhanced
guidance for using the fair value to measure assets and liabilities. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. SFAS No. 157 is applicable under other accounting pronouncements that either
require or permit fair value measurements and does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. SPAR is
in the process of analyzing the implications of SFAS No. 157.

On September 13, 2006, the SEC issued
Staff Accounting Bulletin (SAB) No. 108 on quantifying financial statement misstatements.
In summary, SAB No. 108 states that registrants should use both a balance sheet (iron
curtain) approach and an income statement (rollover) approach when quantifying and
evaluating the materiality of a misstatement, and contains guidance on correcting errors
under the dual approach.

In addition, SAB No. 108 provides
transition guidance for correcting errors existing in prior years. If prior-year errors
that had been previously considered immaterial (based on the appropriate use of the
Companys prior approach) now are considered material based on the approach in this
SAB, the Company does not need to restate prior period financial statements. SAB No. 108
is effective for the Companys annual financial statements beginning with the fiscal
year ending December 31, 2007, although earlier application is encouraged for any interim
period of the Companys 2006 fiscal year filed after September 13, 2006.

F-19

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 2. Summary of
Significant Accounting Policies (continued)

While the Company is considering the
effects of implementing its provisions, the Companys management does not presently
believe that the application of SAB No. 108 will have a material impact on the
Companys consolidated financial position or results of operations.

In July 2006, the FASB issued FASB
interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold
at the effective date to be recognized upon the adoption of FIN 48 and in subsequent
periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 and
the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the
Interpretation. The cumulative effect of applying the provisions of this Interpretation
will be reported as an adjustment to the opening balance of retained earnings for that
fiscal year. The Company is currently evaluating the impact of FIN 48 on its financial
statements.

# Reclassifications

Certain reclassifications have been
made to the prior years financial statements to conform to the 2006 presentation.

# 3. Impairment Charges

# Goodwill

During 2004, in accordance with the requirements
of SFAS 142, the Company determined that there were impairments of the goodwill amounts
associated with certain of its reporting entities.

In April 2004, the Companys
largest client announced that they signed definitive agreements for the sale of their
business to two purchasers. The sale was completed on August 2, 2004. This client
accounted for 10%, 26%, and 30% of the Companys domestic net revenues for the twelve
months ended December 31, 2005, 2004, and 2003, respectively and was the last remaining
profitable business related to the PIA Acquisition on July 8, 1999. At June 30, 2004, the
Company had $7.6 million of goodwill remaining that was related to the PIA Acquisition. As
a result of the loss of this major client, the Company did not expect a positive cash flow
from this business unit. Therefore, the Company recorded an impairment of the PIA related
goodwill resulting in a non-cash charge of $7.6 million to the results of the operations
for 2004.

In June 2003, the Company began its
Canadian operations through the acquisition of substantially all of the business and
assets of Impulse Marketing Services, Inc. In connection with this acquisition, the
Company recorded goodwill of $712,000. In June 2004, in accordance with the requirements
of SFAS 142 the Company evaluated the recorded goodwill. From June 2003 through June 2004
the Canadian subsidiary had operated at a loss. At the time of the evaluation, the
Canadian subsidiary was projecting a loss through the end of 2004 and its return to
profitability was uncertain. Based upon its evaluation, the Company recorded an impairment
of the related goodwill resulting in a non-cash charge of $712,000 for 2004.

# Capitalized Internal Use
Software Development Costs

Historically, the Company has
capitalized costs of computer software developed for internal use. In 2004, based upon a
review of its capitalized costs of computer software developed for internal use, the
Company determined that some of the costs previously capitalized were associated with
certain clients to whom the

F-20

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 3. Impairment Charges
(continued)

Company no longer provided
merchandising and marketing services. As a result of the loss of these clients, the
Company recorded an impairment charge for the net book value of internally developed
software costs of approximately $442,000 for 2004.

# Other Assets and
Liabilities

At March 31, 2004, the Company had
approximately $2.1 million accrued for restructure costs and PIA Acquisition related
costs. As a result of the PIA business impairment, the Company evaluated these accruals
and determined that only $0.4 million was required. The Company applied the $1.7 million
($1.4 million net of tax effect) reduction in PIA related acquisition liabilities against
the remaining goodwill thereby reducing the impairment charges recognized for 2004.

In addition to the above, the Company
recorded an impairment of other assets totaling $68,000 for 2004.

The above net impairment of $8.1
million is shown in the accompanying consolidated statement of operations in 2004 as
Impairment charges.

In connection with the above
Impairment Charges, the Company also recorded a $750,000 valuation allowance related to
deferred tax assets resulting from PIA net operating loss carryforwards recorded as a
result of the PIA Acquisition.

