|                                                                               
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|UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549Form 10-Q

|           |                                                                                                                                
|---------- | -------------------------------------------------------------------------------------------------------------------------------
|(Mark One) |                                                                                                                                
|           | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the second quarterly period ended  
|           | June 30, 2006.                                                                                                                 
|           | OR                                                                                                                             
|           | TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE  ACT OF 1934 for the  transition  period from
|           | _________ to __________                                                                                                        

Commission file number:
0-27824

# SPAR Group, Inc.
(Exact name of registrant as specified in its
charter)

|                       |                                
|---------------------- | -------------------------------
|Delaware               | 33-0684451                     
|State of Incorporation | IRS Employer Identification No.

580 White Plains Road,
Suite 600, Tarrytown, New York 10591(Address of
principal executive offices, including zip code)

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

Indicate by check whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:     Yes      No

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

|                        |                   |                      
|----------------------- | ----------------- | ---------------------
|Large Accelerated Filer | Accelerated Filer | Non-Accelerated Filer

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

|                                                                           
|---------------------------------------------------------------------------
|On June 30, 2006, there were 18,933,932 shares of Common Stock outstanding.

---

# SPAR Group, Inc.

Index

|           |                                                                                       |   
|---------- | ------------------------------------------------------------------------------------- | --
|PART I:    | FINANCIAL INFORMATION                                                                 |   
|           |                                                                                      
|Item 1:    | Financial Statements                                                                 
|           |                                                                                      
|           | Consolidated Balance Sheets                                                          
|           | as of June 30, 2006 and December 31, 2005                                             | 3 
|           |                                                                                      
|           | Consolidated Statements of Operations for the three                                  
|           | months and six months ended June 30, 2006 and 2005                                    | 4 
|           |                                                                                      
|           | Consolidated Statements of Cash Flows for the                                        
|           | six months ended June 30, 2006 and 2005                                               | 5 
|           |                                                                                      
|           | Notes to Consolidated Financial Statements                                            | 6 
|Item 2:    | Management's Discussion and Analysis of Financial Condition and Results of Operations | 15
|           |                                                                                      
|Item 3:    | Quantitative and Qualitative Disclosures about Market Risk                            | 24
|           |                                                                                      
|Item 4:    | Controls and Procedures                                                               | 25
|           |                                                                                      
|PART II:   | OTHER INFORMATION                                                                    
|           |                                                                                      
|Item 1:    | Legal Proceedings                                                                     | 26
|           |                                                                                      
|Item 1A:   | Risk Factors                                                                          | 26
|           |                                                                                      
|Item 2:    | Unregistered Sales of Equity Securities and Use of Proceeds                           | 26
|           |                                                                                      
|Item 3:    | Defaults upon Senior Securities                                                       | 27
|           |                                                                                      
|Item 4:    | Submission of Matters to a Vote of Security Holders                                   | 27
|           |                                                                                      
|Item 5:    | Other Information                                                                     | 27
|           |                                                                                      
|Item 6:    | Exhibits                                                                              | 27
|           |                                                                                      
|SIGNATURES |                                                                                       | 28

2

---

# PART I:     FINANCIAL
INFORMATION

# Item 1:  Financial Statements

SPAR Group, Inc.Consolidated Balance
Sheets (In thousands, except
share and per share data)

|                                               |  | June 30, 2006 |   |             | December 31, 2005 |  
|---------------------------------------------- |  | ------------- | - | ----------- | ----------------- | -
|                                               |  |               |   | (Unaudited) |                   |  
|Assets                                         |  |              
|Current assets:                                |  |              
|Cash and cash equivalents                      |  |               | $ | 1,655       |                   | $
|Accounts receivable, net                       |  |               |   | 10,483      |                   |  
|Prepaid expenses and other current assets      |  |               |   | 523         |                   |  
|                                               |  |               |   |            
|Total current assets                           |  |               |   | 12,661      |                   |  
|Property and equipment, net                    |  |               |   | 940         |                   |  
|Goodwill                                       |  |               |   | 798         |                   |  
|Other assets                                   |  |               |   | 209         |                   |  
|                                               |  |               |   |            
|Total assets                                   |  |               | $ | 14,608      |                   | $
|                                               |  |               |   |            
|Liabilities and stockholders' equity           |  |              
|Current liabilities:                           |  |              
|Accounts payable                               |  |               | $ | 2,012       |                   | $
|Accrued expenses and other current liabilities |  |               |   | 2,062       |                   |  
|Accrued expenses due to affiliates             |  |               |   | 495         |                   |  
|Restructuring charges                          |  |               |   | -           |                   |  
|Customer deposits                              |  |               |   | 722         |                   |  
|Lines of credit                                |  |               |   | 2,967       |                   |  
|                                               |  |               |   |            
|Total current liabilities                      |  |               |   | 8,258       |                   |  
|Other long-term liabilities                    |  |               |   | 8           |                   |  
|Minority interest                              |  |               |   | 451         |                   |  
|                                               |  |               |   |            
|Total liabilities                              |  |               |   | 8,717       |                   |  
|Commitments and contingencies (Note - 8)       |  |              
|Stockholders' equity:                          |  |              
|Preferred stock, $.01 par value:               |  |              
|Authorized shares - 3,000,000                  |  |              
|Issued and outstanding shares - none           |  |               |   | -           |                   |  
|Common stock, $.01 par value:                  |  |              
|Authorized shares - 47,000,000                 |  |              
|Issued and outstanding shares -                |  |              
|18,933,932 - June 30, 2006                     |  |              
|18,916,847 - December 31, 2005                 |  |               |   | 189         |                   |  
|Treasury stock                                 |  |               |   | (1          | )                 |  
|Accumulated other comprehensive (loss) gain    |  |               |   | (28         | )                 |  
|Additional paid-in capital                     |  |               |   | 11,268      |                   |  
|Accumulated deficit                            |  |               |   | (5,537      | )                 |  
|                                               |  |               |   |            
|Total stockholders' equity                     |  |               |   | 5,891       |                   |  
|                                               |  |               |   |            
|Total liabilities and stockholders' equity     |  |               | $ | 14,608      |                   | $
|                                               |  |               |   |            

|Note: |  | The
Balance Sheet at December 31, 2005, is an excerpt from the audited financial statements
at that date but does not include any of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial
statements.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.

