**UNITED        STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**_________________**

**FORM        10-K**

**(Mark        One)**

| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                        SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended**December 31, 2007** |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

OR

 

| o | 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.) |
|                                                                             |                            |
| **555 White Plains Road, Suite 250, Tarrytown, New                        York**      | **10591**                            |
| (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  o  NO          x

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  o  NO          x

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  x     NO  o

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.        o 

Indicate by check mark whether the registrant is a large accelerated filer,        an accelerated filer, a non-accelerated filer or a smaller reporting company. (See        definition of “large accelerated filer”, “accelerated filer”, and        “Smaller reporting company” in Rule 12b-2 of the Exchange Act.). (Check        one):

|   | Large Accelerated Filer  | o | Accelerated Filer    | o |
|--------|-------------------------------|---|---------------------------|---|
|        | Non-Accelerated Filer         | o | Smaller reporting company | x |

(Do not check if a smaller reporting company)

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

The aggregate market value of the Common Stock of the Registrant held by        non-affiliates of the Registrant on June 30, 2007, based on the closing price of the Common        Stock as reported by the Nasdaq Capital Market on such date, was approximately$5,600,000.

The number of shares of the Registrant’s Common Stock outstanding as        of December 31, 2007, was 19,089,177 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 29, 2008, are incorporated by reference into Part III        of this Form 10-K.

 

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**SPAR        GROUP, INC.**

 

**ANNUAL REPORT ON FORM 10-K**

 

|         | **INDEX**                                                                                                                                                               |     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|         |                                                                                                                                                                    |     |
|         | **PART I**                                                                                                                                                              |     |
|         |                                                                                                                                                                    |     |
|    |                                                                                                                                                                    | **Page** |
|         |                                                                                                                                                                    |     |
| Item 1       | Business                                                                                                                                                                | 2   |
| Item 1A      | Risk Factors                                                                                                                                                            | 9   |
| Item 1B      | Unresolved Staff Comments                                                                                                                                               | 14  |
| Item 2       | Properties                                                                                                                                                              | 14  |
| Item 3       | Legal Proceedings                                                                                                                                                       | 15  |
| Item 4       | Submission of Matters to a Vote of Security                        Holders                                                                                              | 16  |
|         |                                                                                                                                                                    |     |
|         | **PART II**                                                                                                                                                             |     |
|         |                                                                                                                                                                    |     |
| Item 5       | Market for Registrant’s Common                        Equity, Related Shareholder Matters and Issuer Purchases of Equity                        Securities        | 17  |
| Item 6       | Selected Financial Data                                                                                                                                                 | 20  |
| Item 7       | Management’s Discussion and Analysis                        of Financial Condition, Results of Operations, Liquidity and Capital                        Resources | 20  |
| Item 7A      | Quantitative and Qualitative Disclosures                        about Market Risk                                                                                       | 28  |
| Item 8       | Financial Statements and Supplementary                        Data                                                                                                      | 28  |
| Item 9       | Changes in and Disagreements with                        Accountants on Accounting and Financial Disclosure                                                             | 29  |
| Item 9A(T)   | Controls and Procedures                                                                                                                                                 | 29  |
| Item 9B      | Other Information                                                                                                                                                       | 30  |
|         |                                                                                                                                                                    |     |
|         | **PART III**                                                                                                                                                            |     |
|         |                                                                                                                                                                    |     |
| Item 10      | Directors, Executive Officers and                        Corporate Governance                                                                                           | 30  |
| Item 11      | Executive Compensation                                                                                                                                                  | 30  |
| Item 12      | Security Ownership of Certain Beneficial                        Owners and Management and Related Stockholder Matters                                                   | 30  |
| Item 13      | Certain Relationships and Related                        Transactions, and Director Independence                                                                        | 30  |
| Item 14      | Principal Accountant Fees and                        Services                                                                                                           | 30  |
|         |                                                                                                                                                                    |     |
|         | **PART IV**                                                                                                                                                             |     |
|         |                                                                                                                                                                    |     |
| Item 15      | Exhibits and Financial Statement                        Schedules                                                                                                       | 31  |
|         | 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 of 1933, as amended (the “Securities        Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the        “Exchange Act”, and together with the Securities Act, 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, to not 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,        the Company cannot assure that such plans, intentions or expectations will be achieved in        whole or in part, that it has identified all potential risks or that it can successfully        avoid or mitigate such risks 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 13        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 other        marketing services in Japan, Canada, Turkey, South Africa, India, Romania, China,        Lithuania, Latvia, Estonia, Australia and New Zealand. The Company continues to focus on        expanding its merchandising and marketing services business throughout the        world.

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.

*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, convenience and grocery stores. Included in its clients are home

 

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entertainment, general merchandise, health and beauty care, consumer goods        and food products companies in the United States.

*International Merchandising Services Division*

In July 2000, the Company established its International Merchandising        Services Division to focus on expanding its merchandising and other 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 |

 

**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 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 and replenishing product inventory. The Company        provides other marketing services such as providing in-store event staffing services, test        market research, mystery shopping, and promotion planning and analysis.

The Company believes merchandising and marketing services previously        undertaken by retailers and manufacturers have continued to be 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 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 continued to        outsource 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. 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.

 

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*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, Estonia, Australia, and New        Zealand. Today the Company operates in 13 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.

Another key to the Company’s international strategy is seeking a        material investment and participation in an international subsidiary by an experienced        person or company in the local country not otherwise affiliated with the Company (each a        “Local Owner’). The Company generally seeks to own at least 51% of a foreign        subsidiary, although it owns 50% of the equity interests in the Company’s        subsidiaries in Japan and China. Canada is the only international subsidiary wholly owned        by the Company. Local Owners provide equity, credit support and certain services and        generally are or provide management support for the corresponding international        subsidiaries. (See Item 1A - Risks of Having Material Local Investors in International        Subsidiaries, below).

*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, 2007, December 31,        2006, and December 31, 2005, and long-lived assets as of December 31, 2007 and December 31,        2006 is provided in Note 11 to the Company’s Consolidated Financial Statements        herein.

**BUSINESS STRATEGY**

As the marketing services industry continues to expand both in the United        States and internationally, large retailers and manufacturers are 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 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

 

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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. 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.

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 information is 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. This technology also 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 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 (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.

 

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*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 both its Domestic Merchandising Services Division and        International 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, Estonia, Australia and New Zealand. Today the Company operates in        13 countries whose population represents approximately 48% of the total world        population.

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                                      |
|   | • | 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,

 

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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*

The Company provides in-store product samplings and in-store product        demonstrations to national chains in target markets worldwide. 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.                                            |

 

**SALES        AND MARKETING**

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 in 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 the prospective client.

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.

 

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**CLIENTS**

The Company currently represents numerous manufacturers and /or retail        clients in a wide range of retail chains and stores worldwide, 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 7% of the Company’s net revenues for the year        ended December 31, 2007. This client accounted for approximately 3% of the Company’s        accounts receivable at December 31, 2007.

In addition, approximately 7%, 8%, and 11% of the Company’s net        revenues for the years ended December 31, 2007, 2006, and 2005, respectively, resulted from        merchandising services performed for manufacturers and others in stores operated by a        leading mass merchandising chain in the United States. These clients accounted for        approximately 5% and 4% of the Company’s accounts receivable at December 31, 2007 and        2006, respectively.

Also, approximately 14% and 11% of the Company’s net revenues for the        years ended December 31, 2007 and 2006, respectively, resulted from merchandising services        performed for manufacturers and others in stores operated by a leading electronics chain in        the United States. These clients accounted for 10% and 7% of Company’s accounts        receivable at December 31, 2007 and 2006, respectively.

**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.

**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 8,800 people        in 2007. Today the Company operates in 13 countries whose population represents        approximately 48% of the total world population.

As of December 31, 2007, the Company’s Domestic Merchandising Services        Division utilized a labor force of approximately 3,800 people. There were 126 full-time        employees and 10 part-time employees engaged in domestic operations. Of the 126 full-time        employees, 83 employees (36 client service and 47 operational support professionals) were        engaged in office operations, 38 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

 

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contractors furnished by SPAR Marketing Services, Inc. (“SMS”),        another affiliate of the Company (see Item 13 – Certain Relationships and        Related Transactions and Director Independence, below) as well as the Company’s        domestic field employees. SMS and SMSI furnished approximately 3,600 merchandising        specialists (all of whom are independent contractors of SMS) and 53 field managers (all of        whom were full-time employees of SMSI), respectively.

As of December 31, 2007, the Company’s International Merchandising        Services Division’s labor force consisted of approximately 5,000 people. There were        114 full-time and 7 part-time employees engaged in international operations. Of the 114        full-time employees, 74 employees were engaged in office operation and 40 full-time        employees were engaged in sales. The International Division’s field force consisted        of approximately 300 field management employees and approximately 4,600 merchandising        specialists of which approximately 3,800 were Company employees and approximately 800 were        independent contractors.

To support the International Merchandising Services Division, the Company        utilizes employees of its Domestic Merchandising Services Division as well as the employees        of its affiliates, SMSI and SPAR Infotech, Inc. (“SIT”). However, dedicated        employees will be added to the International Merchandising Services 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 and Director Independence, 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 to not 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.

One should carefully consider each of the risks described below before        making any investment decision respecting 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 one may lose all or part of their investment.

***Dependency on Largest Client and Large Retail        Chains***

As discussed above in “Clients”, the Company does a significant        amount of business with a leading drug store chain, 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.

 

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***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 two of the last three years (see Item        8 - Financial Statements and Supplementary 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 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.

 

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***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.

***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.

 

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***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 (and former President        and Chief Executive Officer) of the Company, beneficially owns approximately46%of the Company’s outstanding Common Stock,        and Mr. William H. Bartels, founder, director,and Vice Chairman        of the Company, beneficially owns approximately28%of the Company’s outstanding Common Stock. These stockholders have,        should they choose to act together, and under certain circumstances Mr. Brown acting        alone may have, 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 (89% of        domestic field expense in 2007), and SMSI provides substantially all of the domestic field        management services (93% of domestic field management in 2007) used by the Company in        conducting its business (See Item 13 – Certain Relationships and Related        Transactions, and Director Independence below). 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 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, and Director Independence        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.

SMS, SMSI and SIT (collectively, the “SPAR Affiliates”) are        owned solely by Mr. Robert G. Brown, founder, director, Chairman (and former 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, and        Director Independence 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.

 

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***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 4 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 of Having Material Local Investors in International        Subsidiaries***

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. As a        result, each of the Company’s international subsidiaries (other than Canada) is owned        in material part by an entity in the local country where the international subsidiary        resides and is not otherwise affiliated with the Company (each a “Local        Owner”). 50% of the equity interests in the Company’s subsidiaries in Japan and        China and 49% of the equity interests in the Company’s other international        subsidiaries (other than Canada) are owned by Local Owners rather than by the Company. The        joint venture agreements between the Company and the Local Owners in the respective        international subsidiaries (other than Canada) specify, among other things, the equity,        programming and support services the Company is required to provide and the equity, credit        support, certain services and management support that the Local Owner is required to        provide to the international subsidiary. In the event of any disagreement or other dispute        in the business relationships between the Company and Local Owner, it is possible that the        Local Owner may have one or more conflicts of interest with respect to the relationship and        could cause the applicable international subsidiary to operate or otherwise act in a way        that is not in the Company’s best interests.

The joint venture agreements generally have unlimited contract terms and        parties generally do not have the right to unilaterally withdraw. However, a non-defaulting        party has the right to terminate such agreement upon the other party’s default,        receipt of notice and failure to cure within a specified period (generally 60 days). In        addition, either party, at any time after the end of a specified period (usually between        three and five years), may: (1) sell all or part of its equity interest in the        international subsidiary to a third party by providing a written notice to the other party        of such intentions (in which case the other party has the right of first refusal and may        purchase the equity of the offering partner under the same terms and conditions); or (2)        offer to purchase the equity of the other party( in which case the other party has 120 days        to either accept or reject the offer or to reverse the transaction and actually purchase        the offering partners equity under the same terms and conditions).

Several of the international subsidiary contracts are either at or near the        end of the applicable periods during which either of the parties may trigger the right of        first refusal and buy/sell provisions described above. Both the Company and the Local        Owners, as part of their ongoing relationship, are or will be assessing appropriate action        as described above. The Company believes its relationships with the Local Owners are good.        However, there can be no assurance that the Company could (if necessary under the        circumstances) replace equity, credit support, management and other services currently        provided by a Local Owner in sufficient time to perform its client obligations or that the        Company could provide these services and or equity in the event the Local Owner were to        withdraw its investment and support in the local market. Any cancellation, other        nonperformance or material change under the joint venture agreements with the Local Owners        could have a material adverse effect on the Company’s current business, results of        operations and financial condition or future growth.

         

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***Risks Associated with Foreign Currency***

The Company also has foreign currency exposure associated with its        international subsidiaries. In 2007, 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 |
|   | • | Supervisory challenges arising from distance, physical                        absences and such communication barriers.    |

 

**Item 1B. Unresolved Staff Comments**

None.

**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 5,600        square feet of leased office space located in Tarrytown, New York, under an operating lease        with a term expiring in October 31, 2013.

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.

 

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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        | 5,600                            |
| 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                            |
| Cape Town          | Regional Office               | 3,000                            |
| Port Elizabeth     | Regional Office               | 700                              |
|               |                          |                             |
| India              |                          |                             |
| New Delhi          | Headquarters                  | 1,300                            |
| Mumbai             | Regional Office               | 500                              |
|               |                          |                             |
| Romania            |                          |                             |
| Bucharest          | Headquarters                  | 1,100                            |
|               |                          |                             |
| China              |                          |                             |
| Shanghai           | Headquarters                  | 700                              |
| Beijing            | Regional Office               | 300                              |
| Guangzhou          | Regional Office               | 600                              |
| Shenzhen           | Regional Office               | 500                              |
| Cheng Du           | Regional Office               | 300                              |
|               |                          |                             |
| Lithuania          |                          |                             |
| Siauliai           | Headquarters                  | 1,200                            |
|               |                          |                             |
| Australia          |                          |                             |
| Melbourne          | Headquarters                  | 4,200                            |

 

**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.

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

 

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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 representing the net amount of the awards. Both parties filed        post trial motions but all post trial motions were denied. Notices of Appeal were        thereafter filed by both Safeway and Pivotal. Pivotal/SGRP is seeking to have        Safeway’s judgment overturned, thereby increasing the award to Pivotal by over $5        million. Safeway has asked for a new trial on the judgment found against it. The appellate        process is expected to take fourteen to twenty four months to complete. In the interim, the        court ordered a mediation of the dispute, which took place but was not successful in        resolving the matter. Accordingly, the appeals will proceed. The Company has recorded the        net $1.3 million settlement award in other assets.