# 4. Supplemental Balance
Sheet Information

|                                                                    | December 31,
|------------------------------------------------------------------- | ------------
|Accounts receivable, net, consists of the following (in thousands): |             
|                                                                    |             
|                                                                    |             
|Trade                                                               |             
|Unbilled                                                            |             
|Non-trade                                                           |             
|                                                                    |             
|                                                                    |             
|Less:                                                               |             
|Allowance for doubtful accounts                                     |             
|                                                                    |             
|                                                                    |             
|                                                                    |             
|                                                                    |             
|
|Property and equipment consists of the following (in thousands):    |             
|                                                                    |             
|                                                                    |             
|Equipment                                                           |             
|Furniture and fixtures                                              |             
|Leasehold improvements                                              |             
|Capitalized software development costs                              |             
|                                                                    |             
|                                                                    |             
|Less accumulated depreciation and amortization                      |             
|                                                                    |             
|                                                                    |             
|                                                                    |             

F-21

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 4. Supplemental Balance Sheet
Information (continued)

|                                                               | December 31,
|-------------------------------------------------------------- | ------------
|                                                               |             
|Other assets (in thousands):                                   |             
|                                                               |             
|                                                               |             
|Safeway settlement                                             |             
|Other                                                          |             
|                                                               |             
|                                                               |             
|                                                               |             
|                                                               |             
|                                                               |             
|
|Accrued expenses and other current liabilities (in thousands): |             
|                                                               |             
|Taxes payable                                                  |             
|Accrued accounting and legal expenses                          |             
|Accrued salaries payable                                       |             
|Other                                                          |             
|                                                               |             
|                                                               |             
|                                                               |             

# 5. Lines of Credit

In January 2003, the Company (other
than SGRPs foreign subsidiaries) and Webster Business Credit Corporation, then
known as Whitehall Business Credit Corporation (Webster), entered into the
Third Amended and Restated Revolving Credit and Security Agreement (as amended,
collectively, the Credit Facility). The Credit Facility provides for a $7.0
million line of credit.  In January 2006, Webster extended the maturity date to January
23, 2009. Borrowings are based upon a borrowing base formula as defined in the agreement
(principally 85% of eligible domestic accounts receivable). The Credit
Facility is secured by all of the assets of the Company and its domestic subsidiaries and
has set Minimum Fixed Charge Coverage Ratio and Minimum Net Worth covenants. The Credit
Facility also limits certain expenditures, including, but not limited to, capital
expenditures and other investments.

The basic interest rate under the
Credit Facility is Websters Alternative Base Rate plus 0.75% per annum
(a total of 8.7% per annum at December 31, 2006), which automatically changes with each
change made by Webster in such Alternative Base Rate. The Company at its option, subject
to certain conditions, may elect to have portions of its loans under the Credit Facility
bear interest at various LIBOR rates plus 3.25% per annum based on fixed periods of one,
two, three or nine months. The actual average interest rate under the Credit Facility was
8.7% per annum for the twelve months ended December 31, 2006. The Credit Facility is
secured by substantially all of the assets of the Company (other than SGRPs foreign
subsidiaries and their assets).

The domestic revolving loan balances
outstanding under the Credit Facility were $4.2 million and $2.4 million at December 31,
2006 and 2005, respectively. There were letters of credit outstanding under the Credit
Facility of approximately $453,000 and $552,000 at December 31, 2006 and 2005,
respectively. As of December 31, 2006, the SPAR Group had unused availability under the
Credit Facility of $1.5 million out of the remaining maximum $2.3 million unused revolving
line of credit after reducing the borrowing base by outstanding loans and letters of
credit.

Because of the requirement to
maintain a lock box arrangement with Webster and Websters ability to invoke a
subjective acceleration clause at its discretion, borrowings under the Credit Facility are
classified

F-22

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 5. Lines of Credit
(continued)

In January 2003, the Company (other
than SGRP's foreign subsidiaries) and Webster Business Credit Corporation, then known as
Whitehall Business Credit Corporation ("Webster"), entered into the Third Amended and
Restated Revolving Credit and Security Agreement (as amended, collectively, the "Credit
Facility").  The Credit Facility provides for a $7.0 million revolving line of credit and
as amended in January 2006, extended its maturity until January 23, 2009.  The Credit
Facility allowed the Company to borrow up to $7.0 million based upon a borrowing base
formula as defined in the agreement (principally 85% of "eligible" domestic accounts
receivable).    The Credit Facility is secured by all of the assets of the Company and
its domestic subsidiaries and has set Minimum Fixed Charge Coverage Ratio and Minimum Net
Worth covenants.  The Credit Facility also limits certain expenditures, including, but
not limited to, capital expenditures and other investments.

The Company was in violation of Fixed
Charge Coverage Ratio covenant at December 31, 2006, and in March, 2007 Webster amended
the Credit Facility to waive the violation, change the Fixed Charge Coverage Ratio going
forward and increase the interest rate by 0.25% per annum. The Company expects that it
will comply with the amended covenants in future periods. However, there can be no
assurances that the Company will be able to comply with the amended covenants and that if
the Company violates the amended covenants, Webster will continue to issue such waivers in
the future.

Although Webster does not currently
require any personal guarantees from SGRPs major stockholders, Mr. Robert Brown and
Mr. William Bartels, Webster has requested such guarantees in the past. While Messrs.
Brown and Bartels have issued personal guarantees in the past there can be no assurances
that if Webster requests their guarantees in the future they will continue to issue such
guarantees.