3



---

SPAR Group, Inc.Consolidated Statements
of Operations (unaudited) (In thousands, except
per share data)

|                                             |  |  | Three Months Ended June 30, |        | Six Months Ended June 30, |  
|-------------------------------------------- |  |  | --------------------------- | ------ | ------------------------- | -
|
|Net revenues                                 |  |  | $                           | 12,919 |                           | $
|Cost of revenues                             |  |  |                             | 9,142  |                           |  
|                                             |  |  |                             |        |                           |  
|Gross profit                                 |  |  |                             | 3,777  |                           |  
|Selling, general and administrative expenses |  |  |                             | 3,866  |                           |  
|Depreciation and amortization                |  |  |                             | 183    |                           |  
|                                             |  |  |                             |        |                           |  
|Operating (loss) income                      |  |  |                             | (272   | )                         |  
|Interest expense                             |  |  |                             | 46     |                           |  
|Other (income) expense                       |  |  |                             | (411   | )                         |  
|                                             |  |  |                             |        |                           |  
|Income before provision for income taxes and |  | 
|minority interest                            |  |  |                             | 93     |                           |  
|Provision for income taxes                   |  |  |                             | 54     |                           |  
|                                             |  |  |                             |        |                           |  
|Income before minority interest              |  |  |                             | 39     |                           |  
|Minority interest                            |  |  |                             | (61    | )                         |  
|                                             |  |  |                             |        |                           |  
|Net income                                   |  |  | $                           | 100    |                           | $
|                                             |  |  |                             |        |                           |  
|Basic/diluted net income per common share:   |  | 
|Net income - basic/diluted                   |  |  | $                           | 0.01   |                           | $
|                                             |  |  |                             |        |                           |  
|Weighted average common shares - basic       |  |  |                             | 18,926 |                           |  
|                                             |  |  |                             |        |                           |  
|Weighted average common shares - diluted     |  |  |                             | 19,206 |                           |  
|                                             |  |  |                             |        |                           |  

See accompanying notes.

4



---

SPAR Group, Inc.Consolidated Statements
of Cash Flows (In thousands)
(unaudited)

|                                                         | Six Months Ended June 30,
|-------------------------------------------------------- | -------------------------
|
|Operating activities                                     |                          
|Net cash (used in) provided by operating activities      |                          
|Investing activities                                     |                          
|Purchases of property and equipment                      |                          
|                                                         |                          
|Net cash used in investing activities                    |                          
|Financing activities                                     |                          
|Net payments on lines of credit                          |                          
|Other long-term liabilities                              |                          
|Proceeds from employee stock purchase plan and exercised |                          
|options                                                  |                          
|                                                         |                          
|Net cash used in financing activities                    |                          
|Translation loss                                         |                          
|                                                         |                          
|Net change in cash and cash equivalents                  |                          
|Cash and cash equivalents at beginning of period         |                          
|                                                         |                          
|Cash and cash equivalents at end of period               |                          
|                                                         |                          
|Supplemental disclosure of cash flow information         |                          
|Interest paid                                            |                          

See accompanying notes.

5

---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited)

|1. |  | Basis
of Presentation
|-- |  | ---------------------

| | The
accompanying unaudited, consolidated financial statements of SPAR Group, Inc., a Delaware
corporation (SGRP), and its subsidiaries (together with SGRP, collectively,
the Company or the SPAR Group) have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments considered necessary for a fair
presentation have been included in these interim financial statements. However, these
interim financial statements should be read in conjunction with the annual consolidated
financial statements and notes thereto for the Company as contained in the Companys
Annual Report for 2005 on Form 10-K for the year ended December 31, 2005, as filed with
the Securities and Exchange Commission (the SEC) on April 3, 2006, as amended
on Form 10-K/A by Amendment No. 1 filed with the SEC on April 26, 2006, and Amendment No.
2 filed with the SEC on June 21, 2006 (the Companys Annual Report for 2005 on
Form 10-K As Amended). The Companys results of operations for the interim
periods are not necessarily indicative of its operating results for the entire year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Business
and Organization
|-- |  | -------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys operations are 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,
and convenience and grocery stores. The International Merchandising Services Division,
established in July 2000, currently provides similar merchandising and marketing services
through a wholly owned subsidiary in Canada, through 51% owned joint venture subsidiaries
in Turkey, South Africa, India and Romania, as well as Lithuania and Australia (which
began operations in April and May 2006, respectively) and through 50% owned joint
ventures in Japan and China. The Company continues to focus on expanding its
merchandising and marketing services business throughout the world.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6



---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited) (continued)

|3. |  | Earnings
Per Share
|-- |  | ------------------

| | The
following table sets forth the computations of basic and diluted earnings per share (in
thousands, except per share data):
| | ------------------------------------------------------------------------------------------------------------------------------

|                                  | Three Months Ended June 30, |  | Six Months Ended June 30, |       
|--------------------------------- | --------------------------- |  | ------------------------- | ------
|
|Numerator:                        |                             |  |                           |       
|Net income                        |                             |  | $                         | 100   
|Denominator:                      |                             | 
|Shares used in basic net income   |                             | 
|per share calculation             |                             |  |                           | 18,926
|Effect of diluted securities:     |                             | 
|Employee stock options            |                             |  |                           | 280   
|                                  |                             |  |                           |       
|Shares used in diluted net income |                             | 
|per share calculation             |                             |  |                           | 19,206
|                                  |                             |  |                           |       
|Basic and diluted net income per  |                             | 
|common share                      |                             |  | $                         | 0.01  
|                                  |                             |  |                           |       

|4. |  | Lines
of Credit
|-- |  | ---------------

| | In
January 2003, the Company 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).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2006, the Credit Facility was amended to extend its maturity to January 2009 and
to reset the Minimum Fixed Charge Coverage Ratio and Minimum Net Worth covenants. The
Credit Facility also limits certain expenditures, including, but not limited to, capital
expenditures and other investments. It further stipulated that should the Company meet
its covenants for the year ended December 31, 2005 Webster would release Mr. Robert Brown
and Mr. William Bartels from their obligation to provide personal guarantees totaling
$1.0 million and also release certain discretionary bank reserves. The Company met its
covenant requirements for the year ended December 31, 2005 and Webster released both the
personal guarantees and the discretionary bank reserves in May 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
basic interest rate under the Credit Facility is Websters Alternative Base
Rate plus 0.75% per annum (a total of 9.0% per annum at June 30, 2006), which
automatically changes with each change made by Webster in such Alternate 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 six months. The actual average interest rate
under the Credit Facility was 8.41% per annum for the six months ended June 30, 2006. The
Credit Facility is secured by all of the assets of the Company and its domestic
subsidiaries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company was not in violation of any covenants at June 30, 2006 and does not expect to be
in violation at future measurement dates. However, there can be no assurances that the
Company will not be in violation of certain covenants in the future. Should the Company
be in violation, there are no assurances that Webster will issue waivers in the future.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited) (continued)