Briefing on the appeals was continued at the request of Safeway, who needed        additional time to prepare their papers. Safeway’s initial brief on appeal is        expected to be filed by the end of March, 2008. Spar’s opposition will be filed 90        days after Safeway’s brief has been filed. Opposition and Reply briefs will then be        filed within the next 180 days. Thereafter, an oral argument hearing date will be assigned        by the court of appeal.

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.

 

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**PART        II**

**Item 5. Market for Registrant’s Common Equity,        Related Shareholder Matters and Issuer Purchases of Equity Securities**

**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.

 

|           | **2007** | **2006** |
|----------------|----------|----------|
|           | **High** | **Low**  | **High** | **Low** |
| First Quarter  | $        | 1.30     | $ | 0.95 | $ | 1.36 | $ | 0.89 |
| Second Quarter |     | 1.23     |   | 0.89 |   | 1.40 |   | 0.90 |
| Third Quarter  |     | 1.50     |   | 0.95 |   | 1.13 |   | 0.90 |
| Fourth Quarter |     | 1.02     |   | 0.54 |   | 1.35 |   | 0.92 |

 

As of December 31, 2007, there were approximately1,000beneficial 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 4 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, 2007, 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, 2002, and that all dividends have        been reinvested.

 

-17-

 

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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.

 

 

 

**-**18-

 

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**Creation        and Sale of Unregistered Preferred Stock**

 

On March        28, 2008, SGRP filed a “Certificate of Designation of Series “A”        Preferred Stock of SPAR Group, Inc.” (the “Preferred Designation”),        creating a series of 3,000,000 shares of Preferred Stock designated as “Series A        Preferred Stock” with a par value of $0.01 per share (the “Preferred        Stock”), which designation had been approved by SGRP’s Board of Directors (the        “Board”) on March 27, 2008.

 

The        Preferred Designation provides that each share of Preferred Stock is to be issued at a        value equal to the closing bid price of SGRP’s common stock (the “Common        Stock”) immediately preceding the day SGRP and the purchaser(s) entered into of a        binding commitment to issue and acquire Preferred Stock. The Preferred Stock will accrue a        10% divided payable in either cash (when permitted by law and Nasdaq and authorized by the        Board) or common stock when authorized by the Board (valued at the current market price of        a share of common stock at the time paid but not less that the initial purchase price of a        share of such preferred). All accrued and unpaid dividends and potential dividends must be        paid to the holders of the Preferred Stock before any dividends can be paid to the holders        of the Common Stock. The face value (purchase price) of the Preferred Stock and all accrued        and unpaid dividends and potential dividends must be paid to the holders of the Preferred        Stock before any liquidating distributions can be made to the holders of the Common Stock.        The consent of all of the holders of the Preferred Stock is required for SGRP to make any        changes in the Preferred Designation or issue any other class of preferred stock senior to        or pari passu with the Preferred Stock.

 

The        Preferred Stock is redeemable, at the discretion of the Corporation, for a cash redemption        price equal to its face value (purchase price) plus all accrued and unpaid dividends and        potential dividends. Each share of Preferred Stock is convertible into one share of Common        Stock at the rate of one to one at the option of the holder, which option would be        exercisable for so long as the Preferred Stock is outstanding (even if the Corporation has        elected to redeem). Such a conversion also requires that the Corporation satisfy all        accrued and unpaid dividends and potential dividends at the same time. The Preferred Stock        votes with the Common Stock (no class voting) and have voting rights equal to one vote per        share of Preferred Stock.

 

On March        27, 2008, the Board also authorized the issuance of up to 530,000 shares of Preferred Stock        to its affiliates, Robert G. Brown and William H. Bartels (who are officers, directors and        significant shareholders of SGRP - see Item 13, Certain Relationships and Related        Transactions, and Director Independence) in return for (among other things) cash or the        reduction of an equivalent debt owed by the Company to SPAR Management Services, Inc.        (“SMSI”) (see Item 13, Certain Relationships and Related Transactions, and        Director Independence), an affiliate of SGRP wholly owned by Mr. Brown and        Mr. Bartels. On March 31, 2008, the Corporation, Mr. Brown, Mr. Bartels and        SMSI entered into an agreement to issue and purchase 89,286 shares of Preferred Stock at        $1.12 per share (the closing bid price of SGRP’s Common Stock for the most recent        trading day available immediately preceding such agreement date). Pursuant to that        agreement, SGRP’s payable to SMSI will be reduced by $100,000.32, and SGRP will issue        54,564 shares of Preferred Stock to Mr. Brown and 34,722 shares of Preferred Stock to        Mr. Bartels, all effective March 31, 2008. SGRP’s Audit Committee reviewed and        unanimously approved this transaction, including the terms of the Preferred Stock and the        affiliated relationship of the parties. The offer and sale of such Preferred Stock have not        been registered under the Securities Act or other securities laws, as they were a        non-public offer and sale made in reliance upon (among other things) Section 4(2) of the        Securities Act.

 

-19-

 

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**Item 6.        Selected Financial Data**

|   | Not applicable. |
|--------|-----------------|

 

 

**Item 7. Management’s Discussion and Analysis of        Financial Condition, Results of Operations, Liquidity and Capital        Resources**

***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 to not 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 other marketing services through subsidiaries        in Japan, Canada, Turkey, South Africa, India, Romania, China, Lithuania, Latvia, Estonia,        Australia and New Zealand. The Company continues to focus on expanding its merchandising        and marketing services business throughout the world.

**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 internal use software development        costs.

**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)”).

 

-20-

 

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**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**

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 $163,000 and $400,000 at December 31,        2007 and 2006, respectively. Bad debt (recovery) expenses were $(164,000), $84,000, and        $38,000 in 2007, 2006, and 2005, 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 on a straight-line basis.

The Company capitalized $328,000, $280,000, and $346,000 of costs related to        software developed for internal use in 2007, 2006, and 2005, respectively, and recognized        approximately $292,000, $371,000, and $516,000 of amortization of capitalized software for        the years ended December 31, 2007, 2006, and 2005, respectively.

**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,** |    |
|----------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                   |   | **2007**                    |    | **%** |   | **2006** |   | **%** |   | **2005** |   | **%** |   |
| Net revenues                                                                           |   | $                           | 60.7    |   | 100.0 | % | $ | 57.3 |   | 100.0 | % | $ | 51.6 |   | 100.0 | % |
| Cost of revenues                                                                       |   |                        | 41.5    |   | 68.3 |   |   | 37.5 |   | 65.4 |   |   | 32.0 |   | 61.9 |   |
| Selling, general & administrative expenses                                         |   |                        | 20.5    |   | 33.7 |   |   | 19.8 |   | 34.6 |   |   | 16.7 |   | 32.4 |   |
| Depreciation & amortization                                                        |   |                        | 0.7     |   | 1.3 |   |   | 0.7 |   | 1.3 |   |   | 1.0 |   | 2.0 |   |
| Other expense (income)                                                                 |   |                        | 0.3     |   | 0.5 |   |   | (0.1 | ) | (0.2 | ) |   | 0.6 |   | 1.2 |   |
|                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) income before income tax provision and minority                        interest |   |                        | (2.3    | ) | (3.8 | ) |   | (0.6 | ) | (1.1 | ) |   | 1.3 |   | 2.5 |   |
| Provision for income taxes                                                             |   |                        | 0.2     |   | 0.3 |   |   | 0.1 |   | 0.2 |   |   | 0.2 |   | 0.4 |   |
|                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) income before minority interest                                                 |   |                        | (2.5    | ) | (4.1 | ) |   | (0.7 | ) | (1.3 | ) |   | 1.1 |   | 2.1 |   |
| Minority interest                                                                      |   |                        | — |   | — |   |   | (0.1 | ) | (0.2 | ) |   | 0.2 |   | 0.4 |   |
| Net (loss) income                                                                      |   | $                           | (2.5    | ) | (4.1 | )% | $ | (0.6 | ) | (1.1 | )% | $ | 0.9 |   | 1.7 | % |
|                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

-21-

 

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***Results of operations for the twelve months ended December 31,        2007, compared to twelve months ended December 31, 2006*** 

**Net        Revenues**

Net revenues for the twelve months ended December 31, 2007, were $60.7        million, compared to $57.3 million for the twelve months ended December 31, 2006, an        increase of $3.4 million. International net revenues totaled $31.3 million for 2007        increasing 34.7% from $23.2 million in 2006. The increase in international net revenues of        $8.1 million was primarily due to increased net revenues from subsidiaries with operations        continuing from 2006 totaling $8.1 million. The following subsidiaries recorded 2007        increases in net revenues over 2006 results: Australia $4.2 million; India $1.4 million;        Turkey $954,000; Canada $657,000; Lithuania $570,000; China $305,000; Japan $253,000 and        Romania $113,000. South Africa reported a decline in net revenues for the twelve months        ended December 31, 2007, $410,000. Included in the 2006 international revenues was an        additional quarter of revenues totaling $1.3 million resulting from the change in the        reporting year for the Japanese subsidiary. Excluding the $1.3 million of additional        revenues for 2006, 2007 international net revenues increased $9.4 million or 40.5% from        2006. Domestic net revenues totaled $29.4 million in 2007, compared to $34.1 million in        2006. The decrease in domestic net revenues of $4.7 million, or 13.7%, is primarily the        result of lower project work and per unit fee billings, partially offset by revenue from        new clients in 2007. Included in 2006 domestic revenue was $770,000 from the termination of        a customer service agreement.

**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        68.3% of net revenues for the twelve months ended December 31, 2007, compared to 65.4% for        the twelve months ended December 31, 2006. Internationally, the cost of revenues as a        percentage of net revenues was 68.9% and 64.1% for the twelve months ended December 31,        2007, and 2006, respectively. The international cost of revenues percentage increase was        primarily attributable to lower margin revenues in Japan accounting for a greater portion        of revenue in the twelve months ended December 31, 2007, compared to the prior year.        Lithuania, Turkey and China had higher cost of revenues in 2007 compared to 2006. Domestic        cost of revenues was 67.6% and 66.2% of net revenues for the twelve months ended December        31, 2007, and 2006, 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, 2007, 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.

Approximately 90% and 84% of the Company’s domestic cost of revenue in        both the twelve months ended December 31, 2007 and 2006, respectively, 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, and Director Independence 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,** |   | **Increase****(decrease)** |   |
|---------------------------------------|--------|-----------------------------|--------|----------------------------|--------|
|                                  |   | **2007**                    |   | **%**                      |   | **2006** |   | **%** |   | **%** |   |
| Selling, general & administrative |   | $                           | 20.5   |                       | 33.7   | % | $ | 19.8 |   | 34.6 | % | 3.2 | % |
| Depreciation and amortization         |   |                        | 0.7    |                       | 1.3    |   |   | 0.7 |   | 1.3 |   | 2.9 | % |
|                                  |   |                        |   |                       |   |   |   |   |   |   |   |   |   |
| Total operating expenses              |   | $                           | 21.2   |                       | 35.0   | % | $ | 20.5 |   | 35.9 | % | 3.2 | % |

 

 

-22-

 

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Selling, general and administrative expenses increased by approximately        $635,000, or 3.2%, for the twelve months ended December 31, 2007, to $20.5 million compared        to $19.8 million for the twelve months ended December 31, 2006. The $635,000 increase in        selling, general and administrative expenses consisted of an increase in international        selling, general and administrative expenses totaling $1.5 million offset by a decrease in        domestic selling, general and administrative expenses of $876,000. International selling,        general and administrative expenses for the twelve months ended December 31, 2007, were        $10.2 million compared to $8.7 million for the prior year. The increase of approximately        $1.5 million, or 17.4%, was primarily due to $1.5 million of additional selling, general        and administrative expenses related to the new international subsidiaries in Australia $1.4        million and Lithuania $116,000 which began operations in 2006. Increases from existing        international subsidiaries include Canada $714,000, India $177,000, China $94,000, South        Africa $44,000 and Romania $17,000. General corporate international business development        costs increased $39,000. These increases were partially offset by decreases in the Japanese        international subsidiary selling, general and administrative expenses of $1.0 million and        $32,000 from the Turkish subsidiary. In 2006 there were $544,000 in additional expenses        included in the Japan subsidiary’s results due to the inclusion of the fourth quarter        of 2005 results in 2006 due to a change in reporting period. Without these expenses the        decrease in the Japanese subsidiary’s expenses would be $497,000. Domestic selling,        general and administrative expenses totaled $10.3 million for 2007 and were reduced        $873,000 from $11.1 million in 2006.

Depreciation and amortization charges were $768,000 for the twelve months        ended December 31, 2007, compared to $746,000 for the twelve months ended December 31,        2006. The decrease of approximately $22,000, or 2.9%, was due to lower purchases of        property and equipment in recent years.

**Other        Income/Other Expense**

Other expense, net was approximately $39,000 for twelve months ended        December 31, 2007, compared to other income, net of approximately $338,000 for the twelve        months ended December 31, 2006. Included in other income, net 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.

**Interest Expense**

Interest expense totaled approximately $315,000 for 2007 compared to        interest expense of approximately $237,000 for 2006. The increase was a result of higher        debt levels and interest rates in 2007.

**Income        Taxes**

The provision for income taxes was $157,000 and $99,000 for 2007 and 2006,        respectively. The tax provisions were primarily for minimum domestic state taxes due and        international tax liabilities. There were no tax provisions for United States federal tax        as the Company reported losses for the twelve months ended December 31, 2007 and        2006.