The Japanese subsidiary SPAR FM
Japan, Inc. has line of credit agreements totaling 100 million Yen or approximately
$840,000 (based upon the exchange rate at December 31, 2006). The outstanding balances
under the line of credit agreements were 70 million Yen or approximately $588,000 at
December 31, 2006 and 2005, respectively (based upon the exchange rate at those dates).
The average interest rate was 1.6% per annum for the twelve months ended December 31,
2006. In addition, the Japan subsidiary had cash balances totaling 97 million Yen or
approximately $815,000 (based upon the exchange rate at December 31, 2006) and 86 million
Yen or approximately $723,000 (based upon the exchange rate at December 31, 2005) at
December 31, 2006 and 2005 respectively.

In 2006, the Australian subsidiary
SPARFACTS Australia Pty. Ltd. entered into a revolving line of credit arrangement with
Oxford Funding Pty. Ltd. for $1.1 million (Australian) or approximately $789,000 (based
upon the exchange rate at December 31, 2006). At December 31, 2006, SPARFACTS Australia
Pty. Ltd. had $429,000 (Australian) or approximately $339,000 outstanding under the line
of credit (based upon the exchange rate at that date). The average interest rate was 10.9%
per annum for the eight months ended December 31, 2006.

On October 20, 2006, SPAR Canada
Company, a wholly owned subsidiary, entered into a secured credit agreement with Royal
Bank of Canada providing for a Demand Operating Loan for a maximum borrowing of $1.0
million (Canadian) or approximately $858,000 (based upon the exchange rate at December 31,
2006). The Demand Operating Loan provides for borrowing based upon a borrowing base
formula as defined in the agreement (principally 75% of eligible accounts receivable less
certain deductions). At December 31, 2006, SPAR Canada Company had $238,000 (Canadian) or
approximately $204,000 outstanding under the line of credit (based upon the exchange rate
at December 31, 2006). The average interest rate was 7% per annum for the two months ended
December 31, 2006.

F-23

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 6. Income Taxes

The provision for income tax expense
is summarized as follows (in thousands):

|         | December 31, | 
|-------- | ------------ | 
|
|Current  |              | 
|Deferred |              | 
|         |              | 
|         |              | 
|         |              | 

The provision for income taxes is
different from that which would be obtained by applying the statutory federal income tax
rate to income before income taxes. The items causing this difference are as follows (in
thousands):

|                                           | December 31, | 
|------------------------------------------ | ------------ | 
|
|Provision (benefit) for income taxes at    |              | 
|federal statutory rate, net of foreign     |              | 
|tax                                        |              | 
|State income taxes, net of federal benefit |              | 
|Permanent differences                      |              | 
|Change in valuation allowance              |              | 
|International tax provisions               |              | 
|Other                                      |              | 
|                                           |              | 
|Provision for income taxes                 |              | 
|                                           |              | 

Deferred taxes consist of the
following (in thousands):

|                                                     | December 31, | 
|---------------------------------------------------- | ------------ | 
|                                                     |              | 
|
|                                                     |              | 
|Deferred tax assets:                                 |              | 
|Net operating loss carryforwards                     |              | 
|Restructuring                                        |              | 
|Deferred revenue                                     |              | 
|SIM reserve against loan commitment                  |              | 
|Allowance for doubtful accounts and other receivable |              | 
|123R options expense                                 |              | 
|Other                                                |              | 
|Valuation allowance                                  |              | 
|                                                     |              | 
|Total deferred tax assets                            |              | 
|Deferred tax liabilities:                            |              | 
|Goodwill                                             |              | 
|Litigation receivables                               |              | 
|Capitalized software development costs               |              | 
|                                                     |              | 
|Total deferred tax liabilities                       |              | 
|                                                     |              | 
|Net deferred tax assets                              |              | 
|                                                     |              | 

F-24

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 6. Income Taxes
(continued)

At December 31, 2006, the Company has net
operating loss carryforwards (NOLs) of $7.6 million, related to the PIA Acquisition
available to reduce future federal taxable income. The $7.6 million PIA related net
operating loss carryforwards begin to expire in the year 2012. Section 382 of the Internal
Revenue Code restricts the annual utilization of the NOLs incurred prior to a change in
ownership. Such a change in ownership had occurred in 1999, thereby restricting the
NOLs prior to such date available to the Company to approximately $657,500 per year.
In addition, the Company has NOLs related to its prior and current year losses totaling
$9.7 million of which $1.1 million, $5.2 million and $3.4 million expire in 2023, 2024 and
2025, respectively.

As a result of 2006 losses, a
challenging market and the lack of certainty of continued profitability in 2007, the
Company established a valuation allowance equal to the total of its net deferred tax
assets of $6.4 million.

The Company does not provide
currently for U.S. income taxes on the undistributed earnings of its foreign subsidiaries
since, at the present time, management expects any earnings to be reinvested in the
foreign subsidiaries and not distributed.