| | 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 June 30, 2006 and December 31, 2005, in
accordance with EITF 95-22, Balance Sheet Classification of Borrowings Outstanding
Under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and
a Lock-Box Agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
revolving loan balances outstanding under the Credit Facility were $2.2 million and $2.4
million at June 30, 2006 and December 31, 2005, respectively. There were letters of
credit outstanding under the Credit Facility of approximately $552,000 at June 30, 2006,
and December 31, 2005. As of June 30, 2006, the SPAR Group had unused availability under
the Credit Facility of $2.9 million out of the remaining maximum $4.2 million unused
revolving line of credit after reducing the borrowing base by outstanding loans and
letters of credit.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Japanese joint venture SPAR FM Japan, Inc. has a revolving line of credit arrangement
with Japanese banks for 100 million Yen or approximately $850,000 (based upon the
exchange rate at June 30, 2006). At June 30, 2006, SPAR FM Japan, Inc. had a 70 million
Yen or approximately $600,000 loan balance outstanding under the line of credit (based
upon the exchange rate at that date). The average interest rate was 1.4% per annum for the six months ended June 30, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006, the Australia joint venture SPARFACTS Australia Pty. Ltd. entered into a revolving
line of credit arrangement with Oxford Funding Pty. Ltd. for $400,000 (Australian) or
approximately $290,000 (based upon the exchange rate at June 30, 2006). At June 30, 2006,
SPARFACTS Australia Pty. Ltd. (which began operations in May 2006) had a $276,000 (Australian) or approximately $200,000 loan
balance outstanding under the line of credit (based upon the exchange rate at that date).
The average interest rate was 10.8% per annum for the two months ended June 30, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. |  | Related-Party
Transactions
|-- |  | --------------------------

| | Mr. Robert
G. Brown, a Director, the Chairman, President and Chief Executive Officer           and a
major stockholder of SGRP, and Mr. William H. Bartels, a Director, the           Vice
Chairman 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) for both the
six months ended June 30, 2006 and 2005, and approximately 86% and 89% of the Companys
domestic field management at a total cost to the Company of approximately $10.7 million
and $11.0 million for the six months ended June 30, 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 5,500 independent contractors to the Company. Pursuant to the
terms of the Amended and Restated Field Management Agreement dated as of January 1, 2004,
SMSI provides approximately 48 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 (4% of SMS and SMSI costs) paid to SMS
and SMSI for services rendered were approximately $412,000 and $424,000 for the six
months ended June 30, 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 and are owned by Messrs. Brown and
Bartels, they benefit from any income of such companies allocated to them.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited) (continued)

| | SIT
provided substantially all of the Internet computer programming services purchased by the
Company at a total cost of approximately $363,000 and $424,000 for the six months ended
June 30, 2006 and 2005, respectively. SIT provided approximately 12,600 and 14,000 hours
of Internet computer programming services to the Company for the six months ended June
30, 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 $28.90 and $30.62
for the six months ended June 30, 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 for the six months ended June 30, 2006 and 2005,
respectively. However, since SIT is a Subchapter S corporation and is owned
by Messrs. Brown and Bartels, they benefit from any income of such company allocated to
them.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

|                                      | Three Months Ended June 30, |  | Six Months Ended June 30, |      
|------------------------------------- | --------------------------- |  | ------------------------- | -----
|
|Services provided by affiliates:      |                             |  |                           |      
|Independent contractor services (SMS) |                             |  | $                         | 3,993
|                                      |                             |  |                           |      
|Field management services (SMSI)      |                             |  | $                         | 942  
|                                      |                             |  |                           |      
|Handheld computer leases (SMS)        |                             |  | $                         | 69   
|                                      |                             |  |                           |      
|Internet and software program         |                             | 
|consulting services (SIT)             |                             |  | $                         | 176  
|                                      |                             |  |                           |      

9



---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited) (continued)

|                                           | June 30,
2006 |  | December 31,
2005 |    
|------------------------------------------ | ------------- |  | ----------------- | ---
|Accrued expenses due to (from) affiliates: |               |  |                   |    
|SPAR Marketing Services, Inc. (SMS)        |               |  | $                 | 524
|                                           |               |  |                   |    
|SPAR Management Services, Inc. (SMSI)      |               |  | $                 | (60
|                                           |               |  |                   |    
|SPAR Infotech, Inc. (SIT)                  |               |  | $                 | 31 
|                                           |               |  |                   |    

| | In
addition to the above, through the services of Affinity Insurance, Ltd. (Affinity),
the Company purchases insurance coverage for its casualty and property insurance risk.
The Companys Chairman/CEO and Vice Chairman own, through SMSI, a minority (less
than 5%) equity interest in Affinity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | 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. The Black-Scholes calculation was performed for the six months ended June
30, 2006, utilizing the methodology and assumptions consistent with those used in prior
periods under SFAS No. 123, which were disclosed in the Companys previously filed
Annual Report on Form 10-K, As Amended.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Share-based
compensation expense totaled approximately $159,000 for the six months ended June 30,
2006. Basic and diluted earnings per share were impacted by approximately $0.01 for the
six month period ended June 30, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2005, under the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148, no compensation cost was recognized for the stock
option grants to Company employees for the six months ended June 30, 2005. If
compensation cost for the six months ended June 30, 2005, had been recognized by the
Company under the fair value method, the Companys net income and pro forma net
income per share would have been reduced to the adjusted amounts indicated below (in
thousands, except per share data):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | Six Months EndedJune
30, 2005
|--------------------------------------------------- | -----------------------------
|Net income, as reported                             |                              
|Stock based employee compensation expense           |                              
|per the fair market value method                    |                              
|                                                    |                              
|Pro forma net income                                |                              
|                                                    |                              
|Basic and diluted net income per share, as reported |                              
|Basic and diluted net income per share, pro forma   |                              
|                                                    |                              

10



---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited) (continued)

| | Under
the provision of SFAS No. 123 dealing with non-employee stock option grants awarded to
the employees of the Companys affiliates, the Company recorded an expense for the
six months ended June 30, 2006 and 2005, of approximately $50,000 and $72,000
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company determines the fair value of the options granted to employees and non-employees
using the Black-Scholes valuation model and recovers amounts previously expensed or
expenses that vest 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. |  | Customer
Deposits
|-- |  | -----------------

| | Customer
deposits at June 30, 2006, were approximately $722,000 (approximately $349,000 from
domestic operations and approximately $373,000 from international operations) compared to
approximately $1,658,000 at December 31, 2005 (approximately $1,246,000 from domestic
operations and approximately $412,000 from international operations). In March 2006, the
company recorded revenue totaling $770,000 resulting from the termination of a customer
service agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. |  | Commitments
and Contingencies
|-- |  | -----------------------------

| |  | International  Commitments
| |  | --------------------------

| | The
Companys international business model is to partner with local merchandising
companies and combine the Companys proprietary software and expertise in the
merchandising and marketing services business with their partners knowledge of the
local market. In 2001, the Company established its first joint venture in Japan and has
continued this strategy. As of this filing, the Company is currently operating in Japan,
Canada, Turkey, South Africa, India, Romania, China, Lithuania and Australia.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | On
May 26, 2006, the jury in this case returned a verdict resulting in net award of
$1,307,700.64 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 $5,760,879.70 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 $5,235,579.06 for breach
of contract by SGRP and those SGRP subsidiaries.  Judgment will likely be entered in
the near future, and the parties will have 60 days thereafter in which to file appeals.
 It is not possible at this time to determine the likelihood of the filing or
outcome of any such appeals.  However, if Safeway appeals the awards to SGRPs
subsidiaries and overturns them, and PIA Co. and Pivotal appeal the awards to Safeway and
fail to overturn them, that result could have a material adverse effect on SGRP and its
subsidiaries.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited) (continued)