**Minority Interest**

Minority interest of approximately $47,000 and $(101,000) 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, 2007 and 2006,        respectively.

**Net        (Loss) Income**

The SPAR Group had a net loss for 2007 of approximately $2.5 million, or        $0.13 per share, compared to a net loss for 2006 of approximately $621,000, or $0.03 per        share.

**Off        Balance Sheet Arrangements**

None.

 

-23-

 

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***Results of 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, and Director Independence 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,** |   | **Increase****(decrease)** |   |
|---------------------------------------|--------|-----------------------------|--------|----------------------------|--------|
|                                  |   | **2006**                    |   | **%**                      |   | **2005** |   | **%** |   | **%** |   |
|                                  |   |                        |   |                       |   |   |   |   |   |   |   |   |   |
| Selling, general & administrative |   | $                           | 19.8   |                       | 34.6   | % | $ | 16.7 |   | 32.4 | % | 18.8 | % |
| Depreciation and amortization         |   |                        | 0.7    |                       | 1.3    |   |   | 1.0 |   | 2.0 |   | (27.6 | )% |
| Total operating expenses              |   | $                           | 20.5   |                       | 35.9   | % | $ | 17.7 |   | 34.4 | % | 16.1 | % |

 

 

-24-

 

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

**Off        Balance Sheet Arrangements**

None.

 

-25-

 

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***Liquidity and capital resources*** 

For the twelve months ended December 31, 2007, the Company had a net loss of        $2.5 million.

Net cash provided by operating activities for the year ended December 31,        2007 was $12,000, compared to net cash used in operating activities of $2.5 million in        2006. The change of approximately $2.5 million in cash used in operating activities is        primarily due to decreases in net income offset by increases in accounts payable and        accrued expenses due to affiliates.

Net cash used in investing activities for the year ended December 31, 2007        and 2006, was $814,000 and $516,000, respectively. The change in net cash used in investing        activities was a result of increased purchases of property and equipment in        2007.

Net cash provided by financing activities for the year ended December 31,        2007 was $834,000, compared with net cash provided by financing activities of $2.3 million        for the year ended December 31, 2006. The cash provided by financing activities was a        result of the Company’s increased borrowing on its lines of credit.

The above activity resulted in a increase in cash and cash equivalents for        the twelve months ended December 31, 2007 of $98,000.

The Company had negative working capital of $450,000 and positive working        capital of $1.6 million as of December 31, 2007 and 2006, respectively. The Company’s        current ratio was 0.97 and 1.13 at December 31, 2007 and 2006, respectively. The decrease        in working capital and current ratio were primarily due to increases in lines of credit,        accounts payable, accrued expenses due to affiliates and customer deposits partially offset        by an increase in accounts receivable.

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        maturing on January 23, 2009. In March 2007 the credit facility was further amended to        among other things, delay the Minimum Fixed Coverage ratio until the fourth quarter 2007,        establish an EBITDA covenant and increase the interest rate by .25% beginning March 28,        2007. In May 2007 the credit facility was amended to provide for an availability reserve of        $500,000. In August 2007 the credit facility was further amended to reduce the availability        reserve to $250,000 until November 30, 2007. On November 16, 2007 Webster amended the        credit facility to extend the availability reserve of $250,000 indefinitely and to reduce        the revolving line of credit to $5.0 million. On February 12, 2008, the Credit Facility was        further amended to reset the financial covenants for the fourth quarter of 2007 and to        establish monthly EBITDA covenants for 2008. Borrowings are based upon a borrowing base        formula as defined in the agreement (principally 85% of “eligible” domestic        accounts receivable less certain reserves). The Credit Facility is secured by all of the        assets of the Company and its domestic subsidiaries. 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 1.0% per annum (a total of 8.25% per annum at        December 31, 2007), 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 8.96% per annum for the twelve        months ended December 31, 2007. 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 $4.9 million and $4.2 million at December 31, 2007 and 2006, respectively. There were        letters of credit outstanding under the Credit Facility of approximately $0 and $453,000 at        December 31, 2007 and 2006, respectively. As of December 31, 2007, the SPAR Group had        unused availability under the Credit Facility of $102,000 out of the remaining unused        revolving line of credit.

 

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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, 2007 and        2006, 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 not in violation of its covenants at December 31, 2007 and        does not expect to be in violation at future measurement dates. However, there can be no        assurances that the Company will be able to comply with its covenants and that if the        Company violates the amended covenants, Webster will continue to issue such waivers in the        future.

In addition, Mr. Robert G. Brown, a Director, the Chairman (and former        President and Chief Executive Officer) and a major stockholder of SGRP, and        Mr. William H. Bartels, a Director, the Vice Chairman and a major stockholder of SGRP,        have provided personal guarantees of the Credit Facility totaling $1.0 million.

The Japanese subsidiary SPAR FM Japan, Inc. has line of credit agreements        totaling 100 million Yen or approximately $891,000 (based upon the exchange rate at        December 31, 2007). The outstanding balances under the line of credit agreements were 90        million Yen, or approximately $802,000 and 70 million Yen, or approximately $588,000 at        December 31, 2007 and 2006, respectively (based upon the exchange rate at those dates). The        average interest rate was 1.9% per annum for the twelve months ended December 31, 2007. In        addition, the Japanese subsidiary had cash balances totaling 137 million Yen, or        approximately $1,246,000 (based upon the exchange rate at December 31, 2007) and 97 million        Yen, or approximately $815,000 (based upon the exchange rate at December 31, 2006) at        December 31, 2007 and 2006, 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 $964,000 (based upon the exchange rate at December 31,        2007). At December 31, 2007, SPARFACTS Australia Pty. Ltd. had $315,000 (Australian), or        approximately $276,000, outstanding under the line of credit (based upon the exchange rate        at that date). The average interest rate was 10.6% per annum for the twelve months ended        December 31, 2007.

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 $1,019,400 (based        upon the exchange rate at December 31, 2007). The Demand Operating Loan provides for        borrowing based upon a formula as defined in the agreement (principally 75% of eligible        accounts receivable less certain deductions) and a minimum total debt to tangible net worth        covenant.  On March 28, 2008 Royal Bank of Canada amended the secured credit agreement        to reduce the maximum borrowing to $500,000 (Canadian).  At December 31, 2007, SPAR        Canada Company had $140,000 (Canadian), or approximately $143,000, outstanding under the        line of credit (based upon the exchange rate at December 31, 2007). The average interest        rate was 7.08% per annum for the twelve months ended December 31, 2007.

At December 31, 2007, SPAR Canada Company was in violation of its covenant.        Royal Bank of Canada has waived this violation. The Company expects that it will comply        with its covenants in future periods. However, there can be no assurances that the Company        will be able to comply with its covenants and that if the Company violates its covenants,        Royal Bank will continue to issue such waivers in the future.

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, Estonia, 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 find it necessary 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.

 

-27-

 

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**Certain        Contractual Obligations**

The following table contains a summary of certain of the Company’s        contractual obligations by category as of December 31, 2007 (in thousands).

 

| **Contractual Obligations** |      | **Payments due by Period** |
|-----------------------------|-----------|----------------------------|
|                        | **Total** |                       | **Less than 1 year** |   | **1-3 years** |   | **3-5 years** |   | **More than 5 years** |
|                        |      |                       |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit Facilities           |      | $                          | 6,119 |   | $ | 6,119 |   |   | — |   |   | — |   | — |
| Capital Lease Obligations   |      |                       | 659 |   |   | 272 |   | $ | 387 |   |   | — |   | — |
| Operating Lease Obligations |      |                       | 2,521 |   |   | 562 |   |   | 1,470 |   | $ | 489 |   | — |
| Total                       |      | $                          | 9,299 |   | $ | 6,953 |   | $ | 1,857 |   | $ | 489 |   | — |

 

**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.

The Company is exposed to market risk related to the variable interest rate        on its lines of credit. At December 31, 2007, the Company’s outstanding debt totaled        $6.1 million, as noted in the table below (in thousands):

 

| Location      |  | Variable Interest Rate (1) |  | Local Currency Amount |  | US Dollar Equivalent (2) |
|---------------|--|----------------------------|--|-----------------------|--|--------------------------|
| United States |  | 8.3%                       |  | 4,898 USD             |  | $4,898                   |
| Japan         |  | 1.9%                       |  | 90,000 YEN            |  | 802                      |
| Australia     |  | 11.9%                      |  | 315 AUD               |  | 276                      |
| Canada        |  | 7.1%                       |  | 140 CAD               |  | 143                      |
|          |  |                       |  |                  |  | $6,119                   |

 

| (1) | Per annum interest at December 31, 2007     |
|-----|---------------------------------------------|
| (2) | Based on exchange rate at December 31, 2007 |

 

Based on 2007 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 $38,000.

The Company has foreign currency exposure associated with its international        subsidiaries. In both 2007 and 2006, these exposures are primarily concentrated in the        Canadian Dollar, South African Rand, Australian Dollar and Japanese Yen. At December 31,        2007, international assets totaled $7.9 million and international liabilities totaled $12.0        million. For 2007, international revenues totaled $31.3 million and the Company’s        share of the net loss was approximately $979,000.

**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.

 

-28-

 

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

None.

**Item 9A.(T) Controls and Procedures**

**Disclosure controls and procedures**

An evaluation was conducted under the supervision and with the participation        of the Company’s management, including the Chief Executive Officer (CEO) and Chief        Financial Officer (CFO), of the effectiveness of the design and operation of the        Company’s disclosure controls and procedures as of December 31, 2007. Based on that        evaluation, the CEO and CFO concluded that the Company’s disclosure controls and        procedures were effective as of such date to ensure that information required to be        disclosed in the reports that it files or submits under the Exchange Act is recorded,        processed, summarized and reported within the time periods specified in Securities and        Exchange Commission rules and forms.

**Management’s Annual Report on Internal Control Over Financial        Reporting**

The Company’s management is responsible for establishing and        maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)        of the Exchange Act. The Company’s internal control over financial reporting is a        process designed to provide reasonable assurance to the Company’s management and        Board of Directors regarding the reliability of its financial reporting and the preparation        of financial statements for external purposes in accordance with generally accepted        accounting principles that:

| • | pertain to the maintenance of records that in reasonable                        detail accurately and fairly reflect the transactions and dispositions of                        the assets of the Company; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | provide reasonable assurance that transactions are recorded                        as necessary to permit preparation of financial statements in accordance                        with generally accepted accounting principles, and that receipts and                        expenditures of the Company are being made only in accordance with                        authorizations of management and directors of the Company; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | provide reasonable assurance regarding prevention or timely                        detection of unauthorized acquisition, use or disposition of the                        Company’s assets that could have a material effect on the financial                        statements. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Because of its inherent limitations, internal control over financial        reporting may not prevent or detect misstatements. Also, projections of any evaluation of        effectiveness to future periods are subject to the risk that controls may become inadequate        because of changes in conditions, or that the degree of compliance with the policies or        procedures may deteriorate. Therefore, internal control over financial reporting determined        to be effective provides only reasonable assurance regarding the reliability of financial        reporting and the preparations of financial statements for external purposes in accordance        with generally accepted accounting principles.

The Company carried out an evaluation of the effectiveness as of December        31, 2007, of the design and operation of its internal control over financial reporting        pursuant to Rule 13a-15 of the Exchange Act, which was conducted under the supervision and        with the participation of the Company’s Chief Executive Officer and Chief Financial        Officer. This evaluation was based on the criteria set forth by the Committee of Sponsoring        Organizations of the Treadway Commission (COSO) in the report entitled “Internal        Control--Integrated Framework”. Based upon this evaluation, the Company’s Chief        Executive Officer and Chief Financial Officer concluded that the Company’s internal        controls over financial reporting are effective as of December 31, 2007.

This annual report does not include an attestation report of the        company’s registered public accounting firm regarding internal control over financial        reporting. The company’s registered public accounting firm was not required to report        on internal controls for 2007, pursuant to the temporary rules of the Securities and        Exchange Commission.

**Internal control over financial reporting**

The Company’s management, including the CEO and CFO, confirm that        there was no change in the Company’s internal control over financial reporting during        the quarter ended December 31, 2007 that has materially affected, or is reasonably likely        to materially affect, the Company’s internal control over financial        reporting.

 

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**Item 9B. Other Information**

None.

**PART        III**

**Item 10. Directors, Executive Officers and Corporate        Governance**

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 29, 2008,        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**

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 29, 2008,        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 29, 2008,        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 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 29, 2008,        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 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 29, 2008,        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.

