UNITED STATES        SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549**Form 10-Q**

         

**(Mark One)**x     QUARTERLY        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the third        quarterly period ended**September****30****,        2007****.**

     OR

o     TRANSITION        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the        transition period fromto.  

         

           

        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.        555 White Plains Road, Suite 250, Tarrytown, New York 10591(Address of principal executive offices, including zip code)

 

 

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:      x        Yes    o 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  o      Accelerated        Filer o                      Non-Accelerated Filerx

Indicate by check mark whether the registrant        is a shell company(as        defined in Rule 12b-2 of the Exchange Act).     YES         o             NOx

        On September 30, 2007, there were 19,088,927shares of        Common Stock outstanding.

----

**SPAR Group, Inc.**

Index

| **PART I:**                        | **FINANCIAL INFORMATION**                                                                                                                                               |                           |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|
| Item 1:                            | Financial Statements                                                                                                                                                    |                           |
|                               | Consolidated Balance                    Sheets                    as of September 30, 2007 and December 31, 2006

                                                 | 3

                       |
|                               | Consolidated                    Statements of Operations for the three and                    nine months ended September 30, 2007 and 2006

                      | 4

                       |
|                               | Consolidated Statements                    of Cash Flows for the                    nine months ended September 30, 2007 and 2006

                                | 5

                       |
|                               | Notes                    to Consolidated Financial Statements

                                                                                                    | 6                              |
| Item 2:
                      | Management's Discussion and                    Analysis of Financial                    Condition and Results of Operations

                                      | 17

                      |
| Item 3:                            | Quantitative                    and Qualitative Disclosures about Market Risk

                                                                                    | 27                             |
| Item 4:                            | Controls and                    Procedures                                                                                                                              | 28                             |
| **PART II:**                       | **OTHER INFORMATION**                                                                                                                                                   |                           |
| Item 1:                            | Legal Proceedings                                                                                                                                                       | 29                             |
| Item 1A:                           | Risk Factors                                                                                                                                                            | 29                             |
| Item 2:                            | Unregistered Sales of                    Equity Securities and Use of Proceeds                                                                                          | 30                             |
| Item 3:                            | Defaults upon Senior                    Securities                                                                                                                      | 30                             |
| Item 4:                            | Submission of Matters to a                    Vote of Security Holders                                                                                                  | 30                             |
| Item 5:                            | Other                    Information                                                                                                                                    | 30                             |
| Item 6:                            | Exhibits                                                                                                                                                                | 30                             |
| **SIGNATURES**                     |                                                                                                                                                                    | 31                             |

----

**PART I:     FINANCIAL INFORMATION**

**Item 1: Financial Statements**

****SPAR Group, Inc.****

Consolidated Balance Sheets

(In thousands, except share and per share data)

         

|                                                                                                                                                                                    | **September****30****,**                                   |        | **December 31,**                                  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------|--------|---------------------------------------------------|
|                                                                                                                                                                                    | **2007**                                                   |        | **2006**                                          |
|                                                                                                                                                                                    | (Unaudited)                                                |        | (Note)                                            |
| **Assets**                                                                                                                                                                              |                                                       |        |                                              |
| Current assets:                                                                                                                                                                         |                                                       |        |                                              |
| Cash and cash equivalents                                                                                                                                                               | **$     ****1,503   **  |        | $     1,148    |
| Accounts receivable, net                                                                                                                                                                | **10,046   **                                    |   | 12,982                                  |
| Prepaid expenses and other current                    assets                                                                                                                            | **677   **                                       |        | 553                                     |
| Total currentassets                                                                                                                                                                     | **12,226   **                                    |        | 14,683                                  |
|                                                                                                                                                                                    |                                                       |        |                                              |
| Property and equipment, net                                                                                                                                                             | **1,411   **                                     |        | 901                                     |
| Goodwill                                                                                                                                                                                | **798   **                                       |        | 798                                     |
| Other assets                                                                                                                                                                            | **1,597   **                                     |        | 1,695                                   |
| Total assets                                                                                                                                                                            | **$     ****16,032   ** |        | $     18,077   |
|                                                                                                                                                                                    |                                                       |        |                                              |
| **Liabilities and stockholders'                    equity**                                                                                                                             |                                                       |        |                                              |
| Current liabilities:                                                                                                                                                                    |                                                       |        |                                              |
| Accounts payable                                                                                                                                                                        | **$     ****3,830  **   |        | $     2,551    |
| Accrued expenses and other current                    liabilities                                                                                                                       | **4,371  **                                      |        | 2,864                                   |
| Accrued expenses due to affiliates                                                                                                                                                      | **2,158  **                                      |   | 1,752                                   |
| Customer deposits                                                                                                                                                                       | **694  **                                        |        | 560                                     |
| Lines of credit                                                                                                                                                                         | **3,021  **                                      |        | 5,318                                   |
| Total current liabilities                                                                                                                                                               | **14,074  **                                     |        | 13,045                                  |
|                                                                                                                                                                                    |                                                       |        |                                              |
| Other long-term liabilities                                                                                                                                                             | **244  **                                        |        | 6                                       |
| Minority interest                                                                                                                                                                       | **652  **                                        |   | 498                                     |
| Total liabilities                                                                                                                                                                       | **14,970  **                                     |        | 13,549                                  |
|                                                                                                                                                                                    |                                                       |        |                                              |
| Commitments and contingencies (Note –                    9)                                                                                                                       |                                                       |        |                                              |
|                                                                                                                                                                                    |                                                       |        |                                              |
| Stockholders' equity:                                                                                                                                                                   |                                                       |        |                                              |
| Preferred stock, $.01 par value:

Authorized shares – 3,000,000

Issued and outstanding shares –                    none                                                    | **–  **                                    |   | –                                 |
| Common stock, $.01 par value:

Authorized shares – 47,000,000

Issued and outstanding shares –

19,088,927 – September 30, 2007

18,934,182 – December 31, 2006 | **189  **                                        |        | 189                                     |
| Treasury stock                                                                                                                                                                          | **(1)**                                                    |        | (1)                                               |
| Accumulated other comprehensive loss                                                                                                                                                    | **(32)**                                                   |        | (109)                                             |
| Additional paid-in capital                                                                                                                                                              | **11,935  **                                          |        | 11,484                                  |
| Accumulated deficit                                                                                                                                                                     | **(11,029)**                                               |        | (7,035)                                           |
| Total stockholders' equity                                                                                                                                                              | **1,062**                                                  |        | 4,528                                   |
| Total liabilities and stockholders'                    equity                                                                                                                           | **$     ****16,032**              |        | $     18,077   |

         

         

Note:   The Balance Sheet at December 31, 2006,        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.*

----

**SPAR        Group, Inc.**

Consolidated Statements of Operations

(unaudited)

(In thousands, except per share data)

|                                                                           | **Three Months Ended****September****30,**                           |                                                                | **Nine****Months Ended****September****30,** |
|--------------------------------------------------------------------------------|----------------------------------------------------------------------|---------------------------------------------------------------------|----------------------------------------------|
|                                                                           | **2007**                                                             | **2006**                                                            |                                         | **2007** | **2006** |
|                                                                           |                                                                 |                                                                |                                         |   |   |
| Net revenues                                                                   | **$     ****14,365 **                  | **$     **12,709                      |                                         | **$     ****42,284 ** | **$     **41,477  |
| Cost of revenues                                                               | **10,483 **                                                     | 8,856                                                          |                                         | **29,738 ** | 27,853  |
| Gross profit                                                                   | **3,882 **                                                      | 3,853                                                          |                                         | **12,546 ** | 13,624  |
|                                                                           |                                                                 |                                                                |                                         |   |   |
| Selling, general and administrative                    expenses                | **5,108 **                                                      | 4,855                                                          |                                         | **15,340 ** | 13,794  |
| Depreciation and amortization                                                  | **180 **                                                        | 170                                                            |                                         | **571 ** | 565  |
| Operating loss                                                                 | **(1,406)**                                                          | (1,172)                                                             |                                         | **(3,365)** | (735) |
|                                                                           |                                                                 |                                                                |                                         |   |   |
| Interest expense                                                               | 66                                                              | 65                                                             |                                         | 247  | 162  |
| Other expense (income)                                                         | 77                                                              | 48                                                             |                                         | 27  | (542) |
| Lossbefore                    provision for income taxes and minority interest | (1,549)                                                              | (1,285)                                                             |                                         | (3,639) | (355) |
|                                                                           |                                                                 |                                                                |                                         |   |   |
| Provision for income taxes                                                     | **79 **                                                         | 73                                                             |                                         | **220 ** | 172  |
| Lossbefore                    minority interest                                | **(1,628)**                                                          | (1,358)                                                             |                                         | **(3,859)** | (527) |
|                                                                           |                                                                 |                                                                |                                         |   |   |
| Minority interest                                                              | **119 **                                                        | 34                                                             |                                         | **135 ** | (11) |
| Net loss                                                                       | **$     ****(1,747)**                       | **$     (1,392)**                          |                                         | **$     (3,994)** | **$                          (516)** |
|                                                                           |                                                                 |                                                                |                                         |   |   |
| Basic/diluted net loss per common                    share:                    |                                                                 |                                                                |                                         |   |   |
|                                                                           |                                                                 |                                                                |                                         |   |   |
| Net loss– basic/diluted                                                  | **$                           (0.09)** | **$                          (0.07)** |                                         | **$                          (0.21)** | **$     (0.03)** |
|                                                                           |                                                                 |                                                                |                                         |   |   |
| Weighted average common shares– basic/diluted                            | **19,012  **                                               | 18,934                                                         |                                         | **18,973 ** | 18,929  |