# 7. Commitments and
Contingencies

# Lease Commitments

The Company leases equipment and
certain office space in several cities, under non-cancelable operating lease agreements.
Certain leases require the Company to pay its share of any increases in operating expenses
and real estate taxes. Rent expense was approximately $780,000, $900,000, and
$1.0 million for 2006, 2005, and 2004, respectively. At December 31, 2006,
future minimum commitments under all non-cancelable operating lease arrangements are as
follows (in thousands):

|      | 
|----- | 
|2007  | 
|2008  | 
|2009  | 
|2010  | 
|2011  | 
|2012  | 
|      | 
|Total | 
|      | 

# International Commitments

The Companys international
model is to partner with local merchandising companies and combine their knowledge of the
local market with the Companys proprietary software and expertise in the
merchandising business. In 2001, the Company established its first international
subsidiary and has continued this strategy.  As of this filing, the Company is currently operating
in Japan, Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia,
Australia and New Zealand through 9 subsidiaries.

Certain of these international
subsidiaries are marginally profitable while others are operating at a loss. None of these
entities have excess cash reserves. In the event of continued losses, the Company may be
required to provide additional cash infusions into these subsidiaries.

F-25

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 7. Commitments and
Contingencies (continued)

# Legal Matters

Safeway Inc. (Safeway)
filed a Complaint against PIA Merchandising Co., Inc. (PIA Co.), a wholly
owned subsidiary of SPAR Group, Inc. (SGRP), Pivotal Sales Company
(Pivotal), a wholly owned subsidiary of PIA Co., and SGRP in Alameda Superior
Court, case no. 2001028498 on October 24, 2001. Safeway claims, as subsequently amended,
alleged causes of action for breach of contract and breach of implied contract. PIA Co.
and Pivotal filed cross-claims against Safeway on or about March 11, 2002, and amended
them on or about October 15, 2002, alleging causes of action by PIA Co. and Pivotal
against Safeway for breach of contract, interference with economic relationship, unfair
trade practices and unjust enrichment. Trial commenced in March 2006.

On May 26, 2006, the jury in this
case returned a verdict resulting in a net award of $1,307,700 to Pivotal, a SGRP
subsidiary. This net award is to be paid by Safeway and resulted from separate jury
findings that awarded damages to those SGRP subsidiaries on certain claims and damages to
Safeway on other claims. In particular, the jury awarded damages to Pivotal of $5,760,879
for Safeways interference with Pivotals contractual relationships with third
party manufacturers and also awarded $782,400 to Pivotal and PIA for Safeways breach
of contract with those SGRP subsidiaries. The jury awarded damages to Safeway of
$5,235,579 for breach of contract by SGRP and those SGRP subsidiaries. Judgment was
entered in favor of Pivotal in September 2006 for $1,307,700. Both parties have filed
appeals. Pivotal/SGRP is seeking to have Safeways judgment overturned. Safeway has
asked for a new trial on the judgment found against them. The appellate process is
expected to take fourteen to twenty four months to complete. The Company has recorded both
the $1.3 million settlement award and approximately $1.2 million of related legal expenses
as a net favorable impact to other income of approximately $100,000 for the year ended
December 31, 2006.

In addition to the above, the Company
is a party to various other legal actions and administrative proceedings arising in the
normal course of business. In the opinion of Companys management, disposition of
these other matters are not anticipated to have a material adverse effect on the financial
position, results of operations or cash flows of the Company.

# 8. Treasury Stock

The Company initiated a share
repurchase program in 2002, which allowed for repurchase of up to 100,000 shares. In 2003,
the Board of Directors authorized the repurchase of an additional 122,000 shares
increasing the total to 222,000 shares.

The following table summarizes the
Companys treasury stock activity for the years 2006, 2005, and 2004.

|                                  | Quantity | Amount
|--------------------------------- | -------- | ------
|                                  |          |       
|Treasury Stock, January 1, 2004   |          |       
|Used to fulfill options exercised |          |       
|                                  |          |       
|                                  |          |       
|Treasury Stock, December 31, 2004 |          |       
|Used to fulfill options exercised |          |       
|                                  |          |       
|                                  |          |       
|Treasury Stock, December 31, 2005 |          |       
|Used to fulfill options exercised |          |       
|                                  |          |       
|                                  |          |       
|Treasury Stock, December 31, 2006 |          |       
|                                  |          |       

F-26

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 9. Employee Benefits

# Stock Purchase Plans

The Company has Employee and
Consultant Stock Purchase Plans (the SP Plans). The SP Plans allow employees
and consultants of the Company to purchase common stock without having to pay any
commissions on the purchases. On August 8, 2002, the Companys Board of Directors
approved a 15% discount for employee purchases and recommended that its affiliates (see
Note 10 - Related-Party Transactions) approve a 15% cash bonus for affiliate consultant
purchases. The maximum amount that any employee or consultant can contribute to the SP
Plans per quarter is $6,250, and the total number of shares reserved by the Company for
purchase under the SP Plans is 500,000.

Shares purchased by employees and
consultants under the SP Plans were 31,385, 28,065, and 43,023 for 2006, 2005, and 2004,
respectively.