 

-30-

 

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**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    |
| – Güreli Yeminli Mali Müsavirlik A.S.                                                                                                                               | F-2    |
| – Baker Tilly Klitou and Partners S.R.L                                                                                                                                       | F-3    |
| – Nagesh Behl & Co.                                                                                                                                                       | F-4    |
| – UAB “ Rezultatas”                                                                                                                                               | F-5    |
| – Pitcher Partners                                                                                                                                                            | F-6    |
| Consolidated Balance Sheets as of December 31, 2007, and                        December 31, 2006                                                                                   | F-7    |
| Consolidated Statements of Operations for the years ended                        December 31, 2007, December 31, 2006, and December 31, 2005                                        | F-8    |
| Consolidated Statements of Stockholders’ Equity for                        the years ended December 31, 2007, December 31, 2006, and December 31,                        2005 | F-9    |
| Consolidated Statements of Cash Flows for the years ended                        December 31, 2007, December 31, 2006, and December 31, 2005                                        | F-10   |
| Notes to Consolidated Financial Statements                                                                                                                                          | F-11   |

 

|   | **2.** | **Financial Statement Schedules.** |
|--------|--------|------------------------------------|

 

| Schedule II - Valuation and Qualifying Accounts for the                        three years ended December 31, 2007 | F-31 |
|--------------------------------------------------------------------------------------------------------------------|------|

 

|   | **3.** | **Exhibits.** |
|--------|--------|---------------|

 

|   | **Exhibit****Number** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 3.1                   | Certificate of Incorporation of SPAR Group, Inc. (referred                        to therein under its former name of 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, as amended through November 8, 2007 (incorporated by                        reference to the Company's report on Form 8-K, as filed with the SEC on                        November 14, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 3.3                   | Amended and Restated Charter of the Audit Committee of the                        Board of Directors of SPAR Group, Inc., adopted May 18, 2004, as amended                        through November 8, 2007 (incorporated by reference to the Company’s                        report on Form 8-K, as filed with the SEC on November 14, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

 

-31-

 

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|   | 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).                                                                                                                             |
|        | 3.8                                  | Certificate of Designation of SPAR Group, Inc. Series A Preferred Stock dated                    March 28, 2008 (as filed herewith).                                                                                                                                                                                                                                                                                           |
|   | 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 (incorporated by                        reference to the Company’s annual report on Form 10-K for year ended                        December 31, 2006, as filed with the SEC on April 2, 2007).                                                                                 |
|   | 10.5

                          | Change in Control Severance Agreement between Kori G. Belzer                        and SPAR Group, Inc., dated as of March 30, 2007 (incorporated by reference                        to the Company’s annual report on Form 10-K for year ended December                        31, 2006, as filed with the SEC on April 2, 2007).                                                                                     |
|   | 10.6

                          | Change in Control Severance Agreement between Patricia                        Franco and SPAR Group, Inc., dated as of March 30, 2007 (incorporated by                        reference to the Company’s annual report on Form 10-K for year ended                        December 31, 2006, as filed with the SEC on April 2, 2007).                                                                                    |
|   | 10.7

                          | Change in Control Severance Agreement between James R.                        Segreto and SPAR Group, Inc., dated as of March 30, 2007 (incorporated by                        reference to the Company’s annual report on Form 10-K for year ended                        December 31, 2006, as filed with the SEC on April 2, 2007).                                                                                   |
|   | 10.8                                 | Change in Control Severance Agreement between Charles                        Cimitile and SPAR Group, Inc., dated as of June 4, 2007 (incorporated by                        reference to the Company’s report on Form 8-K, as filed with the SEC                        on June 6, 2007).                                                                                                                               |
|   | 10.9

                          | 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). |

 

 

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|   | 10.10

                          | 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).                                                                                      |
|--------|---------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.11                                 | Amended and Restated Programming and Support Agreement by                        and between SPAR Marketing Force, Inc. and SPAR Infotech, Inc., dated and                        effective as of September 15, 2007 (incorporated by reference to the                        Company’s report on Form 8-K, as filed with the SEC on November 14,                        2007).                                                                                                                                   |
|   | 10.12

                          | 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).                                                                                                                                                                   |
|   | 10.13

                          | 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).                                                                                                                                                                             |
|   | 10.14

                          | 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).                                                                                            |
|   | 10.15

                          | 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). |
|   | 10.16

                          | 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).  |
|   | 10.17

                          | 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). |
|   | 10.18

                          | 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).                        |
|   | 10.19

                          | 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).                                                                                                    |
|   | 10.20

                          | 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).          |

 

 

-33-

 

----

|   | 10.21

                          | 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).                                                                                                                                                                                                                                                                                       |
|--------|---------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.22

                          | Joint Venture Shareholders Agreement between Friedshelf 401                        (Proprietary) Limited, SPAR Group International, Inc., Derek O’Brien,                        Brian Mason, SMD Meridian CC, Meridian Sales & Merchandising (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). |
|   | 10.23

                          | 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).                                                                                                                                                                                                                                                     |
|   | 10.24

                          | 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).                                                                                                                                                                                                                                                                                                                                  |
|   | 10.25

                          | 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).                                                                                                                                                                                                                                                                                                                               |
|   | 10.26

                          | 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).                                                                                                                                                                                                                                                                                                     |
|   | 10.27

                          | 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).                                                                                                                                                                                                                                                                                                         |
|   | 10.28

                          | 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                        (incorporated by reference to the Company’s annual report on Form                        10-K for the fiscal year ended December 31, 2006, as filed with the SEC on                        April 2, 2007).                                                                                                                                                                                                                                                         |
|   | 10.29

                          | 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 (incorporated by reference to the Company’s annual report                        on Form 10-K for the fiscal year ended December 31, 2006, as filed with the                        SEC on April 2, 2007).                                                                                                                                                                                                                                                 |
|   | 10.30

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.31

                          | 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).                                                                                                                                                                                                                                                                                                                                             |

 

 

-34-

 

----

|   | 10.32

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|---------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.33

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.34

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.35

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 10.36

                          | 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). |
|   | 10.37

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | 10.38

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.39

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.40

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.41

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.42

                          | 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, 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-

 

----

|   | 10.43

                          | 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 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|---------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.44

                          | 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 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | 10.45

                          | 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 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10.46

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.47

                          | 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). |
|   | 10.48

                          | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10.49

                          | 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                        (incorporated by reference to the Company’s annual report on Form                        10-K for year ended December 31, 2006, as filed with the SEC on April 2,                        2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.50                                 | Waiver And Amendment No. 9 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                        May 18, 2007 with respect to the fiscal year ended December 31, 2006                        (incorporated by reference to the Company’s quarterly report on Form                        10-Q for quarter ended March 31, 2007, as filed with the SEC on May 21,                        2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | 10.51                                 | Limited Guaranty of Robert G. Brown in favor of Webster                        Business Credit Corporation, dated as of May 18, 2007 (incorporated by                        reference to the Company’s quarterly report on Form 10-Q for quarter                        ended March 31, 2007, as filed with the SEC on May 21, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.52                                 | Limited Guaranty of William H. Bartels in favor of Webster                        Business Credit Corporation, dated as of May 18, 2007 (incorporated by                        reference to the Company’s quarterly report on Form 10-Q for quarter                        ended March 31, 2007, as filed with the SEC on May 21, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

 

-36-

 

----

|   | 10.53                                 | Waiver And Amendment No. 10 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 1, 2007 with respect to the fiscal quarter ended June 30, 2007                        (incorporated by reference to the Company’s quarterly report on Form                        10-Q for quarter ended June 30, 2007, as filed with the SEC on August 20,                        2007).            |
|--------|---------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.54                                 | Waiver And Amendment No. 11 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 16, 2007 with respect to the fiscal year ended December 31, 2006                        (incorporated by reference to the Company’s quarterly report on Form                        10-Q for quarter ended September 30, 2007, as filed with the SEC on                        November 19, 2007). |
|   | 10.55                                 | Waiver And Amendment No.                        12 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 February 12, 2008 with respect to the fiscal                        year ended December 31, 2007 (as filed herewith).                                                                                                                                                                                             |
|   | 10.56

                          | Confirmation of Credit Facilities Letter by Royal Bank of                        Canada in favor of SPAR Canada Company dated as of October 17, 2006                        (incorporated by reference to the Company’s annual report on Form                        10-K for the fiscal year ended December 31, 2006, as filed with the SEC on                        April 2, 2007).                                                                                                                                                                                                      |
|   | 10.57

                          | General Security Agreement by SPAR Canada Company in favor                        of Royal Bank of Canada dated as of October 20, 2006 (incorporated by                        reference to the Company’s annual report on Form 10-K for the fiscal                        year ended December 31, 2006, as filed with the SEC on April 2, 2007).                                                                                                                                                                                                                                           |
|        | 10.58                                 | Waiver Letter and Amendment by and between Royal Bank of Canada and SPAR                        Canada Company, dated as of March 31, 2008 (as 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 Güreli                        Yeminli Mali Müsavirlik 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 UAB                        “Rezultatas”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 23.6                                  | 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.                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 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.                                                                                                                                                                                                                                                                                                                                                                                               |

 

 

-37-

 

----

|   |
|--------|
|        | 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/ Gary S.                        Raymond |
|   | Gary S. Raymond                               |
|   | Chief Executive Officer                       |
|   |                                          |
|   |                                          |
|   | Date: March 31, 2008                          |

 

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/ Gary S. Raymond       |   | Chief Executive Officer and Director                                                        |
| Gary S. Raymond           |   |                                                                                        |
| Date: March 31, 2008      |   |                                                                                        |
|                      |   |                                                                                        |
| /s/ Robert G. Brown       |   | Chairman of the Board and Director                                                          |
| Robert G. Brown           |   |                                                                                        |
| Date: March 31,, 2008     |   |                                                                                        |
|                      |   |                                                                                        |
| /s/ William H. Bartels    |   | Vice Chairman and Director                                                                  |
| William H. Bartels   |   |                                                                                        |
| Date: March 31,, 2008     |   |                                                                                        |
|                      |   |                                                                                        |
| /s/ Robert O. Aders       |   | Director                                                                                    |
| Robert O. Aders           |   |                                                                                        |
| Date: March 31, 2008      |   |                                                                                        |
|                      |   |                                                                                        |
| /s/ Jack W. Partridge     |   | Director                                                                                    |
| Jack W. Partridge         |   |                                                                                        |
| Date: March 31, 2008      |   |                                                                                        |
|                      |   |                                                                                        |
| /s/ Jerry B. Gilbert      |   | Director                                                                                    |
| Jerry B. Gilbert          |   |                                                                                        |
| Date: March 31, 2008      |   |                                                                                        |
|                      |   |                                                                                        |
| /s/ Lorrence T. Kellar    |   | Director                                                                                    |
| Lorrence T. Kellar   |   |                                                                                        |
| Date: March 31, 2008      |   |                                                                                        |
|                      |   |                                                                                        |
| /s/ C. Manly Molpus       |   | Director                                                                                    |
| C. Manly Molpus           |   |                                                                                        |
| Date: March 31, 2008      |   |                                                                                        |
|                      |   |                                                                                        |
| /s/ James R. Segreto      |   | Chief Financial Officer,                                                                    |
| James R. Segreto          |   | Treasurer and Secretary (Principal Financial and Accounting                        Officer) |
| Date: March 31, 2008      |   |                                                                                        |

 

 

-39-

 

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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, 2007 and 2006, and the related consolidated statements of operations,        stockholders’ equity, and cash flows for each of the three years in the period ended        December 31, 2007. 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 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,        2007. These statements reflect total assets constituting 8.3% of consolidated total assets        as of December 31, 2007, and total revenues constituting 10.0% 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 UAB SPAR RSS Baltic; SPAR Merchandising Romania, Ltd.; SPAR Turkey,        Ltd. (SPAR Alan Pazarlama Hizmetleri Limited Sirketi); and SPAR Solutions India Private        Limited for 2007, is based solely on the reports of the other auditors. We did not audit        the financial statements of SPARFACTS Australia PTY LTD.; 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 UAB SPAR RSS        Baltic; SPARFACTS Australia PTY LTD.;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        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 2007 and 2006, 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, 2007 and 2006, 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, 2007, 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,        2008

 

 

F-1

 

----

Report        of Independent Registered Public Accounting Firm

        To the Board of Directors        SPAR Alan Pazarlama Hizmetleri Limited Sirketi

        We have audited the accompanying balance sheets of SPAR Alan Pazarlama Hizmetleri Limited        Sirketi (the “Company”) as at December 31, 2007 and December 31, 2006 and the        related statement of operations and 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 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 of December 31, 2007 and the result of        its operations for the year then ended in conformity with U.S. generally accepted        accounting principles.

|   | /s/ Güreli Yeminli Mali MüŞavirlik                    A.Ş. |
|--------|--------------------------------------------------------------------------------|

        Istanbul, Turkey

        February 20, 2008

 

 

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 2007 and 2006, and        the related statements of operations, shareholders’ equity, and cash flows for the        years ended 31 December 2007 and 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 2007, and 31 December 2006, and the results of its operations and its cash flows        for the year ended 31 December 2007 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 15, 2008

 

 

 

F-3

 

----

Report        of Independent Registered Public Accounting Firm

The Board        of Directors and Stockholders

SPAR        Solutions Merchandising Private Limited

New Delhi,        India

The        board of directors and stockholders of SPAR Solutions Merchandising Private        Limited

We have        audited the accompanying balance sheets of SPAR Solutions Merchandising Private Limited, a        company incorporated under the laws of India, as of December 31, 2006 and 2007 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 to express an opinion on these financial statements based on our        audits.