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. |  | Geographic
Data
|-- |  | ---------------

| | A
summary of the Companys net revenues, operating income and long lived assets by
geographic area for the six months ended June 30, 2006 and 2005, respectively, and at
June 30, 2006 and December 31, 2005, are as follows (in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | Three Months Ended June 30, |  | Six Months Ended June 30, |       
|------------------ | --------------------------- |  | ------------------------- | ------
|
|Net revenues:      |                             |  |                           |       
|United States      |                             |  | $                         | 7,869 
|International      |                             |  |                           | 5,050 
|                   |                             |  |                           |       
|Total net revenues |                             |  | $                         | 12,919
|                   |                             |  |                           |       

|                              | Three Months Ended June 30, |  | Six Months Ended June 30, |     
|----------------------------- | --------------------------- |  | ------------------------- | ----
|
|Operating (loss) income:      |                             |  |                           |     
|United States                 |                             |  | $                         | 25  
|International                 |                             |  |                           | (297
|                              |                             |  |                           |     
|Total operating (loss) income |                             |  | $                         | (272
|                              |                             |  |                           |     

|                        | June 30, |  | December 31, |      
|----------------------- | -------- |  | ------------ | -----
|
|Long lived assets:      |          |  |              |      
|United States           |          |  | $            | 1,673
|International           |          |  |              | 274  
|                        |          |  |              |      
|Total long lived assets |          |  | $            | 1,947
|                        |          |  |              |      

| | International
revenues disclosed above were based upon revenues reported by the Companys 100%
owned foreign subsidiary, its 51% owned foreign joint venture subsidiaries and its 50%
owned foreign joint ventures. During 2005, the Japan joint venture changed from a fiscal
year ending September 30 to a calendar year ending December 31. Due to the change of
their fiscal year, the operating results reported by the Japan joint venture for the
first quarter ending March 31, 2006, included not only the operating results for the
quarter, but also the operating results for the calendar fourth quarter of 2005. The
inclusion of the fourth quarter operating results increased net revenues and operating
income by $1.3 million and $13,000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Japan
accounted for 14.7% and 11.8% of the Companys net revenues for the three months
ended June 30, 2006 and 2005, respectively, and 15.9% and 10.6% of the Companys net
revenues for the six months ended June 30, 2006 and 2005, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited) (continued)

| | Canada
accounted for 8.2% of the Companys net revenues for both the three months ended
June 30, 2006 and 2005, and 7.3% and 7.5% of the Companys net revenues for the six
months ended June 30, 2006 and 2005, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
other international operations accounted for 16.2% and 8.2% of the Companys net
revenues for the three months ended June 30, 2006 and 2005, respectively, and 11.8% and
8.8% of the Companys net revenues for the six months ended June 30, 2006 and 2005,
respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. |  | Supplemental
Balance Sheet Information
|--- |  | --------------------------------------

|                                                                    | June 30, |  | December 31, |       
|------------------------------------------------------------------- | -------- |  | ------------ | ------
|
|Accounts receivable, net, consists of the following (in thousands): |          |  |              |       
|Trade                                                               |          |  | $            | 7,228 
|Unbilled                                                            |          |  |              | 2,234 
|Non-trade                                                           |          |  |              | 1,529 
|                                                                    |          |  |              |       
|                                                                    |          |  |              | 10,991
|Less allowance for doubtful accounts                                |          |  |              | (508  
|                                                                    |          |  |              |       
|Accounts receivable, net                                            |          |  | $            | 10,483
|                                                                    |          |  |              |       

|                                                                       | June 30, |  | December 31, |       
|---------------------------------------------------------------------- | -------- |  | ------------ | ------
|
|Property and equipment, net, consists of the following (in thousands): |          |  |              |       
|Equipment                                                              |          |  | $            | 5,216 
|Furniture and fixtures                                                 |          |  |              | 596   
|Leasehold improvements                                                 |          |  |              | 568   
|Capitalized software development costs                                 |          |  |              | 1,397 
|                                                                       |          |  |              |       
|                                                                       |          |  |              | 7,777 
|Less accumulated depreciation and amortization                         |          |  |              | (6,837
|                                                                       |          |  |              |       
|Property and equipment, net                                            |          |  | $            | 940   
|                                                                       |          |  |              |       

|                                                                                        | June 30, |  | December 31, |      
|--------------------------------------------------------------------------------------- | -------- |  | ------------ | -----
|
|Accrued expenses and other current liabilities consist of the following (in thousands): |          |  |              |      
|Accrued medical and worker compensation expenses                                        |          |  | $            | 411  
|Taxes payable                                                                           |          |  |              | 427  
|Accrued accounting and legal expense                                                    |          |  |              | 219  
|Accrued salaries payable                                                                |          |  |              | 703  
|Other                                                                                   |          |  |              | 302  
|                                                                                        |          |  |              |      
|Accrued expenses and other current liabilities                                          |          |  | $            | 2,062
|                                                                                        |          |  |              |      

13



---

# SPAR Group, Inc.Notes to Consolidated
Financial Statements (unaudited) (continued)

|11. |  | Foreign
Currency Rate Fluctuations
|--- |  | ----------------------------------

| | The
Company has foreign currency exposure associated with its international 100% owned
subsidiary, its 51% owned joint venture subsidiaries and its 50% owned joint ventures. In
the six months ended June 30, 2006, these exposures were primarily concentrated in the
Canadian dollar, South African Rand and Japanese Yen. At June 30, 2006, international
assets totaled approximately $5.0 million and international liabilities totaled
approximately $7.8 million. For the six months ended June 30, 2006, international
revenues totaled $10.1 million and there was an international net loss of $283,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. |  | Interest
Rate Fluctuations
|--- |  | --------------------------

| | The
Company is exposed to market risk related to the variable interest rates on its lines of
credit. At June 30, 2006, the Companys outstanding debt totaled approximately $3.0
million, which consisted of domestic variable-rate (9.0% per annum at that date) debt of
approximately $2.2 million, Japanese joint venture variable rate (1.4% per annum at that
date) debt of approximately $600,000 and Australian joint venture subsidiary variable
rate (10.8% per annum at that date) debt of approximately $200,000. Based on the six
months ending June 30, 2006, average outstanding borrowings under variable-rate debt, a
one-percentage point per annum increase in interest rates would have negatively impacted
pre-tax earnings and cash flows for the six months ended June 30, 2006, by approximately
$15,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13. |  | Reclassifications
|--- |  | -----------------

| | Certain
reclassifications have been made to the prior year financial statements to conform
to the 2006 presentation.
| | --------------------------------------------------------------------------------------------------------------------