The Companys expense resulting
from the 15% discount offered to employees and consultants was approximately $5,200,
$5,000, and $10,000 for the years ending December 31, 2006, 2005, and 2004, respectively.

# Retirement/Pension Plans

The Company has a 401(k) Profit
Sharing Plan covering substantially all eligible employees. Employer contributions were
approximately $29,000, $27,000, and $97,000 for 2006, 2005, and 2004, respectively.

# 10. Related-Party
Transactions

Mr. Robert           G. Brown, a
Director, the Chairman, President and Chief Executive Officer and a           major
stockholder of SGRP, and Mr. William H. Bartels, a Director and the Vice
          Chairman of the Company and a major stockholder of SGRP, are executive officers
          and the sole stockholders and directors of SPAR Marketing Services, Inc.
          (SMS), SPAR Management Services, Inc. (SMSI), and SPAR
          Infotech, Inc. (SIT).

SMS and SMSI provided approximately
99% of the Companys domestic merchandising specialists in the field (through its
independent contractor field force) and approximately 78% of the Companys domestic
field management at a total cost of approximately $18.9 million, $20.0 million, and $24.4
million for 2006, 2005, and 2004, respectively. Pursuant to the terms of the Amended and
Restated Field Service Agreement dated as of January 1, 2004, SMS provides the services of
SMSs merchandising specialist field force of approximately 5,000 independent
contractors to the Company. Pursuant to the terms of the Amended and Restated Field
Management Agreement dated as of January 1, 2004, SMSI provides approximately 50 full-time
national, regional and district managers to the Company. For those services, the Company
has agreed to reimburse SMS and SMSI for all of their costs of providing those services
and to pay SMS and SMSI each a premium equal to 4% of their respective costs, except that
for 2004 SMSI agreed to concessions that reduced the premium paid by approximately
$640,000 for 2004. Total net premiums (4% of SMS and SMSI costs less 2004 concessions)
paid to SMS and SMSI for services rendered were approximately $730,000, $770,000, and
$320,000 for 2006, 2005, and 2004, respectively. The Company has been advised that Messrs.
Brown and Bartels are not paid any salaries as officers of SMS or SMSI so there were no
salary reimbursements for them included in such costs or premium. However, since SMS and
SMSI are Subchapter S corporations, Messrs. Brown and Bartels benefit from any
income of such companies allocated to them.

F-27

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 10. Related-Party
Transactions (continued)

SIT provided substantially all of the
Internet computer programming services to the Company at a total cost of approximately
$678,000, $771,000, and $1.2 million for 2006, 2005, and 2004, respectively. SIT provided
approximately 23,000, 25,000, and 34,000 hours of Internet computer programming services
to the Company for 2006, 2005, and 2004, respectively. Pursuant to the Amended and
Restated Programming and Support Agreement dated as of January 1, 2004, SIT continues to
provide programming services to the Company for which the Company has agreed to pay SIT
competitive hourly wage rates for time spent on Company matters and to reimburse the
related out-of-pocket expenses of SIT and its personnel. The average hourly billing rate
was $28.87, $30.34, and $34.71 for 2006, 2005, and 2004, respectively. The Company has
been advised that no hourly charges or business expenses for Messrs. Brown and Bartels
were charged to the Company by SIT for 2005. However, since SIT is a Subchapter
S corporation, Messrs. Brown and Bartels benefit from any income of such company
allocated to them.

In November 2004 and January 2005,
the Company entered into separate operating lease agreements between SMS and the
Companys wholly owned subsidiaries, SPAR Marketing Force, Inc. (SMF) and
SPAR Canada Company (SPAR Canada). In May 2005, the Company and SMS amended
the lease agreements reducing the total monthly payment. Each lease, as amended, has a 36
month term and representations, covenants and defaults customary for the leasing industry.
The SMF lease is for handheld computers to be used by field merchandisers in the
performance of various merchandising and marketing services in the United States and has a
monthly payment of $17,891. These handheld computers had an original purchase price of
$632,200. The SPAR Canada lease is also for handheld computers to be used by field
merchandisers in the performance of various merchandising and marketing services in Canada
and has a monthly payment of $2,972. These handheld computers had an original purchase
price of $105,000. The monthly payments, as amended, are based upon a lease factor of
2.83%.

In March 2005, SMF entered into an
additional 36 month lease with SMS for handheld computers. The lease factor is 2.83% and
the monthly payment is $2,341. These handheld computers had an original purchase price of
$82,727.

Through arrangements with the
Company, SMS, SMSI and SIT participate in various benefit plans, insurance policies and
similar group purchases by the Company, for which the Company charges them their allocable
shares of the costs of those group items and the actual costs of all items paid
specifically for them. All transactions between the Company and the above affiliates are
paid and/or collected by the Company in the normal course of business.