We        conducted our audits in accordance with generally accepted auditing standards of 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 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 consolidated financial statements referred to above present fairly, in all        material respects, the financial position of SPAR Solutions Merchandising Private Limited        as of December 31, 2007 and 2006, 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        20, 2008

 

F-4

 

----

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 sheets of UAB “SPAR RSS BALTIC” as of December        31, 2007 and 2006, 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 the standards of 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 UAB “SPAR RSS BALTIC” as of December 31,        2007 and 2006, 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/ UAB “Rezultatas” |
|--------|----------------------------------|

 

 

Vilnius,Lithuania

February        15, 2008

 

F-5

 

----

Report        of Independent Registered Public Accounting Firm

The        Board of Directors and Stockholders

SPARFACTS Pty Ltd

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-6

 

----

**SPAR        Group, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

*(In        thousands, except share and per share data)*

 

 

|                                                                     |   | **December 31,** |                                       |
|--------------------------------------------------------------------------|--------|------------------|--------------------------------------------|
|                                                                     |   | **2007**         |                                       | **2006** |   |
| **Assets**                                                               |   |             |                                       |   |   |   |   |
| Current assets:                                                          |   |             |                                       |   |   |   |   |
| Cash and cash equivalents                                                |   | **$**            | **1,246**                                  |   | $ | 1,148 |   |
| Accounts receivable, net                                                 |   |             | **13,748**                                 |   |   | 12,982 |   |
| Prepaid expenses and other current assets                                |   |             | **975**                                    |   |   | 553 |   |
| Total current assets                                                     |   |             | **15,969**                                 |   |   | 14,683 |   |
| Property and equipment, net                                              |   |             | **1,528**                                  |   |   | 901 |   |
| Goodwill                                                                 |   |             | **798**                                    |   |   | 798 |   |
| Other assets                                                             |   |             | **1,648**                                  |   |   | 1,695 |   |
| Total assets                                                             |   | **$**            | **19,943**                                 |   | $ | 18,077 |   |
| **Liabilities and stockholders’ equity**                           |   |             |                                       |   |   |   |   |
|                                                                          |        |                  |                                            |  |  |  |  |
| Current liabilities:                                                     |   |             |                                       |   |   |   |   |
| Accounts payable                                                         |   | **$**            | **3,631**                                  |   | $ | 2,551 |   |
| Accrued expenses and other current liabilities                           |   |             | **3,981**                                  |   |   | 2,864 |   |
| Accrued expenses due to affiliates                                       |   |             | **2,107**                                  |   |   | 1,752 |   |
| Customer deposits                                                        |   |             | **580**                                    |   |   | 560 |   |
| Lines of credit                                                          |   |             | **6,119**                                  |   |   | 5,318 |   |
|  

Total current liabilities

                                 |   |             | **16,418**

                          |   |   | 13,045

                          |   |
| Minority interest and other long-term                        liabilities |   |             | **975**                                    |   |   | 504 |   |
|  

Total liabilities

                                         |   |             | **17,393**

                          |   |   | 13,549

                          |   |
| Commitments and contingencies (Note 6)                                   |   |             |                                       |   |   |   |   |
| Stockholders’ equity:                                              |   |             |                                       |   |   |   |   |
| Preferred stock, $.01 par value:                                         |   |             |                                       |   |   |   |   |
| Authorized shares - 3,000,000                                            |   |             |                                       |   |   |   |   |
| Issued and outstanding shares - none                                     |   |             | **—**                                |   |   | — |   |
| Common stock, $.01 par value:                                            |   |             |                                       |   |   |   |   |
| Authorized shares - 47,000,000                                           |   |             |                                       |   |   |   |   |
| Issued and outstanding shares -                                          |   |             |                                       |   |   |   |   |
| 19,089,177 - 2007                                                        |   |             |                                       |   |   |   |   |
| 18,934,182 - 2006                                                        |   |             | **191**                                    |   |   | 189 |   |
| Treasury stock                                                           |   |             | **(1**                                     | **)** |   | (1 | ) |
| Accumulated other comprehensive loss                                     |   |             | **(43**                                    | **)** |   | (109 | ) |
| Additional paid-in capital                                               |   |             | **11,982**                                 |   |   | 11,484 |   |
| Accumulated deficit                                                      |   |             | **(9,579**                                 | **)** |   | (7,035 | ) |
| Total stockholders’ equity                                         |   |             | **2,550**                                  |   |   | 4,528 |   |
| Total liabilities and stockholders’ equity                         |   | **$**            | **19,943**                                 |   | $ | 18,077 |   |
|                                                                     |   |             |                                       |   |   |   |   |

 

*See        accompanying notes.*

 

F-7

 

----

**SPAR        Group, Inc. and Subsidiaries**

**Consolidated Statements of Operations**

*(In        thousands, except per share data)*

 

 

|                                                                                         |   | **Year Ended December 31,** |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|
|                                                                                         |   | **2007**                    |   | **2006** |   | **2005** |
| Net revenues                                                                                 |   | **$**                       | **60,716** |   | $ | 57,316 |   | $ | 51,586 |
| Cost of revenues                                                                             |   |                        | **41,468** |   |   | 37,463 |   |   | 31,939 |
| Gross profit                                                                                 |   |                        | **19,248** |   |   | 19,853 |   |   | 19,647 |
| Selling, general and administrative expenses                                                 |   |                        | **20,466** |   |   | 19,831 |   |   | 16,691 |
| Depreciation and amortization                                                                |   |                        | **768** |   |   | 746 |   |   | 1,031 |
| Operating (loss) income                                                                      |   |                        | **(1,986** | **)** |   | (724 | ) |   | 1,925 |
| Interest expense                                                                             |   |                        | **315** |   |   | 237 |   |   | 191 |
| Other expense (income)                                                                       |   |                        | **39** |   |   | (338 | ) |   | 446 |
| (Loss) income before provision for income taxes and minority                        interest |   |                        | **(2,340** | **)** |   | (623 | ) |   | 1,288 |
| Provision for income taxes                                                                   |   |                        | **157** |   |   | 99 |   |   | 242 |
| (Loss) income before minority interest                                                       |   |                        | **(2,497** | **)** |   | (722 | ) |   | 1,046 |
| Minority interest                                                                            |   |                        | **47** |   |   | (101 | ) |   | 168 |
|                                                                                              |        |                             |  |  |  |  |  |  |  |
| Net (loss) income                                                                            |   | **$**                       | **(2,544** | **)** | $ | (621 | ) | $ | 878 |
| Basic/diluted net (loss) income per common share:                                            |   |                        |   |   |   |   |   |   |   |
| Net (loss) income - basic/diluted                                                            |   | **$**                       | **(0.13** | **)** | $ | (0.03 | ) | $ | 0.05 |
| Weighted average common shares - basic                                                       |   |                        | **19,011** |   |   | 18,934 |   |   | 18,904 |
| Weighted average common shares - diluted                                                     |   |                        | **19,011** |   |   | 18,934 |   |   | 19,360 |

         

*See        accompanying notes.*

 

F-8

 

----

**SPAR        Group, Inc. and Subsidiaries**

**Consolidated Statements of Stockholders’ Equity**

*(In        thousands)*

 

|                                                                                                    |        | **Common Stock** |        |        | **Additional** |        |        |                  |        | **Accumulated****Other** |                        | **Total** |        |
|----------------------------------------------------------------------------------------------------|--------|------------------|--------|--------|----------------|--------|--------|-----------------------|--------|--------------------------|------------------------|-----------|--------|
|                                                                                                    |        | **Shares**       |        |        | **Amount**     |        |        | **Treasury****Stock** |        |                          | **Paid-In****Capital** |           |        | **Accumulated****Deficit** |  | **Comprehensive****(Loss) Gain** |  | ****Stockholders’****Equity**** |  |
| Balance at January 1, 2005                                                                         |   | 18,859           |   | $      | 189            |   | $      | (108                  | )      | $                        | 11,011                 |      | $      | (7,292 | ) | $ | (86 | ) | $ | 3,714 |   |
|  

Stock options exercised and                        employee

stock purchase plan purchases |   | 58               |   |   | —        |   |   | 107                   |   |                     | (22                    | )         |   | — |   |   | — |   |   | 85 |   |
|  

Issuance of stock options to                        non-

employees for services           |   | —          |   |   | —        |   |   | —               |   |                     | 70                     |      |   | — |   |   | — |   |   | 70 |   |
| Comprehensive gain:                                                                                |   |             |   |   |           |   |   |                  |   |                     |                   |      |   |   |   |   |   |   |   |   |   |
| Foreign currency translation gain                                                                  |   | —          |   |   | —        |   |   | —               |   |                     | —                |      |   | — |   |   | 103 |   |   | 103 |   |
| Net income                                                                                         |   | —          |   |   | —        |   |   | —               |   |                     | —                |      |   | 878 |   |   | — |   |   | 878 |   |
| Comprehensive gain                                                                                 |   |             |   |   |           |   |   |                  |   |                     |                   |      |   |   |   |   |   |   |   | 981 |   |
| Balance at December 31, 2005                                                                       |   | 18,917           |   | $      | 189            |   | $      | (1                    | )      | $                        | 11,059                 |      | $      | (6,414 | ) | $ | 17 |   | $ | 4,850 |   |
|  

Stock options exercised and employee

stock purchase plan purchases                        |   | 17               |   |   | —        |   |   | —               |   |                     | 1                      |      |   | — |   |   | — |   |   | 1 |   |
|  

Issuance of stock options to                        non-

employees for services           |   | —          |   |   | —        |   |   | —               |   |                     | 110                    |      |   | — |   |   | — |   |   | 110 |   |
|  

Issuance of stock options                        to

employees for services                |   | —          |   |   | —        |   |   | —               |   |                     | 314                    |      |   | — |   |   | — |   |   | 314 |   |
| Comprehensive loss:                                                                                |   |             |   |   |           |   |   |                  |   |                     |                   |      |   |   |   |   |   |   |   |   |   |
| Foreign currency translation loss                                                                  |   | —          |   |   | —        |   |   | —               |   |                     | —                |      |   | — |   |   | (126 | ) |   | (126 | ) |
| Net loss                                                                                           |   | —          |   |   | —        |   |   | —               |   |                     | —                |      |   | (621 | ) |   | — |   |   | (621 | ) |
| Comprehensive loss                                                                                 |   |             |   |   |           |   |   |                  |   |                     |                   |      |   |   |   |   |   |   |   | (747 | ) |
| Balance at December 31, 2006                                                                       |   | 18,934           |   | $      | 189            |   | $      | (1                    | )      | $                        | 11,484                 |      | $      | (7,035 | ) | $ | (109 | ) | $ | 4,528 |   |
|  

Stock options exercised and                        employee

stock purchase plan purchases |   | **155**          |   |   | **2**          |   |   | —               |   |                     | **199**                |      |   | — |   |   | — |   |   | **201** |   |
|  

Issuance of stock options to                        non-

employees for services           |   | —          |   |   | —        |   |   | —               |   |                     | **18**                 |      |   | — |   |   | — |   |   | **18** |   |
|  

Issuance of stock options                        to

employees for services                |   | —          |   |   | —        |   |   | —               |   |                     | **281**                |      |   | — |   |   | — |   |   | **281** |   |
| Comprehensive loss:                                                                                |   |             |   |   |           |   |   |                  |   |                     |                   |      |   |   |   |   |   |   |   |   |   |
| Foreign currency translation gain                                                                  |   | —          |   |   | —        |   |   | —               |   |                     | —                |      |   | — |   |   | **66** |   |   | **66** |   |
| Net loss                                                                                           |   | —          |   |   | —        |   |   | —               |   |                     | —                |      |   | **(2,544** | **)** |   | — |   |   | **(2,544** | **)** |
| Comprehensive loss                                                                                 |   |             |   |   |           |   |   |                  |   |                     |                   |      |   |   |   |   |   |   |   | **(2,478** | **)** |
| **Balance at December 31, 2007**                                                                   |   | **19,089**       |   | **$**  | **191**        |   | **$**  | **(1**                | **)**  | **$**                    | **11,982**             |      | **$**  | **(9,579** | **)** | **$** | **(43** | **)** | **$** | **2,550** |   |

 

*See        accompanying notes.*

 

F-9

 

----

**SPAR        Group, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

*(In        thousands)*

 

 

|                                                                                                                    |   | **Year Ended December 31,** |        |
|-------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                                                                    |   | **2007**                    |        | **2006** |   | **2005** |   |
| **Operating activities**                                                                                                |   |                        |        |   |   |   |   |   |   |   |
| Net (loss) income                                                                                                       |   | **$**                       | **(2,544**  | **)** | $ | (621 | ) | $ | 878 |   |
| Adjustments to reconcile net (loss) income to net                        cashprovided by (used in) operating activities |   |                        |        |   |   |   |   |   |   |   |
| Minority interest earnings in subsidiaries                                                                              |   |                        | **178**     |   |   | 93 |   |   | 168 |   |
|                                                                                                                    |   |                        |        |   |   |   |   |   |   |   |
| Depreciation                                                                                                            |   |                        | **768**     |   |   | 746 |   |   | 1,031 |   |
| Issuance of stock options for service                                                                                   |   |                        | **299**     |   |   | 424 |   |   | 70 |   |
| Changes in operating assets and liabilities:                                                                            |   |                        |        |   |   |   |   |   |   |   |
| Accounts receivable                                                                                                     |   |                        | **(766**    | **)** |   | (2,326 | ) |   | 650 |   |
| Prepaid expenses and other assets                                                                                       |   |                        | **(375**    | **)** |   | (1,331 | ) |   | 375 |   |
| Accounts payable, accrued expenses, other currentliabilities and customer deposits                                      |   |                        | **2,097**   |   |   | 82 |   |   | 201 |   |
| Accrued expenses due to affiliates                                                                                      |   |                        | **355**     |   |   | 562 |   |   | 203 |   |
| Restructuring charges                                                                                                   |   |                        | **—** |   |   | (99 | ) |   | (151 | ) |
| Net cash provided by (used in) operating                        activities                                              |   |                        | **12**      |   |   | (2,470 | ) |   | 3,425 |   |
| **Investing activities**                                                                                                |   |                        |        |   |   |   |   |   |   |   |
| Purchases of property and equipment                                                                                     |   |                        | **(814**    | **)** |   | (516 | ) |   | (628 | ) |
|                                                                                                                    |   |                        |        |   |   |   |   |   |   |   |
| **Financing activities**                                                                                                |   |                        |        |   |   |   |   |   |   |   |
| Net borrowings (payments) on lines of credit                                                                            |   |                        | **801**     |   |   | 2,349 |   |   | (1,987 | ) |
| Payment on leases                                                                                                       |   |                        | **(168**    | **)** |   | (4 | ) |   | 29 |   |
| Proceeds from employee stock purchase plan and                        exercisedoptions                                  |   |                        | **201**     |   |   | 1 |   |   | 85 |   |
| Net cash provided by (used in) financing                        activities                                              |   |                        | **834**     |   |   | 2,346 |   |   | (1,873 | ) |
| Translation gain (loss)                                                                                                 |   |                        | **66**      |   |   | (126 | ) |   | 103 |   |
|                                                                                                                    |   |                        |        |   |   |   |   |   |   |   |
| Net change in cash and cash equivalents                                                                                 |   |                        | **98**      |   |   | (766 | ) |   | 1,027 |   |
| Cash and cash equivalents at beginning of year                                                                          |   |                        | **1,148**   |   |   | 1,914 |   |   | 887 |   |
| Cash and cash equivalents at end of year                                                                                |   | **$**                       | **1,246**   |   | $ | 1,148 |   | $ | 1,914 |   |
| **Supplemental disclosure of cash flows                        information**                                            |   |                        |        |   |   |   |   |   |   |   |
| Interest paid                                                                                                           |   | **$**                       | **238**     |   | $ | 208 |   | $ | 132 |   |
| Income taxes paid                                                                                                       |   | **$**                       | **131**     |   | $ | 131 |   | $ | 127 |   |
| Property and equipment financed by capital leases                                                                       |   | **$**                       | **581**     |   | $ | — |   | $ | — |   |

 

 

*See        accompanying notes.*

 

F-10

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements

December        31, 2007

 

**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 13 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 other marketing services in Japan, Canada, Turkey, South Africa,        India, Romania, China, Lithuania, Latvia, Estonia, 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, convenience        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.