14



---

# SPAR Group, Inc.

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

# Forward-Looking
Statements

Statements
contained in this Quarterly Report on Form 10-Q for the six months ended June 30, 2006
(this Quarterly Report), of SPAR Group, Inc. (SGRP, and together
with its subsidiaries, the SPAR Group or the Company), include
forward-looking statements (within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act) that are based on the Companys
best estimates. In particular and without limitation, this Managements
Discussion and Analysis of Financial Condition and Results of
Operations contains such forward-looking statements, which are
included in (among other places) the discussions respecting net revenues from significant
clients, significant chain work and international joint ventures, federal taxes and net
operating loss carryforwards, commencement of operations and future funding of
international joint ventures, credit facilities and covenant compliance, cost savings
initiatives, liquidity and sources of cash availability. Forward-looking statements
involve known and unknown risks, uncertainties and other factors that could cause the
Companys actual results, performance and achievements, whether expressed or implied
by such forward-looking statements, to not occur or be realized or to be less than
expected. Such forward-looking statements generally are based upon the Companys best
estimates of future results, performance or achievement, current conditions and the most
recent results of operations. Forward-looking statements may be identified by the use of
forward-looking terminology such as may, will, likely,
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 and other cautionary statements contained in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2005, as filed with the Securities and
Exchange Commission (the SEC) on April 3, 2006, as amended on Form 10-K/A by
Amendment No. 1 filed with the SEC on April 26, 2006, and Amendment No. 2 filed with the
SEC on June 21, 2006 (the Companys Annual Report for 2005 on Form 10-K As
Amended), including the risk factors described in Item 1 of that annual report under
the caption Certain Risk Factors and the changes (if any) in such risk factors
described in Item IA of Part II of this Quarterly Report (collectively, Risk
Factors), as well as the cautionary statements contained in this Quarterly Report.
All forward-looking statements attributable to the Company or persons acting on its behalf
are expressly qualified by the Risk Factors and other cautionary statements in this
Quarterly Report and in the Companys Annual Report for 2005 on Form 10-K As Amended,
which are incorporated by reference into this Quarterly Report. Although the Company
believes that its plans, intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, it cannot assure that such plans, intentions or
expectations will be achieved in whole or in part. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, or any Risk Factors or other
cautionary statements, whether as a result of new information, future events or otherwise,
except as required by law.

# Overview

In
the United States, the Company provides merchandising and marketing services to
manufacturers and retailers principally in mass merchandiser, electronics, drug store,
grocery, and other retail trade classes through its Domestic Merchandising Services
Division. Internationally, the Company provides similar in-store merchandising and
marketing services through a wholly owned subsidiary in Canada, 51% owned joint venture
subsidiaries in Turkey, South Africa, India and Romania, as well as Lithuania and
Australia (which began operations in April and May 2006, respectively) and 50% owned joint
ventures in Japan and China. For the six months ended June 30, 2006, the Company
consolidated Canada, Turkey, South Africa, India, Romania, Lithuania, Australia, China and
Japan into the Companys financial statements.

15



---

# SPAR Group, Inc.

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, electronic store chains, drug store chains and grocery
stores. Included in its clients are home entertainment, general merchandise, health and
beauty care, consumer goods and food product companies in the United States.

Merchandising
and marketing 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 or distributors. 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 or
distributors, and include new store openings and existing store resets, re-merchandising,
remodels and category implementations, new product launches, special seasonal or
promotional merchandising, focused product support and product recalls. The Company also
provides in-store product demonstrations, in-store product sampling and other in-store
event staffing services, RFID services, technology services and marketing research
services.

International
Merchandising Services Division

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

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

# Critical Accounting
Policies

There
were no material changes to the Companys critical accounting policies as reported in
the Companys Annual Report for 2005 on Form 10-K As Amended.

16



---

# SPAR Group, Inc.

# Results of Operations

# Three months ended June
30, 2006, compared to three months ended June 30, 2005

The
following table sets forth selected financial data and data as a percentage of net
revenues for the periods indicated (in thousands, except percent data).

|                                          | Three Months Ended June 30,
|----------------------------------------- | ---------------------------
|
|Net revenues                              |                            
|Cost of revenues                          |                            
|Selling, general & administrative expense |                            
|Depreciation and amortization             |                            
|Interest expense                          |                            
|Other (income) expense                    |                            
|                                          |                            
|Income before income tax provision and    |                            
|minority interest                         |                            
|Provision for income taxes                |                            
|                                          |                            
|Income before minority interest           |                            
|Minority interest                         |                            
|                                          |                            
|Net income                                |                            
|                                          |                            

Prior year SG&A legal expenses
were reclassified to Other expense to conform to the 2006 presentation.

# Net Revenues

Net
revenues for the three months ended June 30, 2006, were $12.9 million, compared to $12.8
million for the three months ended June 30, 2005, an increase of 0.9%. Domestic net
revenues for the three months ended June 30, 2006, were $7.9 million compared to $9.2
million for the prior year period. The decrease of $1.3 million was primarily due to a
reduction in project revenues in 2006 versus 2005.International net revenues for
the three months ended June 30, 2006 were $5.1 million compared to $3.6 million for the
prior year period. The increase of $1.5 million was primarily due to increases in Japan of
approximately $387,000 and India of approximately $301,000, as well as additional revenues
from the new joint ventures which began operations in 2006, Australia $691,000, Lithuania
$104,000 and China $17,000, offset by a decrease in South Africa net revenues of
approximately $104,000 resulting from the loss of a large customer.

One
domestic client accounted for 15% and 21% of the Companys net revenues for the three
months ended June 30, 2006 and 2005, respectively. This client also accounted for
approximately 13% and 10% of accounts receivable at June 30, 2006 and December 31, 2005,
respectively.

A
second domestic client accounted for 10% and 4% of the Companys net revenues for the
three months ended June 30, 2006 and 2005, respectively. This client also accounted for
approximately 15% and 1% of the Companys accounts receivable at June 30, 2006 and
December 31, 2005, respectively.

Approximately
9% of the Companys net revenues for both the three months ended June 30, 2006 and
2005 resulted from merchandising services performed for clients at a leading domestic
electronics chain. Services performed for these clients in that electronics chain also
accounted for approximately 2% and 8% of the Companys accounts receivable at June
30, 2006 and December 31, 2005, respectively. The Companys contractual relationships
or agreements are with various clients and not that retail electronics chain.

17



---

# SPAR Group, Inc.

Approximately
7% and 8% of the Companys net revenues for the three months ended June 30, 2006 and
2005, respectively, resulted from merchandising services performed for domestic clients at
a leading mass merchandising chain. Services performed for these clients in that chain
also accounted for approximately 2% and 8% of the Companys accounts receivable at
June 30, 2006 and December 31, 2005, respectively. The Companys contractual
relationships or agreements are with various clients and not that retail mass
merchandising chain.

The
loss of these clients or the loss of the ability to provide merchandising and marketing
services in those chains 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.