The following transactions occurred
between the Company and the above affiliates (in thousands):

|                                      | Year Ended December 31, | 
|------------------------------------- | ----------------------- | 
|
|Services provided by affiliates:      |                         | 
|Independent contractor services (SMS) |                         | 
|                                      |                         | 
|                                      |                         | 
|Field management services (SMSI)      |                         | 
|                                      |                         | 
|                                      |                         | 
|Handheld computer leases (SMS)        |                         | 
|                                      |                         | 
|Internet and software program         |                         | 
|                                      |                         | 
|consulting services (SIT)             |                         | 
|                                      |                         | 

F-28

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 10. Related-Party
Transactions (continued)

|                                                   |  | 
|-------------------------------------------------- |  | 
|Accrued expenses due to affiliates (in thousands): |  | 
|                                                   |  | 
|                                                   |  | 
|                                                   |  | 
|                                                   |  | 
|SPAR Marketing Services, Inc.                      |  | 
|SPAR Management Services, Inc.                     |  | 
|SPAR Infotech, Inc.                                |  | 
|                                                   |  | 
|                                                   |  | 
|                                                   |  | 

In addition to the above, through the
services of Affinity Insurance, Ltd., the Company purchased insurance coverage for its
casualty and property insurance risk for approximately $1.1 million for each of the three
years ended December 31, 2006, 2005, and 2004. The Companys CEO and Vice Chairman
own, through SMSI, a minority (less than 5%) equity interest in Affinity.

# 11. Stock Options

SGRP currently has four stock option
plans: the 2000 Stock Option Plan (2000 Plan), the Special Purpose Stock
Option Plan (Special Purpose Plan), the Amended and Restated 1995 Stock Option
Plan (1995 Plan) and the 1995 Directors Plan (Directors
Plan).

On December 4, 2000, SGRP adopted the
2000 Plan as the successor to the 1995 Plan and the Directors Plan with respect
to all new options issued. The 2000 Plan provides for the granting of either
incentive or nonqualified stock options to specified employees, consultants, and directors
of the Company for the purchase of up to 3,600,000 (less those options still outstanding
under the 1995 Plan or exercised after December 4, 2000 under the 1995 Plan). The options
have a term of ten years, except in the case of incentive stock options granted to greater
than 10% stockholders for whom the term is five years. The exercise price of nonqualified
stock options must be equal to at least 85% of the fair market value of SGRPs common
stock at the date of grant (although typically the options are issued at 100% of the fair
market value), and the exercise price of incentive stock options must be equal to at least
the fair market value of SGRPs common stock at the date of grant. During 2006,
options to purchase 338,000 shares of SGRPs common stock were granted, options to
purchase 13,835 shares of the Companys common stock were exercised and options to
purchase 190,887 shares of SGRPs stock were voluntarily surrendered and cancelled
under this plan. At December 31, 2006, options to purchase 2,221,534 shares of
SGRPs common stock remain outstanding under this plan and options to purchase
557,108 shares of SGRPs common stock were available for grant under this plan.

On July 8, 1999, in connection with
the merger, SGRP established the Special Purpose Plan of PIA Merchandising Services, Inc.
to provide for the issuance of substitute options to the holders of outstanding options
granted by SPAR Acquisition, Inc. There were options to purchase 134,114 shares granted at $0.01 per share under this plan.
Since July 8, 1999, SGRP has not granted any new options under this plan. During 2006,
3,500 options to purchase shares of the Companys common stock were exercised under
this plan. At December 31, 2006, options to purchase 1,250 shares of SGRPs
common stock remain outstanding under this plan.

The 1995 Plan provided for the
granting of either incentive or nonqualified stock options to specific employees,
consultants, and directors of the Company for the purchase of up to 3,500,000 shares
of SGRPs common stock. The options had a term of ten years from the date of
issuance, except in the case of incentive stock options granted to greater than 10%
stockholders for which the term was five years. The exercise price of nonqualified stock
options must have been equal to at least 85% of the fair market value of the
Companys common stock at the date of grant. Since 2000, the Company has not granted
any new options

F-29

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 11. Stock Options
(continued)

under this plan. During 2006, 1,000
options to purchase shares of SGRPs common stock were cancelled. At
December 31, 2006, options to purchase 13,375 shares of the Companys common
stock remain outstanding under this plan. The 1995 Plan was superseded by the 2000 Plan
with respect to all new options issued.

The Directors Plan was a stock
option plan for non-employee directors and provided for the purchase of up to 120,000
shares of SGRPs common stock. Since 2000, SGRP has not granted any new options under
this plan. During 2006, no options to purchase shares of SGRPs common stock were
exercised under this plan. However, 20,000 options to purchase shares of SGRPs
common stock were cancelled under this plan. At December 31, 2006, there are no options to
purchase shares of SGRPs common stock that remain outstanding under this plan. The
Directors Plan has been replaced by the 2000 Plan with respect to all new options
issued.