 

F-11

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**1.        Business and Organization (continued)**

**International Merchandising Services Division**

In July        2000, the Company established its International Merchandising Services Division to focus on        expanding its merchandising and marketing services business worldwide. The Company has        expanded its international business as follows:

 

| Date Established | Percent Ownershipin 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 |

 

**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 2007, 2006 and 2005 in accordance with the provisions of FIN 46(R).

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.

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.

**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.

 

F-12

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**2.        Summary of Significant Accounting Policies (continued)**

**Unbilled Accounts Receivable**

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

**Doubtful Accounts 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 $163,000 and $400,000 at December 31, 2007 and 2006,        respectively. Bad debt (recovery) expenses were $(164,000), $84,000, and $38,000 in 2007,        2006, and 2005, 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 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 on a straight-line basis.

The        Company capitalized $328,000, $280,000, and $346,000 of costs related to software developed        for internal use in 2007, 2006, and 2005, respectively, and recognized approximately        $292,000, $371,000 and $516,000 of amortization of capitalized software for the years ended        December 31, 2007, 2006, and 2005, respectively.

**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 that would be        recognized is the excess of the asset’s carrying value over the asset’s fair        value.

**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.

 

F-13

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**2.        Summary of Significant Accounting Policies (continued)**

**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 7% of the Company’s net revenues for the year ended December 31,        2007. This client accounted for approximately 3% of the Company’s accounts receivable        at December 31, 2007.

In        addition, approximately 7%, 8%, and 11% of the Company’s net revenues for the years        ended December 31, 2007, 2006, and 2005, respectively, resulted from merchandising and        marketing services performed for manufacturers and others in stores operated by a leading        mass merchandising chain in the United States. These clients accounted for approximately 5%        and 4% of the Company’s accounts receivable at December 31, 2007 and 2006,        respectively.

Also,        approximately 14% and 11% of the Company’s net revenues for the years ended December        31, 2007 and 2006, respectively, resulted from merchandising and marketing services        performed for manufacturers and others in stores operated by a leading electronics chain in        the United States. These clients accounted for 10% and 7% of the Company’s accounts        receivable at December 31, 2007 and 2006, respectively.

**Foreign        Currency Rate Fluctuations**

The        Company has foreign currency exposure associated with its international subsidiaries. In        both 2007 and 2006, these exposures are primarily concentrated in the Canadian Dollar,        South African Rand, Australian Dollar and Japanese Yen. At December 31, 2007, international        assets totaled $7.9 million and international liabilities totaled $12.0 million. For 2007,        international revenues totaled $31.3 million and the Company’s share of the net loss        was approximately $979,000.

**Interest Rate Fluctuations**

The        Company is exposed to market risk related to the variable interest rate on its lines of        credit. At December 31, 2007, the Company’s outstanding debt totaled $6.1 million, as        noted in the table below (in thousands):

 

| Location      | Variable Interest Rate (1) | Local Currency Amount | US Dollar Equivalent (2) |
|---------------|----------------------------|-----------------------|--------------------------|
| United States | 8.3%                       | 4,898 USD             | $4,898                   |
| Japan         | 1.9%                       | 90,000 YEN            | 802                      |
| Australia     | 11.9%                      | 315 AUD               | 276                      |
| Canada        | 7.1%                       | 140 CAD               | 143                      |
|          |                       |                  | $6,119                   |

 

| (1) | Per annum interest at December 31, 2007 |
|-----|-----------------------------------------|

| (2) | Based on exchange rate at December 31, 2007 |
|-----|---------------------------------------------|

 

Based        on 2007 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 $38,000.

**Income        Taxes**

Deferred        tax assets and liabilities represent the future tax return consequences of certain        temporary 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

 

F-14

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**2.        Summary of Significant Accounting Policies (continued)**

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 133%, 138%, and 145% for 2007, 2006, and 2005, respectively; risk-free interest        rate of 4.04%, 4.67%, and 4.37% for 2007, 2006, and 2005, respectively; and expected lives        of six years.

Share-based compensation expense related to employee stock option grants        totaled approximately $281,000 and $314,000 for the twelve months ended December 31, 2007        and 2006, respectively. The impact on basic earnings per share was approximately $0.01 and        $0.02 for the twelve months ended December 31, 2007 and 2006, respectively.

As of        December 31, 2007, the Company had $547,744 of unrecognized expense related to unvested        share based compensation which will be recognized ratably as compensation cost over the        vesting period form January 2008 through December 2012.

In        2005, 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, 2005** |
| Net income, as reported                                                                                                                |   | $                     | 878 |
| Stock based employee compensation expense      under the fair market                        value method |   |                  | 426 |
| Pro forma net income                                                                                                                   |   | $                     | 452 |
|                                                                                                                                   |   |                  |   |
| Basic and diluted net income per share, as                        reported                                                             |   | $                     | 0.05 |
| Basic and diluted net income per share, pro forma                                                                                      |   | $                     | 0.02 |

 

**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

 

F-15

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**2.        Summary of Significant Accounting Policies (continued)**

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*(“SFAS142”), 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 December 31, 2007 and 2006, the Company performed the required impairment        test discussed in SFAS 142. The Company calculated the fair value of each business 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 was no        impairment to the goodwill associated with the acquisition of its in-store demonstration        business and therefore no impairment charge was recorded for the year ended December 31,        2007, or 2006. The goodwill balance was $798,000 at December 31, 2007 and 2006.

**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 loss in the statement of stockholders’        equity. Foreign currency transaction gains and losses are reflected in net        earnings.

**Recently Issued Accounting Standards**

In        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The        statement defines fair value, establishes a framework for measuring fair value in generally        accepted accounting principles, and expands disclosures about fair value measurements. This        statement applies under other accounting pronouncements that require or permit fair value        measurements, the FASB having previously concluded in those accounting pronouncements that        fair value is the relevant measurement attribute. Accordingly, this statement does not        require any new fair value measurements. SFAS No. 157 is effective January 1, 2008 for        financial assets and liabilities and January 1, 2009 for non-financial assets and        liabilities. The Company is currently evaluating the effect, if any, of this statement on        its financial condition and results of operations.

In        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial        Assets and Financial Liabilities - including an amendment of FASB Statement No. 115”        which permits entities to choose to measure many financial instruments and certain other        items at fair value that are not currently required to be measured at fair value. SFAS No.        159 also establishes presentation and disclosure requirements designed to facilitate        comparisons between entities that choose different measurement attributes for similar types        of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature        that requires certain assets and liabilities to be carried at fair value. SFAS No. 159 does        not eliminate disclosure requirements included in other accounting standards, including        requirements for disclosures about fair value measurements included in SFAS No. 157 and        SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”. SFAS No.        159 is effective as of the beginning of an entity’s first fiscal year that begins        after November 15, 2007. The Company will adopt SFAS No. 159 on January 1, 2008, and does        not anticipate adoption to materially impact its financial position or results of        operations.

 

F-16

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**2.        Summary of Significant Accounting Policies (continued)**

In        December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations,”        or SFAS No. 141(R), which replaces SFAS No. 141, “Business Combinations,” and        requires an acquirer to recognize the assets acquired, the liabilities assumed, and any        noncontrolling interest in the acquiree at the acquisition date, measured at their fair        values as of that date, with limited exceptions. This statement also requires the acquirer        in a business combination achieved in stages to recognize the identifiable assets and        liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of        their fair values. SFAS No. 141(R) makes various other amendments to authoritative        literature intended to provide additional guidance or to confirm the guidance in that        literature to that provided in this statement. This statement applies prospectively to        business combinations for which the acquisition date is on or after the beginning of the        first annual reporting period beginning on or after December 15, 2008. The Company expects        to adopt this statement on January 1, 2009. SFAS No. 141(R)’s impact on accounting        for business combinations is dependent upon acquisitions at that time.

In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests        in Consolidated Financial Statements, which amends Accounting Research Bulletin No. 51,        “Consolidated Financial Statements,” to improve the relevance, comparability,        and transparency of the financial information that a reporting entity provides in its        consolidated financial statements. SFAS No. 160 establishes accounting and reporting        standards that require the ownership interests in subsidiaries not held by the parent to be        clearly identified, labeled and presented in the consolidated statement of financial        position within equity, but separate from the parent’s equity. This statement also        requires the amount of consolidated net income attributable to the parent and to the        noncontrolling interest to be clearly identified and presented on the face of the        consolidated statement of income. Changes in a parent’s ownership interest while the        parent retains its controlling financial interest must be accounted for consistently, and        when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the        former subsidiary must be initially measured at fair value. The gain or loss on the        deconsolidation of the subsidiary is measured using the fair value of any noncontrolling        equity investment. The statement also requires entities to provide sufficient disclosures        that clearly identify and distinguish between the interests of the parent and the interests        of the noncontrolling owners. This statement applies prospectively to all entities that        prepare consolidated financial statements and applies prospectively for fiscal years, and        interim periods within those fiscal years, beginning on or after December 15, 2008. The        Company is currently evaluating the effect, if any, of this statement on its financial        condition and results of operations.

**Reclassifications**

Certain        reclassifications have been made to the 2006 and 2005 financial statements to conform to        the 2007 presentation.

**3.        Supplemental Balance Sheet Information**

 

|                                                                                       |   | **December 31,** |       |
|--------------------------------------------------------------------------------------------|--------|------------------|------------|
| Accounts receivable, net, consists of the following (in                        thousands): |   | **2007**         |       | **2006** |   |
|                                                                                       |   |             |       |   |   |   |   |
| Trade                                                                                      |   | **$**            | **9,833**  |   | $ | 10,112 |   |
| Unbilled                                                                                   |   |             | **3,789**  |   |   | 2,774 |   |
| Non-trade                                                                                  |   |             | **289**    |   |   | 496 |   |
|                                                                                       |   |             | **13,911** |   |   | 13,382 |   |
| Less:                                                                                      |   |             |       |   |   |   |   |
| Allowance for doubtful accounts                                                            |   |             | **(163**   | **)** |   | (400 | ) |
|                                                                                       |   | **$**            | **13,748** |   | $ | 12,982 |   |

 

 

F-17

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

|                                                                                    |   | **December 31,** |
|-----------------------------------------------------------------------------------------|--------|------------------|
| Property and equipment consists of the following (in                        thousands): |   | **2007**         |   | **2006** |
|                                                                                    |   |             |   |   |   |   |
| Equipment                                                                               |   | **$**            | **6,781** |   | $ | 5,380 |
| Furniture and fixtures                                                                  |   |             | **625** |   |   | 606 |
| Leasehold improvements                                                                  |   |             | **245** |   |   | 568 |
| Capitalized software development costs                                                  |   |             | **1,837** |   |   | 1,508 |
|                                                                                    |   |             | **9,488** |   |   | 8,062 |
| Less accumulated depreciation and amortization                                          |   |             | **7,960** |   |   | 7,161 |
|                                                                                    |   | **$**            | **1,528** |   | $ | 901 |

 

 

 

|                                       |   | **December 31,** |
|--------------------------------------------|--------|------------------|
| Other assets (in thousands):               |   | **2007**         |   | **2006** |
|                                       |   |             |   |   |   |   |
| Safeway settlement (inclusive of interest) |   | **$**            | **1,481** |   | $ | 1,307 |
| Other                                      |   |             | **167** |   |   | 388 |
|                                       |   | **$**            | **1,648** |   | $ | 1,695 |
|                                       |   |             |   |   |   |   |

 

 

|                                                                                  |   | **December 31,** |
|---------------------------------------------------------------------------------------|--------|------------------|
| Accrued expenses and other current liabilities (in                        thousands): |   | **2007**         |   | **2006** |
|                                                                                  |   |             |   |   |   |   |
| Taxes payable                                                                         |   | **$**            | **664** |   | $ | 489 |
| Accrued accounting and legal expenses                                                 |   |             | **227** |   |   | 219 |
| Accrued salaries payable                                                              |   |             | **1,304** |   |   | 946 |
| Other                                                                                 |   |             | **1,786** |   |   | 1,210 |
|                                                                                  |   | **$**            | **3,981** |   | $ | 2,864 |

 

 

**4.        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 revolving line of credit maturing on January        23, 2009. In March 2007 the credit facility was further amended to among other things,        delay the Minimum Fixed Coverage ratio until the fourth quarter 2007, establish an EBITDA        covenant and increase the interest rate by .25% beginning March 28, 2007. In May 2007 the        credit facility was amended to provide for an availability reserve of $500,000. In August        2007 the credit facility was further amended to reduce the availability reserve to $250,000        until November 30, 2007. On November 16, 2007 Webster amended the credit facility to extend        the availability reserve of $250,000 indefinitely and to reduce the revolving line of        credit to $5.0 million. On February 12, 2008, the Credit Facility was further amended to        reset the financial covenants for the fourth quarter of 2007 and to establish monthly        EBITDA covenants for 2008. Borrowings are based upon a borrowing base formula as defined in        the agreement (principally 85% of “eligible” domestic accounts receivable less        certain reserves). The Credit Facility is secured by all of the assets of the Company and        its domestic subsidiaries. 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 1.0% per annum (a total of 8.25% per annum at December 31, 2007), 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,

 

F-18

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**4.        Lines of Credit (continued)**

three        or nine months. The actual average interest rate under the Credit Facility was 8.96% per        annum for the twelve months ended December 31, 2007. 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 $4.9 million        and $4.2 million at December 31, 2007 and 2006, respectively. There were letters of credit        outstanding under the Credit Facility of approximately $0 and $453,000 at December 31, 2007        and 2006, respectively. As of December 31, 2007, the SPAR Group had unused availability        under the Credit Facility of $102,000 out of the remaining unused revolving line 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, 2007 and 2006, 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 not in violation of its covenants at December 31, 2007 and does not expect to        be in violation at future measurement dates. However, there can be no assurances that the        Company will be able to comply with its covenants and that if the Company violates the        amended covenants, Webster will continue to issue such waivers in the future.