# Cost of Revenues

Cost
of revenues consists of in-store labor and field management wages, related benefits,
travel and other direct labor-related expenses. Cost of revenues as a percentage of net
revenues was 70.8% for the three months ended June 30, 2006, compared to 63.8% for the
three months ended June 30, 2005. Domestic cost of revenues as a percentage of net
revenues was 73.5% and 65.3% for the three months ended June 30, 2006 and 2005,
respectively. The increase is primarily attributable to the mix of business with higher
cost project revenues accounting for a greater portion of net revenues in the three months
ended June 30, 2006 compared to prior year. Cost of revenues from international operations
as a percentage of net revenues was 66.5% and 60.2% for the three months ended June 30,
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 project revenues in Japan accounting for a greater portion of net revenues in
the three months ended June 30, 2006 compared to prior year.

Approximately
85% and 88% of the Companys domestic cost of revenues in the three months ended June
30, 2006 and 2005, 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 Note 5  Related-Party Transactions).

# Selling, General and
Administrative Expenses

Selling,
general and administrative expenses include corporate overhead, project management,
information technology, executive compensation, human resource, legal and accounting
expenses.

Selling,
general and administrative expenses for the three months ended June 30, 2006 totaling
approximately $3.9 million were consistent with 2005. Domestic selling, general and
administrative expenses for the three months ended June 30, 2006 were $1.9 million
compared to approximately $2.6 million for the three months ended June 30, 2005. The
decrease of approximately $683,000 or 26.3% was primarily due to the reversal of unpaid
prior year incentive accruals totaling approximately $300,000 as well as the
reclassification of first quarter 2006 litigation expenses of approximately $400,000 to
other expense. International selling, general and administrative expenses for the three
months ended June 30, 2006 were approximately $1.9 million compared to approximately $1.3
million for the three months ended June 30, 2005. The increase of approximately $667,000
or 51.8% was primarily due to an increase in Japan costs of approximately $217,000,
international corporate business development costs of approximately $119,000 and selling,
general and administrative expenses of new joint ventures which began operations in 2006
totaling approximately $393,000.

18



---

# SPAR Group, Inc.

# Depreciation and
Amortization

Depreciation
and amortization charges were approximately $183,000 and $272,000 for the three months
ended June 30, 2006 and 2005, respectively. The decrease of approximately $89,000 or 33%
was due to lower purchases of property and equipment in recent years.

# Other (Income) Expense

Other
income was approximately $411,000 for the three months ended June 30, 2006 compared to
other expense of approximately $346,000 for the three months ended June 30, 2005. Other
income in 2006 is primarily a result of the favorable jury award in a lawsuit in the net
amount of approximately $1.3 million, partially offset by related legal expenses for the
period of approximately $1.0 million. Other expense in 2005 resulted from the
reclassification of legal expenses related to the litigation that were reclassified to
other expense to conform to the 2006 presentation.

# Income Taxes

Income
taxes were approximately $54,000 and $15,000 for the three months ended June 30, 2006 and
2005, respectively. The tax provisions were primarily for minimum state taxes. There were
no tax provisions for federal tax for the three months ended June 30, 2006 and 2005, since
the Company expects to utilize net operating loss carry forwards which are available to
offset any federal taxes due.

# Minority Interest

Minority
interest of approximately $61,000 and $34,000 resulted from the net operating losses of the
51% owned joint venture subsidiaries and the 50% owned joint ventures for the three months
ended June 30, 2006 and 2005, respectively.

# Net Income

The
Company had net income of approximately $100,000 for the three months ended June 30, 2006,
or $0.01 per diluted share, compared to a net income of approximately $116,000, or $0.01
per diluted share, for the corresponding period last year.

19



---

# SPAR Group, Inc.

# Results of Operations

# Six months ended June
30, 2006, compared to six months ended June 30, 2005

The
following table sets forth selected financial data and data as a percentage of net
revenues for the periods indicated (in thousands, except percent data).

|                                          | Six Months Ended June 30,
|----------------------------------------- | -------------------------
|
|Net revenues                              |                          
|Cost of revenues                          |                          
|Selling, general & administrative expense |                          
|Depreciation and amortization             |                          
|Interest expense                          |                          
|Other (income) expense                    |                          
|                                          |                          
|Income before income tax provision and    |                          
|minority interest                         |                          
|Provision for income taxes                |                          
|                                          |                          
|Income before minority interest           |                          
|Minority interest                         |                          
|                                          |                          
|Net income                                |                          
|                                          |                          

Prior year SG&A legal expenses
were reclassified to Other expense to conform to the 2006 presentation.

# Net Revenues

Net
revenues for the six months ended June 30, 2006, were $28.8 million, compared to $27.3
million for the six months ended June 30, 2005, an increase of 5.3%. Domestic net revenues
for the six months ended June 30, 2006, was $18.7 million (including $770,000 in
non-recurring revenues from the termination of a service agreement) compared to $20.0
million for the six months ended June 30, 2005. The decrease of $1.3 million or 6.5% was
primarily due to a reduction in project revenues in 2006 versus 2005. International net
revenues for the six months ended June 30, 2006 were $10.1 million compared to $7.3
million for the prior year period. The increase in International net revenues of $2.8
million or 37.3% was primarily due to the inclusion of the Japan calendar year fourth
quarter 2005 net revenues totaling $1.3 million as a result of the change in the year end
reporting for the Japan joint venture, increased net revenues from India $692,000 and
Japan $354,000, as well as additional revenues from the new joint ventures which began
operations in 2006, Australia $691,000, Lithuania $104,000 and China $32,000, offset by a
decrease in South Africa net revenues totaling $667,000, due to the loss of a major client
in 2005.

One
domestic client accounted for 13% and 19% of the Companys net revenues for the six
months ended June 30, 2006 and 2005, respectively. This client also accounted for
approximately 13% and 10% of the Companys accounts receivable at June 30, 2006 and
December 31, 2005, respectively.

A
second domestic client accounted for 12% and 10% of the Companys net revenues for
the six months ended June 30, 2006 and 2005, respectively. This client also accounted for
approximately 15% and 1% of the Companys accounts receivable at June 30, 2006 and
December 31, 2005, respectively.

20



---

# SPAR Group, Inc.

Approximately
10% of the Companys net revenues for both the six months ended June 30, 2006 and
2005 resulted from merchandising services performed for clients at a leading domestic
electronics chain. Services performed for these clients in that electronics chain also
accounted for approximately 2% and 8% of the Companys accounts receivable at June
30, 2006 and December 31, 2005, respectively. The Companys contractual relationships
or agreements are with various clients and not that retail electronics chain.

Approximately
8% and 9% of the Companys net revenues for the six months ended June 30, 2006 and
2005, respectively, resulted from merchandising services performed for domestic clients at
a leading mass merchandising chain. Services performed for these clients in that chain
also accounted for approximately 2% and 8% of the Companys accounts receivable at
June 30, 2006 and December 31, 2005, respectively. The Companys contractual
relationships or agreements are with various clients and not that retail mass
merchandising chain.

The
loss of these clients or the loss of the ability to provide merchandising and marketing
services in those chains 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.