The following table summarizes stock
option activity under SGRPs plans:

|                                       | Shares | Weighted Average
Exercise Price
|-------------------------------------- | ------ | -------------------------------
|                                       |        |                                
|Options outstanding, January 1, 2004   |        |                                
|2004                                   |        |                                
|Granted                                |        |                                
|Exercised                              |        |                                
|Canceled or expired                    |        |                                
|                                       |        |                                
|Options outstanding, December 31, 2004 |        |                                
|                                       |        |                                
|2005                                   |        |                                
|Granted                                |        |                                
|Exercised                              |        |                                
|Canceled or expired                    |        |                                
|                                       |        |                                
|Options outstanding, December 31, 2005 |        |                                
|                                       |        |                                
|2006                                   |        |                                
|Granted                                |        |                                
|Exercised                              |        |                                
|Canceled or expired                    |        |                                
|                                       |        |                                
|Options outstanding, December 31, 2006 |        |                                

|                                         |               
|---------------------------------------- | --------------
|Option price range at  December 31, 2006 | $0.01 to $5.27

|                                          |       |       |      
|----------------------------------------- | ----- | ----- | -----
|                                          | 2006  | 2005  | 2004 
|                                          |       |      
|Grant Date weighted average fair value of
|options granted during the year           | $0.99 | $1.32 | $1.47

F-30

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 11. Stock Options
(continued)

The following table summarizes
information about stock options outstanding at December 31, 2006:

|                   | Options Outstanding |           | Options Exercisable |          
|------------------ | ------------------- | --------- | ------------------- | ---------
|
|Less than $1.00    |                     | 504,851   |                     | 8.0 years
|$1.01 - $2.00      |                     | 1,531,503 |                     | 6.9 years
|$2.01 - $4.00      |                     | 178,305   |                     | 6.8 years
|Greater than $4.00 |                     | 21,500    |                     | 6.3 years
|                   |                     |           |                     |          
|Total              |                     | 2,236,159 |                     |          
|                   |                     |           |                     |          

The Company recorded expenses of
approximately $110,000, $70,000 and $103,000 for the twelve months ended December 31,
2006, 2005 and 2004, respectively, under the provision of SFAS No. 123 dealing with stock
option grants to non-employees for stock option grants that were awarded to the employees
of the Companys affiliates. The Company determines the fair value of the options
granted to non-employees using the Black-Scholes valuation model and expenses that value
over the service period. Until an option is vested, the fair value of the option continues
to be updated through the vesting date. The options granted have a ten (10) year life and
vest over four-year periods at a rate of 25% per year, beginning on the first anniversary
of the date of grant.

# 12. Geographic Data

A summary of the Companys net
revenue, operating income (loss) and long lived assets by geographic area as of and for
the year ended December 31, is as follows (in thousands):

|                              | Year Ended December 31,
|----------------------------- | -----------------------
|                              |                        
|
|                              |                        
|Net revenue:                  |                        
|United States                 |                        
|International                 |                        
|                              |                        
|Total net revenue             |                        
|                              |                        
|                              |                        
|
|                              |                        
|
|                              |                        
|Operating (loss) income:      |                        
|United States                 |                        
|International                 |                        
|                              |                        
|Total operating (loss) income |                        
|                              |                        
|                              |                        

F-31

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 12. Geographic Data (continued)

|                        | December 31,
|----------------------- | ------------
|                        |             
|Long lived assets:      |             
|                        |             
|                        |             
|United States           |             
|International           |             
|                        |             
|                        |             
|Total long lived assets |             
|                        |             

International revenues disclosed
above were based upon revenues reported by the Companys nine international
subsidiaries. The Japan subsidiary contributed 16%, 11% and 5% of the consolidated net
revenue of the Company for the twelve months ended December 31, 2006, 2005, and 2004,
respectively. Included in the 2006 international revenue was an additional quarter of
revenue, totaling approximately $1.3 million or 2% of the consolidated net revenue of the
Company, associated with the change in reporting year of the Companys subsidiary in
Japan. The Canadian subsidiary contributed 8%, 8% and 3% of the consolidated net revenue
of the Company for the twelve months ended December 31, 2006, 2005, and 2004,
respectively. The South African subsidiary contributed 4%, 7% and 8% to the consolidated
net revenue of the Company for the twelve months ended December 31, 2006, 2005 and 2004,
respectively,. The Australian subsidiary contributed 7% to the consolidated net revenue of
the Company for the twelve months ended December 31, 2006. Each of the remaining foreign
subsidiaries contributed less than 4% to the consolidated net revenue for the twelve
months ended December 31, 2006, 2005 and 2004.

# 13. Restructuring Charges

In July 2004, as a result of the loss
of several significant clients and the pending sale of the Companys largest client,
the Company entered into a plan to restructure and reduce its field force, as well as, its
selling, general and administrative cost structure to reflect its lower revenue base.
These reductions consisted of personnel reductions, personnel related expenses and office
closings. As a result of the July 2004 restructuring, the Company expensed approximately
$480,000 in the quarter ending September 30, 2004, approximately $230,000 for severance
benefits and approximately $250,000 for office leases that the Company ceased using. By
December 31, 2006, the Companys restructuring reserve was fully utilized.

In 1999, in connection with the PIA
Acquisition, the Companys Board of Directors approved a plan to restructure the
operations of the PIA Companies. Restructuring costs were composed of committed costs
required to integrate the SPAR Companies and the PIA Companies field
organizations and the consolidation of administrative functions to achieve beneficial
synergies and costs savings. At June 30, 2004, the Company evaluated its restructuring
reserves and determined that certain restructuring reserves were no longer necessary (see
Note 3 - Impairment Charges).