In        addition, Mr. Robert G. Brown, a Director, the Chairman (former President and Chief        Executive Officer) and a major stockholder of SGRP, and Mr. William H. Bartels, a        Director, the Vice Chairman and a major stockholder of SGRP, have provided personal        guarantees of the Credit Facility totaling $1.0 million.

The        Japanese subsidiary SPAR FM Japan, Inc. has line of credit agreements totaling 100 million        Yen, or approximately $891,000 (based upon the exchange rate at December 31, 2007). The        outstanding balances under the line of credit agreements were 90 million Yen, or        approximately $802,000 and 70 million Yen, or approximately $588,000 at December 31, 2007        and 2006, respectively (based upon the exchange rate at those dates). The average interest        rate was 1.9% per annum for the twelve months ended December 31, 2007. In addition, the        Japanese subsidiary had cash balances totaling 137 million Yen, or approximately $1,246,000        (based upon the exchange rate at December 31, 2007) and 97 million Yen, or approximately        $815,000 (based upon the exchange rate at December 31, 2006) at December 31, 2007 and 2006        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 $964,000 (based upon the exchange rate at December 31, 2007). At December 31,        2007, SPARFACTS Australia Pty. Ltd. had $315,000 (Australian), or approximately $276,000        outstanding under the line of credit (based upon the exchange rate at that date). The        average interest rate was 10.6% per annum for the twelve months ended December 31,        2007.

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 $1,019,400 (based upon the        exchange rate at December 31, 2007). The Demand Operating Loan provides for borrowing based        upon a formula as defined in the agreement (principally 75% of eligible accounts receivable        less certain deductions) and a minimum total debt to tangible net worth covenant. On March        28, 2008 Royal Bank of Canada amended the secured credit agreement to reduce the maximum        borrowing to $500,000 (Canadian).  At December 31, 2007, SPAR Canada Company had        $140,000 (Canadian), or approximately $143,000 outstanding under the line of credit (based        upon the exchange rate at December 31, 2007). The average interest rate was 7.08% per annum        for the twelve months ended December 31, 2007.

At        December 31, 2007, SPAR Canada Company was in violation of its covenant. Royal Bank of        Canada has waived this violation. The Company expects that it will comply with its        covenants in future periods. However, there can be no assurances that the Company will be        able to comply with its covenants and that if the Company violates its covenants, Royal        Bank will continue to issue such waivers in the future.

 

F-19

 

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SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**5.        Income Taxes**

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

 

|     |   | **December 31,** |        |
|----------|--------|------------------|-------------|
|     |   | **2007**         |        | **2006** |   | **2005** |   |
| Current  |   | **$**            | **157**     |   | $ | 99 |   | $ | 242 |   |
| Deferred |   |             | **—** |   |   | — |   |   | — |   |
|     |   | **$**            | **157**     |   | $ | 99 |   | $ | 242 |   |

 

 

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,** |
|---------------------------------------------------------------------------------------------------------------------------------|--------|------------------|
|                                                                                                                            |   | **2007**         |   | **2006** |   | **2005** |   |
| Provision (benefit) for income taxes at  federal statutory rate, net of                        foreign  tax |   | **$**            | **(751** | **)** | $ | (273 | ) | $ | 334 |   |
| State income taxes, net of federal benefit                                                                                      |   |             | **(115** | **)** |   | 41 |   |   | 153 |   |
| Permanent differences                                                                                                           |   |             | **33** |   |   | 36 |   |   | 14 |   |
| Change in valuation allowance                                                                                                   |   |             | **880** |   |   | 150 |   |   | (349 | ) |
| International tax provisions                                                                                                    |   |             | **107** |   |   | 136 |   |   | 71 |   |
| Other                                                                                                                           |   |             | **3** |   |   | 9 |   |   | 19 |   |
| Provision for income taxes                                                                                                      |   | **$**            | **157** |   | $ | 99 |   | $ | 242 |   |

 

 

| Deferred taxes consist of the following (in                        thousands): |   | **December 31,** |        |
|--------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                           |   | **2007**         |        | **2006** |   |
| Deferred tax assets:                                                           |   |             |        |   |   |   |   |
| Net operating loss carryforwards                                               |   | **$**            | **7,490**   |   | $ | 6,580 |   |
| Deferred revenue                                                               |   |             | **45**      |   |   | 52 |   |
| SIM reserve against loan commitment                                            |   |             | **147**     |   |   | 147 |   |
| Allowance for doubtful accounts and other                        receivable    |   |             | **39**      |   |   | 150 |   |
| Share-based compensation expense                                               |   |             | **226**     |   |   | 119 |   |
| Accrued expenses                                                               |   |             | **11**      |   |   | — |   |
| Other                                                                          |   |             | **27**      |   |   | 23 |   |
| Valuation allowance                                                            |   |             | **(7,238**  | **)** |   | (6,358 | ) |
| Total deferred tax assets                                                      |   |             | **747**     |   |   | 713 |   |
|                                                                           |   |             |        |   |   |   |   |
| Deferred tax liabilities:                                                      |   |             |        |   |   |   |   |
| Goodwill                                                                       |   |             | **61**      |   |   | 40 |   |
| Litigation receivables                                                         |   |             | **496**     |   |   | 496 |   |
| Capitalized software development costs                                         |   |             | **190**     |   |   | 177 |   |
| Total deferred tax liabilities                                                 |   |             | **747**     |   |   | 713 |   |
| Net deferred tax assets                                                        |   | **$**            | **—** |   | $ | — |   |

 

 

F-20

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**5.        Income Taxes (continued)**

At        December 31, 2007, the Company has net operating loss carryforwards (NOLs) of $6.9 million,        related to the PIA Acquisition available to reduce future federal taxable income. The $6.9        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 $13.6 million of which $1.1 million, $5.2 million, $3.6        million and $3.7 million expire in 2023, 2024, 2026 and 2027, respectively.

As a        result of losses, a challenging market and the lack of certainty of future profitability,        the Company has established a valuation allowance equal to the total of its net deferred        tax assets of $7.2 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.

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 is 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 Company has        adopted FIN 48 as of January 1, 2007.

The        Company adopted provisions of FASB Interpretation No. 48, Accounting for Uncertainty in        Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48,        the Company recognized an increase of approximately $145,000 in the liability for        unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007        accumulated deficit. A reconciliation of the beginning and ending amount of unrecognized        tax benefits is as follows:

 

| Balance at January 1, 2007                  |        | $      | 431,000  |        |
|---------------------------------------------|--------|--------|----------|--------|
| Additions for tax positions of prior years  |   |   | 53,000   |   |
| Reductions for tax positions of prior years |   |   | (145,000 | )      |
| Balance at December 31, 2007                |   | $      | 339,000  |   |

 

FIN 48        requires that interest and penalties that the tax law requires to be paid on the        underpayment of taxes should be accrued on the difference between the amount claimed or        expected to be claimed on the return and the tax benefit recognized in the financial        statements. The Company’s policy is to record this interest and penalties as        additional tax expense.

SPAR        and its subsidiaries file numerous consolidated, combined and separate company income tax        returns in the U.S. Federal jurisdiction and in many U.S. state and foreign jurisdictions.        With few exceptions, SPAR is subject to U.S. Federal, state and local income tax        examinations for the years 2004 through the present. However, tax authorities have the        ability to review years prior to the position taken by the Company to the extent that SPAR        utilized tax attributes carried forward from those prior years.

In        management’s view, the Company’s tax reserves at December 31, 2007, totaling        $162,000 for potential domestic state tax liabilities were sufficient to meet the        requirements of FIN 48. The reserve for potential international tax liabilities totaling        $177,000 was also deemed sufficient to satisfy FIN 48.

 

F-21

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**5.        Income Taxes (continued)**

Details        of the Company’s FIN 48 reserves at December 31, 2007 are outlined in the table below        (in thousands):

 

|                 |   | Taxes  |    | Interest |   | Penalty |   | Total TaxLiability |
|----------------------|--------|--------|---------|----------|--------|---------|--------|--------------------|
| Domestic             |   |   |    |     |   |    |   |               |   |   |   |   |
| State                |   | $      | 102     |     | $      | 38      |   | $                  | 22 |   | $ | 162 |
| Federal              |   |   | — |     |   | — |   |               | — |   |   | — |
| International        |   |   | 125     |     |   | 29      |   |               | 23 |   |   | 177 |
| Total FIN 48 Reserve |   | $      | 227     |     | $      | 67      |   | $                  | 45 |   | $ | 339 |

 

**6.        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        $472,000, $780,000, and $900,000 for 2007, 2006, and 2005, respectively. At        December 31, 2007, future minimum commitments under all non-cancelable operating lease        arrangements are as follows (in thousands):

 

| Year       |   |   | Amount |
|-------------------------------------|--------|--------|--------|
| 2008       |   | $      | 562    |
| 2009       |   |   | 539    |
| 2010       |   |   | 462    |
| 2011       |   |   | 469    |
| 2012       |   |   | 330    |
| 2013       |   |   | 159    |
| Total      |   | $      | 2,521  |

 

**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, Estonia, 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 find it necessary to provide additional cash infusions into these        subsidiaries.

**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.

F-22

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**6.        Commitments and Contingencies (continued)**

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        representing the net amount of the awards. Both parties filed post trial motions but all        post trial motions were denied. Notices of Appeal were thereafter filed by both Safeway and        Pivotal. Pivotal/SGRP is seeking to have Safeway’s judgment overturned, thereby        increasing the award to Pivotal by over $5 million. Safeway has asked for a new trial on        the judgment found against it. The appellate process is expected to take fourteen to twenty        four months to complete. In the interim, the court ordered a mediation of the dispute,        which took place but was not successful in resolving the matter. Accordingly, the appeals        will proceed. The Company has recorded the net $1.3 million settlement award in other        assets.

Briefing on the appeals was continued at the request of Safeway, who needed        additional time to prepare their papers. Safeway’s initial brief on appeal is        expected to be filed by the end of March, 2008. Spar’s opposition will be filed 90        days after Safeway’s brief has been filed. Opposition and Reply briefs will then be        filed within the next 180 days. Thereafter, an oral argument hearing date will be assigned        by the court of appeal.

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.

**7.        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 2007,        2006, and 2005.

 

|                                                                                       |   | Quantity |   |   | Amount    |   |
|--------------------------------------------------------------------------------------------|--------|----------|--------|--------|-----------|--------|
| Treasury Stock, January 1,                        2005            |   | 21,908   |   | $      | 108,100   |   |
| Used to fulfill options exercised                                                |   | (21,654  | )      |   | (106,888  | )      |
|                                                                                       |   |     |   |   |      |   |
| Treasury Stock, December 31,                        2005          |   | 254      |   | $      | 1,212     |   |
| Used to fulfill options                        exercised          |   | —  |   |   | —   |   |
|                                                                                       |   |     |   |   |      |   |
| Treasury Stock, December 31,                        2006          |   | 254      |   | $      | 1,212     |   |
| Used to fulfill options                        exercised          |   | —  |   |   | —   |   |
|                                                                                       |   |     |   |   |      |   |
| **Treasury Stock, December 31,                        2007**      |   | **254**  |   | **$**  | **1,212** |   |

 

**8.        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

 

F-23

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**8.        Employee Benefits (continued)**

that        its affiliates (see Note 9 - 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 34,994, 31,385, and 28,065        for 2007, 2006, and 2005, respectively. As of December 31, 2007, there were 329,868 shares        remain outstanding under the SP plan.

The        Company’s expense resulting from the 15% discount offered to employees and        consultants was approximately $1,200, $5,200, and $5,000 for the years ended December 31,        2007, 2006, and 2005, respectively.

**Retirement/Pension Plans**

The        Company has a 401(k) Profit Sharing Plan covering substantially all eligible employees.        Employer contributions were approximately $66,000, $29,000, and $27,000 for 2007, 2006, and        2005, respectively.

**9.        Related-Party Transactions**

Mr. Robert G. Brown, a Director, the Chairman (former 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 85% of the        Company’s domestic field management at a total cost of approximately $18.0 million,        $18.9 million, and $20.0 million for 2007, 2006, and 2005, 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 53 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. Total net        premiums paid to SMS and SMSI for services rendered were approximately $690,000, $730,000,        and $770,000 for 2007, 2006, and 2005, 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.

SIT        provided substantially all of the Internet computer programming services to the Company at        a total cost of approximately $606,000, $678,000, and $771,000 for 2007, 2006, and 2005,        respectively. SIT provided approximately 18,000, 23,000, and 25,000 hours of Internet        computer programming services to the Company for 2007, 2006, and 2005, 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 $33.49, $28.87, and $30.34 for 2007, 2006, and 2005, 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 since 2005. However,        since SIT is a “Subchapter S” corporation, Messrs. Brown and Bartels        benefit from any income realized by SIT.

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

 

F-24

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**9.        Related-Party Transactions (continued)**

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. The above referenced equipment leases have expired as of the        date of this report and the Company has elected to continue to lease the equipment on a        month-to-month basis.

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,** |       |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                              |   |                        | **2007**   |   |   | **2006** |   |   | **2005** |   |
| Services provided by affiliates:                                                                                  |   |                        |       |   |   |   |   |   |   |   |
| Independent contractor services (SMS)                                                                             |   | **$**                       | **13,713** |   | $ | 15,094 |   | $ | 16,333 |   |
|                                                                                                              |   |                        |       |   |   |   |   |   |   |   |
| Field management services (SMSI)                                                                                  |   | **$**                       | **4,238**  |   | $ | 3,850 |   | $ | 3,704 |   |
|                                                                                                              |   |                        |       |   |   |   |   |   |   |   |
| Handheld computer leases (SMS)                                                                                    |   | **$**                       | **256**    |   | $ | 278 |   | $ | 266 |   |
| Internet and software program      consulting services                        (SIT) |   | **$**                       | **606**    |   | $ | 678 |   | $ | 771 |   |

 

 

| Accrued expenses due to affiliates (in                        thousands): |   | **December 31** |        |      |
|---------------------------------------------------------------------------|--------|-----------------|--------|-----------|
|                                                                      |   |            |   | **2007**  |   |   |   | **2006** |   |
| SPAR Marketing Services, Inc.                                             |   |            | $      | **1,490** |   |   | $ | 1,238 |   |
| SPAR Management Services, Inc.                                            |   |            |   | **457**   |   |   |   | 346 |   |
| SPAR Infotech, Inc.                                                       |   |            |   | **160**   |   |   |   | 168 |   |
|                                                                      |   |            | $      | **2,107** |   |   | $ | 1,752 |   |
|                                                                           |        |                 |        |           |  |  |  |  |  |  |

 

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, 2007, 2006, and 2005. The        Company’s Chairman and Vice Chairman own, through SMSI, a minority (less than 5%)        equity interest in Affinity.