# Cost of Revenues

Cost
of revenues consists of in-store labor and field management wages, related benefits,
travel and other direct labor-related expenses. Cost of revenues as a percentage of net
revenues was 66.0% for the six months ended June 30, 2006, compared to 61.6% for the six
months ended June 30, 2005. Domestic cost of revenues as a percentage of net revenues was
66.8% and 62.3% for the six months ended June 30, 2006 and 2005, respectively. The
increase is primarily attributable to the mix of business with higher cost project
revenues accounting for a greater portion of revenues in the six months ended June 30,
2006. Cost of revenues from international operations as a percentage of net revenues was
64.6% and 59.6% for the six months ended June 30, 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 project revenues in
Japan accounting for a greater portion of revenue in the six months ended June 30, 2006
compared to prior year.

Approximately
86% and 89% of the Companys domestic cost of revenues in the six months ended June
30, 2006 and 2005, 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 Note 5  Related-Party Transactions).

# Selling, General and
Administrative Expenses

Selling,
general and administrative expenses include corporate overhead, project management,
information technology, executive compensation, human resource, legal and accounting
expenses.

Selling,
general and administrative expenses for the six months ended June 30, 2006, were
approximately $8.9 million compared to approximately $8.1 million for the six months ended
June 30, 2005 an increase of approximately $860,000, or 10.6%. Domestic selling, general
and administrative expenses for the six months ended June 30, 2006 were approximately $5.1
million compared to approximately $5.7 million for the six months ended June 30, 2005. The
decrease of approximately $600,000 or 10.4% was primarily due to the reversal of unpaid
prior year incentive accruals totaling approximately $300,000 and lower incentive accruals
in 2006 compared to 2005 of approximately $300,000. International selling, general and
administrative expenses for the six months ended June 30, 2006 were approximately $3.8
million compared to approximately $2.3 million for the six months ended June 30, 2005. The
increase of approximately $1.5 million, or 62.3% was primarily due to additional Japan
costs of approximately $554,000 resulting from the additional quarter of expense due to
the change in year-end reporting, approximately $357,000 from increased spending in Japan
and approximately $440,000 of additional selling, general and administrative expenses
related to the new joint venture subsidiaries that began operations in 2006.

21



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# SPAR Group, Inc.

# Depreciation and
Amortization

Depreciation
and amortization charges were approximately $396,000 and $551,000 for the six months ended
June 30, 2006 and 2005, respectively. The decrease of approximately $155,000 or 28% was
due to lower purchases of property and equipment in recent years.

# Other (Income) Expense

Other
income was approximately $589,000 for the six months ended June 30, 2006 compared to other
expense of approximately $408,000 for the six months ended June 30, 2005. Other income in
2006 was primarily due to the favorable jury award in a lawsuit in the net amount of
approximately $1.3 million, partially offset by related legal expenses for the period of
approximately $1.0 million and the favorable settlement of a vendor lawsuit. Other expense
in 2005 resulted from the reclassification of legal expenses related to the litigation
that were reclassified to other expense to conform to the 2006 presentation.

# Income Taxes

Income
taxes were approximately $99,000 and $30,000 for the six months ended June 30, 2006 and
2005, respectively. The tax provisions were primarily for minimum state taxes. There were
no tax provisions for federal tax for the six months ended June 30, 2006 and 2005, since
the Company expects to utilize net operating loss carry forwards which are available to
offset any federal taxes due.

# Minority Interest

Minority
interest of approximately ($44,000) and $77,000 resulted from the net operating losses and
profits of the 51% owned joint venture subsidiaries and the 50% owned joint ventures for
the six months ended June 30, 2006 and 2005, respectively.

# Net Income

The
Company had net income of approximately $877,000 for the six months ended June 30, 2006, or $0.05 per
diluted share, compared to a net income of approximately $1.3 million, or $0.07 per diluted share, for
the corresponding period last year.

# Liquidity and Capital
Resources

In
the six months ended June 30, 2006, the Company had a net income of $877,000.

Net
cash used by operating activities for the six months ended June 30, 2006, was
approximately $6,000 compared to net cash provided by operating activities for the six
months ended June 30, 2005 of approximately $3.1 million. The decrease in net cash
provided by operating activities was primarily due to decreases in net income, lower
decreases in accounts receivable and other assets and decreases in accrued expenses.

Net
cash used in investing activities for the six months ended June 30, 2006, was
approximately $205,000 compared to net cash used in investing activities of approximately
$257,000 for the six months ended June 30, 2005. The decrease in net cash used in
investing activities was a result of continued decreases in purchases of property and
equipment in 2006.

Net
cash used in financing activities for the six months ended June 30, 2006, was
approximately $3,000, compared to net cash used in financing activities of approximately
$2.5 million for the six months ended June 30, 2005. The decrease of net cash used in
financing activities was primarily a result of increased net borrowings on lines of
credit.

22



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# SPAR Group, Inc.

The
above activity resulted in a decrease in cash and cash equivalents for the six months
ended June 30, 2006, of approximately $259,000.

At
June 30, 2006, the Company had positive working capital of $4.4 million, as compared to a
positive working capital of $3.1 million at December 31, 2005. The increase in working
capital is due primarily to reductions in accrued expenses and other current liabilities,
accrued expenses due to affiliates and customer deposits, partially offset by increases in
lines of credit. The Companys current ratio was 1.53 at June 30, 2006, and 1.31 at
December 31, 2005.

In
January 2003, the Company 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).

In
January 2006, the Credit Facility was amended to extend its maturity to January 2009 and
to reset the Minimum Fixed Charge Coverage Ratio, and Minimum Net Worth covenants. The
Credit Facility also limits certain expenditures, including, but not limited to, capital
expenditures and other investments. It further stipulated that should the Company meet its
covenants for the year ended December 31, 2005 Webster would release Mr. Robert Brown and
Mr. William Bartels from their obligation to provide personal guarantees totaling $1.0
million and also release certain discretionary bank reserves. The Company met its covenant
requirements for the year ended December 31, 2005 and Webster released both the personal
guarantees and the discretionary bank reserves in May 2006.

The
basic interest rate under the Credit Facility is Websters Alternative Base
Rate plus 0.75% per annum (a total of 9% per annum at June 30, 2006), which
automatically changes with each change made by Webster in such Alternate 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 six months. The actual average interest rate
under the Credit Facility was 8.41% per annum for the six months ended June 30, 2006. The
Credit Facility is secured by all of the assets of the Company and its domestic
subsidiaries.

The
Company was not in violation of any covenants at June 30, 2006 and does not expect to be
in violation at future measurement dates. However, there can be no assurances that the
Company will not be in violation of certain covenants in the future. Should the Company be
in violation, there are no assurances that Webster will issue waivers in the future.

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 June 30, 2006 and December 31, 2005, in
accordance with EITF 95-22, Balance Sheet Classification of Borrowings Outstanding
Under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a
Lock-Box Agreement.