F-32

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 13. Restructuring
Charges (continued)

The following table displays a roll
forward of the liabilities for restructuring charges from January 1, 2004 to December 31,
2006 (in thousands):

|                                           | Employee
Separation | Equipment
Lease
Settlements | Office
Lease
Settlements | Total
|------------------------------------------ | ------------------- | --------------------------- | ------------------------ | -----
|                                           |                     |                            
|January 1, 2004, balance                   |                     |                             | $                        | -    
|                                           |                     |                            
|Impairment charge (see Note 3 - Impairment |                     |                            
|Charges)                                   |                     |                             |                          | -    
|2004 restructure plan                      |                     |                             |                          | 230  
|2004 payments                              |                     |                             |                          | (230 
|                                           |                     |                             |                          |      
|December 31, 2004, balance                 |                     |                             | $                        | -    
|                                           |                     |                             |                          |      
|                                           |                     |                            
|2005 payments                              |                     |                             |                          | -    
|                                           |                     |                             |                          |      
|December 31, 2005, balance                 |                     |                             | $                        | -    
|                                           |                     |                             |                          |      
|                                           |                     |                            
|2006 payments                              |                     |                             |                          | -    
|                                           |                     |                             |                          |      
|December 31, 2006, balance                 |                     |                             | $                        | -    
|                                           |                     |                             |                          |      
|                                           |                     |                             |                          |      

# 14. Net (Loss) Income
Per Share

The following table sets forth the
computations of basic and diluted net income (loss) per share (in thousands, except per
share data):

|                                                 | Year Ended December 31,
|------------------------------------------------ | -----------------------
|                                                 |                        
|
|                                                 |                        
|Numerator:                                       |                        
|Net (loss) income                                |                        
|                                                 |                        
|Denominator:                                     |                        
|Shares used in basic net (loss) income per share |                        
|calculation                                      |                        
|Effect of diluted securities:                    |                        
|Employee stock options                           |                        
|                                                 |                        
|Shares used in diluted net (loss) income per     |                        
|share calculations                               |                        
|                                                 |                        
|                                                 |                        
|Basic and diluted net (loss) income per common   |                        
|share:                                           |                        
|                                                 |                        

The computation of dilutive loss per
share for 2006 and 2004 excluded anti-dilutive stock options to purchase approximately
249,000 and 430,000 shares as of December 31, 2006 and 2004, respectively.

F-33

---

SPAR Group, Inc. and
Subsidiaries

Notes to Consolidated
Financial Statements (continued) December 31, 2006

# 15. Quarterly Financial
Data (Unaudited)

Quarterly data for 2006 and 2005 was
as follows (in thousands, except earnings per share data):

|                                    | Quarter
|----------------------------------- | -------
|                                    |        
|
|                                    |        
|Year Ended December 31, 2006:       |        
|Net revenues                        |        
|Gross profit                        |        
|Net income (loss)                   |        
|                                    |        
|                                    |        
|Basic/diluted net income (loss) per |        
|common share                        |        
|                                    |        
|                                    |        
|Year Ended December 31, 2005:       |        
|Net revenues                        |        
|Gross profit                        |        
|Net income (loss)                   |        
|                                    |        
|                                    |        
|Basic/diluted net income (loss) per |        
|common share                        |        
|                                    |        

2006 First quarter net revenues were
favorably impacted by the inclusion of an additional quarter of revenue, totaling $1.3
million, associated with the change in the reporting year of the Companys subsidiary
in Japan and approximately $800,000 of additional revenue from the termination of a
customer service agreement.

Net income for the second quarter
2006 was favorably impacted by approximately $200,000 resulting from a favorable $1.3
million judgment awarded in a lawsuit offset by legal expenses of approximately $1.1
million.

2005Included in the net income for the
fourth quarter of 2005 is approximately $400,000 of other income resulting form the
release of a reserve associated with the PIA Acquisition of July 1999.

F-34

---

SPAR Group, Inc. and
Subsidiaries

Schedule II 
Valuation and Qualifying Accounts

(In thousands)

|                              | Balance at
Beginning of
Period | Charged to Costs
and Expenses | Deductions | Balance at End
of Period
|----------------------------- | ------------------------------ | ----------------------------- | ---------- | ------------------------
|                              |                                |                              
|Year ended December 31, 2006: |                                |                               |            |                         
|Deducted from asset accounts: |                                |                              
|Allowance for doubtful        |                                |                              
|accounts                      |                                |                               | $          | 616                     
|                              |                                |                              
|Year ended December 31, 2005: |                                |                              
|Deducted from asset accounts: |                                |                              
|Allowance for doubtful        |                                |                              
|accounts                      |                                |                               | $          | 761                     
|                              |                                |                              
|Year ended December 31, 2004: |                                |                              
|Deducted from asset accounts: |                                |                              
|Allowance for doubtful        |                                |                              
|accounts                      |                                |                               | $          | 515                     
|Sales allowances              |                                |                               | $          | 448                     

(1)    
          Uncollectible accounts written off, net of recoveries

F-35