**10.        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

 

F-25

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**10.        Stock Options (continued)**

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 2007, options to purchase 449,250        shares of SGRP’s common stock were granted, options to purchase 154,745 shares of the        Company’s common stock were exercised and options to purchase 235,811 shares of        SGRP’s stock were voluntarily surrendered and cancelled under this plan. At December        31, 2007, options to purchase 2,280,228 shares of SGRP’s common stock remain        outstanding under this plan and options to purchase 363,669 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 2007, 250 options to purchase        shares of the Company’s common stock were exercised under this plan. At        December 31, 2007, options to purchase 1,000 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 under this plan. During 2007, no options to purchase shares of SGRP’s        common stock were cancelled. At December 31, 2007, 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 2007, 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, 2007, 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.

 

F-26

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**10.        Stock Options (continued)**

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

 

|                                    |   | **Shares**         |      | **Weighted Average****Exercise Price** |
|-----------------------------------------|--------|--------------------|-----------|----------------------------------------|
| Options outstanding, January 1, 2005    |   |               | 1,291,258 |                                   | $ | 1.66 |
| 2005                                    |   |               |      |                                   |   |   |
| Granted                                 |   |               | 1,334,973 |                                   |   | 1.32 |
| Exercised                               |   |               | (57,875   | )                                      |   | 1.20 |
| Canceled or expired                     |   |               | (440,975  | )                                      |   | 1.30 |
| Options outstanding, December 31, 2005  |   |               | 2,127,381 |                                   | $ | 1.53 |
|                                    |   |               |      |                                   |   |   |
| 2006                                    |   |               |      |                                   |   |   |
| Granted                                 |   |               | 338,000   |                                   | $ | 0.99 |
| Exercised                               |   |               | (17,335   | )                                      |   | 0.04 |
| Canceled or expired                     |   |               | (211,887  | )                                      |   | 2.71 |
| Options outstanding, December 31, 2006  |   |               | 2,236,159 |                                   | $ | 1.35 |
|                                    |   |               |      |                                   |   |   |
| 2007                                    |   |               |      |                                   |   |   |
| Granted                                 |   |               | 449,250   |                                   | $ | 0.92 |
| Exercised                               |   |               | (154,995  | )                                      |   | 1.30 |
| Canceled or expired                     |   |               | (235,811  | )                                      |   | 1.44 |
| Options outstanding, December 31, 2007  |   |               | 2,294,603 |                                   | $ | 1.26 |
| Option price range at December 31, 2007 |   | **$0.01 to $5.27** |

 

 

|                                                                     |   | **2007** |     | **2006** |   | **2005** |
|--------------------------------------------------------------------------|--------|----------|----------|----------|--------|----------|
| Grant Date weighted average fair value ofoptions granted during the year |   | **$**    | **0.92** |     | $      | 0.99     |   | $ | 1.32 |

 

The        following table summarizes information about stock options outstanding at December 31,        2007:

 

 

|                            |   | **Options Outstanding**                           |   | **Options Exercisable**                                  |
|---------------------------------|--------|---------------------------------------------------|--------|----------------------------------------------------------|
| **Range of****Exercise Prices** |   | **Number****Outstanding at****December 31, 2007** |   | **Weighted****Average****Remaining****Contractual Life** |   | **Weighted****Average****Exercise****Price** |   | **Number****Exercisable at****December 31,****2007** |   |   | **Weighted****Average****Exercise Price** |
| Less than $1.00                 |   | 751,539                                           |   | 8.0 years                                                | $ | 0.85 |   | 322,883 |   | $ | 0.82 |
| $1.01 - $2.00                   |   | 1,369,759                                         |   | 6.9 years                                                |   | 1.29 |   | 962,558 |   |   | 1.31 |
| $2.01 - $4.00                   |   | 151,805                                           |   | 6.8 years                                                |   | 2.50 |   | 150,430 |   |   | 2.60 |
| Greater than $4.00              |   | 21,500                                            |   | 6.3 years                                                |   | 5.07 |   | 21,500 |   |   | 5.07 |
| Total                           |   | 2,294,603                                         |   |                                                     |   |   |   | 1,457,371 |   |   |   |

 

The        Company recorded expenses of approximately $18,000, $110,000, and $70,000 for the twelve        months ended December 31, 2007, 2006 and 2005, 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. As of December 31, 2007 the Company had $76,667        of

 

F-27

 

----

SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**10.        Stock Options (continued)**

unrecognized expense related to non-employees which will be recognized        ratably as compensation cost over the vesting period from January 2008 through December        2012.

**11.        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:      |   | **2007**                    |   | **2006** |   | **2005** |
| United States     |   | **$**                       | **29,415** |   | $ | 34,082 |   | $ | 36,701 |
| International     |   |                        | **31,301** |   |   | 23,234 |   |   | 14,885 |
| Total net revenue |   | **$**                       | **60,716** |   | $ | 57,316 |   | $ | 51,586 |

 

 

 

|                          |   | **Year Ended December 31,** |
|-------------------------------|--------|-----------------------------|
|                          |   | **2007**                    |   | **2006** |   | **2005** |
| Operating (loss) income:      |   |                        |   |   |   |   |   |   |   |
| United States                 |   | **$**                       | **(1,434** | **)** | $ | (228 | ) | $ | 1,200 |
| International                 |   |                        | **(552** | **)** |   | (496 | ) |   | 725 |
| Total operating (loss) income |   | **$**                       | **(1,986** | **)** | $ | (724 | ) | $ | 1,925 |

 

 

|                    |   | **December 31,** |
|-------------------------|--------|------------------|
| Long lived assets:      |   | **2007**         |   | **2006** |
| United States           |   | **$**            | **3,706** |   | $ | 3,141 |
| International           |   |             | **268** |   |   | 253 |
|                    |   |             |   |   |   |   |
| Total long lived assets |   | **$**            | **3,974** |   | $ | 3,394 |

 

International revenues disclosed above were based upon revenues reported by        the Company’s nine international subsidiaries. The Japanese subsidiary contributed        16%, 11% and 5% of the consolidated net revenue of the Company for the twelve months ended        December 31, 2007, 2006, and 2005, 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%, of the        consolidated net revenue of the Company in each of the twelve months ended December 31,        2007, 2006, and 2005, respectively. The Australian subsidiary contributed 13% and 7% to the        consolidated net revenue of the Company for the twelve months ended December 31, 2007 and        2006, respectively. Each of the remaining foreign subsidiaries contributed 4% or less to        the consolidated net revenue for the twelve months ended December 31, 2007, 2006, and        2005.

 

F-28

 

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SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

 

**12. Net        (Loss) Income Per Share**

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

 

|                                                                                   |   | **Year Ended December 31,** |
|----------------------------------------------------------------------------------------|--------|-----------------------------|
|                                                                                   |   | **2007**                    |   | **2006** |   | **2005** |
| Numerator:                                                                             |   |                        |   |   |   |   |   |   |   |
| Net (loss) income                                                                      |   | **$**                       | **(2,544** | **)** | $ | (621 | ) | $ | 878 |
|                                                                                   |   |                        |   |   |   |   |   |   |   |
| Denominator:                                                                           |   |                        |   |   |   |   |   |   |   |
| Shares used in basic net (loss) income per share                        calculation    |   |                        | **19,011** |   |   | 18,934 |   |   | 18,904 |
| Effect of diluted securities:                                                          |   |                        |   |   |   |   |   |   |   |
| Employee stock options                                                                 |   |                        | **—** |   |   | **—** |   |   | 456 |
| Shares used in diluted net (loss) income per share                        calculations |   |                        | **19,011** |   |   | 18,934 |   |   | 19,360 |
|                                                                                   |   |                        |   |   |   |   |   |   |   |
| Basic and diluted net (loss) income per common                        share:           |   | **$**                       | **(0.13** | **)** | $ | (0.03 | ) | $ | 0.05 |

 

The        computation of dilutive loss per share for 2007 and 2006 excluded anti-dilutive stock        options to purchase approximately 217,000 and 249,000 shares as of December 31, 2007 and        2006, respectively.

**13.        Subsequent Event**

On March        28, 2008, SGRP filed a “Certificate of Designation of Series “A”        Preferred Stock of SPAR Group, Inc.” (the “Preferred Designation”),        creating a series of 3,000,000 shares of Preferred Stock designated as “Series A        Preferred Stock” with a par value of $0.01 per share (the “Preferred        Stock”), which designation had been approved by SGRP’s Board of Directors (the        “Board”) on March 27, 2008.

 

The        Preferred Designation provides that each share of Preferred Stock is to be issued at a        value equal to the closing bid price of SGRP’s common stock (the “Common        Stock”) immediately preceding the day SGRP and the purchaser(s) entered into of a        binding commitment to issue and acquire Preferred Stock. The Preferred Stock will accrue a        10% divided payable in either cash (when permitted by law and Nasdaq and authorized by the        Board) or common stock when authorized by the Board (valued at the current market price of        a share of common stock at the time paid but not less that the initial purchase price of a        share of such preferred). All accrued and unpaid dividends and potential dividends must be        paid to the holders of the Preferred Stock before any dividends can be paid to the holders        of the Common Stock. The face value (purchase price) of the Preferred Stock and all accrued        and unpaid dividends and potential dividends must be paid to the holders of the Preferred        Stock before any liquidating distributions can be made to the holders of the Common Stock.        The consent of all of the holders of the Preferred Stock is required for SGRP to make any        changes in the Preferred Designation or issue any other class of preferred stock senior to        or pari passu with the Preferred Stock.

 

The        Preferred Stock is redeemable, at the discretion of the Corporation, for a cash redemption        price equal to its face value (purchase price) plus all accrued and unpaid dividends and        potential dividends. Each share of Preferred Stock is convertible into one share of Common        Stock at the rate of one to one at the option of the holder, which option would be        exercisable for so long as the Preferred Stock is outstanding (even if the Corporation has        elected to redeem). Such a conversion also requires that the Corporation satisfy all        accrued and unpaid dividends and potential dividends at the same time. The Preferred Stock        votes with the Common Stock (no class voting) and have voting rights equal to one vote per        share of Preferred Stock.

 

On March        27, 2008, the Board also authorized the issuance of up to 530,000 shares of Preferred Stock        to its affiliates, Robert G. Brown and William H. Bartels (who are officers, directors and        significant shareholders of SGRP - see Note 9, Related Party Transactions) in return for        (among other things) cash or the reduction of an equivalent debt owed by the Company to        SPAR Management Services, Inc. (“SMSI”) (see Note 9, Related Party        Transactions), an affiliate of SGRP wholly owned by Mr. Brown and Mr. Bartels. On        March 31, 2008, the Corporation, Mr. Brown, Mr. Bartels and SMSI entered into an        agreement to issue and purchase 89,286 shares of Preferred Stock at $1.12 per share (the        closing bid price

 

 

F-29

 

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SPAR        Group, Inc. and Subsidiaries

Notes to        Consolidated Financial Statements (continued)

December        31, 2007

**13. Subsequent Event        (continued)**

of SGRP’s Common Stock for the most recent trading day        available immediately preceding such agreement date). Pursuant to that agreement,        SGRP’s payable to SMSI will be reduced by $100,00.32, and SGRP will issue 54,564        shares of Preferred Stock to Mr. Brown and 34,722 shares of Preferred Stock to        Mr. Bartels, all effective March 31, 2008. SGRP’s Audit Committee reviewed and        unanimously approved this transaction, including the terms of the Preferred Stock and the        affiliated relationship of the parties. The offer and sale of such Preferred Stock have not        been registered under the Securities Act or other securities laws, as they were a        non-public offer and sale made in reliance upon (among other things) Section 4(2) of the        Securities Act.

 

F-30

 

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SPAR Group, Inc. and        Subsidiaries

Schedule        II – Valuation and Qualifying Accounts

*(In        thousands)*

 

|                            |   | **Balance at****Beginning of****Period** |    | **Charged to****Cost and****Expenses** |     | **Deductions (1)** |   | **Balance at End****of Period** |
|---------------------------------|--------|------------------------------------------|---------|----------------------------------------|----------|--------------------|--------|---------------------------------|
| Year ended December 31, 2007:   |   |                                     |    |                                   |     |               |   |                            |   |   |
| Deducted from asset accounts:   |   |                                     |    |                                   |     |               |   |                            |   |   |
| Allowance for doubtful accounts |   | **$**                                    | **400** |                                   | **(164** | **)**              | **73** |                            | **$** | **163** |
|                            |   |                                     |    |                                   |     |               |   |                            |   |   |
| Year ended December 31, 2006:   |   |                                     |    |                                   |     |               |   |                            |   |   |
| Deducted from asset accounts:   |   |                                     |    |                                   |     |               |   |                            |   |   |
| Allowance for doubtful accounts |   | $                                        | 616     |                                   | 84       |               | 300    |                            | $ | 400 |
|                            |   |                                     |    |                                   |     |               |   |                            |   |   |
| Year ended December 31, 2005:   |   |                                     |    |                                   |     |               |   |                            |   |   |
| Deducted from asset accounts:   |   |                                     |    |                                   |     |               |   |                            |   |   |
| Allowance for doubtful accounts |   | $                                        | 761     |                                   | 38       |               | 183    |                            | $ | 616 |

 

 

 

| (1) | Uncollectible accounts written off, net of                        recoveries |
|-----|------------------------------------------------------------------------------|

 

F-31