The
revolving loan balances outstanding under the Credit Facility were $2.2 million and $2.4
million at June 30, 2006 and December 31, 2005, respectively. There were letters of credit
outstanding under the Credit Facility of approximately $552,000 at June 30, 2006 and
December 31, 2005. As of June 30, 2006, the SPAR Group had unused availability under the
Credit Facility of $2.9 million out of the remaining maximum $4.2 million unused revolving
line of credit after reducing the borrowing base by outstanding loans and letters of
credit.

The
Japanese joint venture SPAR FM Japan, Inc. has a revolving line of credit arrangement with
Japanese banks for 100 million Yen or approximately $850,000 (based upon the exchange rate
at June 30, 2006). At June 30, 2006, SPAR FM Japan, Inc. had a 70 million Yen or
approximately $600,000 loan balance outstanding under the line of credit (based upon the
exchange rate at that date). The average interest rate was 1.4% per annum for the six months ended June 30, 2006.

23



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# SPAR Group, Inc.

In
2006, the Australia joint venture SPARFACTS Australia Pty. Ltd. entered into a revolving
line of credit arrangement with Oxford Funding Pty. Ltd. (which began operations in May 2006) for $400,000 (Australian) or
approximately $290,000 (based upon the exchange rate at June 30, 2006). At June 30, 2006,
SPARFACTS Australia Pty. Ltd. had a $276,000 (Australian) or approximately $200,000 loan
balance outstanding under the line of credit (based upon the exchange rate at that date).
The average interest rate was 10.8% per annum for the two months ended June 30, 2006.

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

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

Management
believes that based upon the results of Companys operations and 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 reduction in business from such
clients, or the Companys inability to remain profitable, could have a material
adverse effect on the Companys cash resources and its ongoing ability to fund
operations.

# Certain Contractual
Obligations

The
following table contains a summary of certain of the Companys contractual
obligations by category as of June 30, 2006 (in thousands).

|                            | Payments due by Period | 
|--------------------------- | ---------------------- | 
|
|Credit Facility             |                        | 
|Operating Lease Obligations |                        | 
|                            |                        | 
|Total                       |                        | 
|                            |                        | 

The
Company also had approximately $552,000 in outstanding Letters of Credit at June 30, 2006.

# Item 3.   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 carries those current assets and
liabilities at their stated or face amounts in its consolidated financial statements, as
the Company believes those amounts approximate the fair value for these items because of
the relatively short period of time between origination of the instrument, asset or
liability and their expected realization or payment. The Company monitors the risks
associated with interest rates and financial instrument, asset and liability 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.

24



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# SPAR Group, Inc.

The
Company is exposed to market risk related to the variable interest rates on its lines of
credit. At June 30, 2006, the Companys outstanding debt totaled approximately $3.0
million, which consisted of domestic variable-rate (9.0% per annum at that date) debt of
approximately $2.2 million, Japanese joint venture variable rate (1.4% per annum at that
date) debt of approximately $600,000 and Australian joint venture subsidiary variable rate
(10.8% per annum at that date) debt of approximately $200,000. Based on the six months
ending June 30, 2006, average outstanding borrowings under variable-rate debt, a
one-percentage point per annum increase in interest rates would have negatively impacted
pre-tax earnings and cash flows for the six months ended June 30, 2006, by approximately
$15,000.

The
Company has foreign currency exposure associated with its international 100% owned
subsidiary, its 51% owned joint venture subsidiaries and its 50% owned joint ventures. In
the six months ended June 30, 2006, these exposures were primarily concentrated in the
Canadian dollar, South African Rand and Japanese Yen. At June 30, 2006, international
assets totaled approximately $5.0 million and international liabilities totaled
approximately $7.8 million. For the six months ended June 30, 2006, international revenues
totaled $10.1 million and there was an international net loss of $283,000.

# Item 4.   Controls and
Procedures

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

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

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

25



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# SPAR Group, Inc.

# PART II: OTHER
INFORMATION

|Item 1. |  | 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 net award of
$1,307,700.64 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 $5,760,879.70 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
$5,235,579.06 for breach of contract by SGRP and those SGRP subsidiaries.  Judgment
will likely be entered in the near future, and the parties will have 60 days thereafter in
which to file appeals.  It is not possible at this time to determine the likelihood
of the filing or outcome of any such appeals.  However, if Safeway appeals the awards
to SGRPs subsidiaries and overturns them, and PIA Co. and Pivotal appeal the awards
to Safeway and fail to overturn them, that result could have a material adverse effect on
SGRP and its subsidiaries.

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.

There
have been no other new reportable proceedings or material developments in previously
reported proceedings since the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2005, as filed with the Securities and Exchange Commission (the
SEC) on April 3, 2006, as amended on Form 10-K/A by Amendment No. 1 filed with
the SEC on April 26, 2006, and Amendment No. 2 filed with the SEC on June 21, 2006 (the
Companys Annual Report for 2005 on Form 10-K As Amended).

|Item 1A. |  | Risk Factors
|-------- |  | ------------

The
Companys Annual Report for 2005 on Form 10-K As Amended describes various risk
factors applicable to the Company and its businesses in Item 1 under the caption Certain
Risk Factors, which risk factors are incorporated by reference into this Quarterly
Report. There have been no material changes in the Companys risk factors since the
Companys Annual Report for 2005 on Form 10-K As Amended.

|Item 2: |  | Unregistered Sales of Equity Securities and Use of Proceeds
|------- |  | -----------------------------------------------------------

| |  | Item 2(a): Not applicable Item 2(b): Not applicableItem 2(c): Not applicable
| |  | ----------------------------------------------------------------------------

26



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# SPAR Group, Inc.

|Item 3: |  | Defaults upon Senior Securities
|------- |  | -------------------------------

| | Item 3(a): |  | Defaults
under Indebtedness:  None.
| | ---------- |  | -----------------------------------

| | Item 3(b): |  | Defaults under Preferred Stock:  Not applicable.
| | ---------- |  | ------------------------------------------------

|Item 4: |  | Submission of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------

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

|Item 5: |  | Other Information
|------- |  | -----------------

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

|Item 6: |  | Exhibits
|------- |  | --------

|     |                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------
|31.1 | Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley
|     | Act of 2002, as filed herewith                                                                                   
|     |                                                                                                                  
|31.2 | Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley
|     | Act of 2002, as filed herewith                                                                                   
|     |                                                                                                                  
|32.1 | Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley
|     | Act of 2002, as filed herewith                                                                                   
|     |                                                                                                                  
|32.2 | Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley
|     | Act of 2002, as filed herewith                                                                                   
|    

27



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# SPAR Group, Inc.

# SIGNATURES

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

|                      |                                              
|--------------------- | ---------------------------------------------
|Date: August 14, 2006 | SPAR Group, Inc., Registrant                 
|                      | By: /s/ Charles Cimitile                     
|                      |                                              
|                      | Charles Cimitile                             
|                      | Chief Financial Officer, Treasurer, Secretary
|                      | and duly authorized signatory                

28



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