*See accompanying notes*

----

**SPAR Group,        Inc.**

Consolidated Statements of Cash Flows

(unaudited) (In thousands)

|                                                                                | **Nine****Months Ended****September****30****,**                                      |
|-------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
|                                                                                | **2007**                                                                              | **2006** |
| **Operating activities**                                                            |                                                                                  |   |
| Net cash provided by operating                    activities                        | **$     ****3,097 **                                    | $     117  |
|                                                                                |                                                                                  |   |
| **Investing activities**                                                            |                                                                                  |   |
| Purchases of property and equipment                                                 | **(639)**                                                                             | (363) |
|                                                                                |                                                                                  |   |
| **Financing activities**                                                            |                                                                                  |   |
| Net payments on lines of credit                                                     | **(2,297)**                                                                           | 280  |
| Other long-term liabilities                                                         | **(84)**                                                                              | (3) |
| Proceeds from employee stock purchase plan and                    options exercised | **201 **                                                                         | **– ** |
| Net cash (used in) provided by financing                    activities              | **(2,180)**                                                                           | 277  |
|                                                                                |                                                                                  |   |
| Translation gain (loss)                                                             | **77 **                                                                          | (53) |
|                                                                                |                                                                                  |   |
| Net change in cash and cash                    equivalents                          | **355 **                                                                         | (22) |
| Cash and cash equivalents at beginning of                    period                 | **1,148 **                                                                       | 1,914  |
| Cash and cash equivalents at end of                    period                       | **$     ****1,503 **                                    | $     1,892  |
|                                                                                |                                                                                  |   |
| **Supplemental disclosure of cash flow                    information**             |                                                                                  |   |
| Interest paid                                                                       | **$                           ****178 **      | $                           153  |
| Taxes paid                                                                          | **$            10 ** | $                           123  |

The Company acquired equipment by entering into capital        leases in the amounts of $358,000 and $84,000 in January 2007 and September 2007,        respectively.

*See accompanying notes.*

----

**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 2006 on Form 10-K for the year ended December 31, 2006, as filed with the        Securities and Exchange Commission (the "SEC") on April 2, 2007, and amended on Form 10-K/A        by Amendment No. 1 filed with the SEC on April 13, 2007 (the "Company's Annual Report for        2006 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.

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

----

**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****September****30,**        |                                        | **Nine****Months Ended****September****30,** |
|------------------------------------------------------|---------------------------------------------------|---------------------------------------------|----------------------------------------------|
|                                                 | **2007**                                          | **2006**                                    |                                         | **2007** | **2006** |
| Numerator:                                           |                                              |                                        |                                         |   |   |
|                                                 |                                              |                                        |                                         |   |   |
| Net loss                                             | $     (1,747)            | $     (1,392)      |                                         | $     (3,994) | $     (516) |
|                                                 |                                              |                                        |                                         |   |   |
| Denominator:                                         |                                              |                                        |                                         |   |   |
| Shares used in basic net lossper share calculation   |      19,012         |      18,934   |                                         |      18,973  |      18,929  |
|                                                 |                                              |                                        |                                         |   |   |
| Effect of diluted securities:                        |                                              |                                        |                                         |   |   |
| Employee stock options                               |      –   |      –  |                                         |      –  |      –  |
|                                                 |                                              |                                        |                                         |   |   |
| Shares used in diluted net lossper share calculation |      19,012         |      18,934   |                                         |      18,973  |      18,929  |
|                                                 |                                              |                                        |                                         |   |   |
| Basic and diluted net lossper common share           | $     (0.09)             | $     (0.07)       |                                         | $     (0.21) | $     (0.03) |

**4.      Lines of Credit**

In January 2003, the Company (other than SGRP's foreign        subsidiaries) and Webster Business Credit Corporation, then known as Whitehall Business        Credit Corporation ("Webster"), entered into the Third Amended and Restated Revolving        Credit and Security Agreement (as amended, collectively, the "Credit Facility"). The Credit        Facility provides for a $7.0 million revolving line of credit maturing on January 23, 2009.        In March 2007 the credit facility was further amended to among other things, delay the        Minimum Fixed Coverage ratio until the fourth quarter 2007, establish an EBITDA covenant        and increase the interest rate by .25% beginning March 28, 2007. In May 2007 the credit        facility was amended to provide for an availability reserve of $500,000. In August 2007 the        credit facility was further amended to reduce the availability reserve to $250,000 until        November 30, 2007. On November 16, 2007 Webster amended the credit facility to extend the        availability reserve of $250,000 indefinitely and to reduce the revolving line of credit to        $5.0 million. Borrowings are based upon a borrowing base formula as defined in the        agreement (principally 85% of "eligible" domestic accounts receivable less certain        reserves). The Credit Facility is secured by all of the assets of the Company and its        domestic subsidiaries. The Credit Facility also limits certain expenditures, including, but        not limited to, capital expenditures and other investments.

The basic interest rate under the Credit Facility is        Webster's "Alternative Base Rate" plus 1.0% per annum (a total of 8.75% per annum at        September 30, 2007), which automatically changes with each change made by Webster in such        Alternative Base Rate. The Company at its option, subject to certain conditions, may elect        to have portions of its loans under the Credit Facility bear interest at various LIBOR        rates plus 3.5% per annum based on fixed periods of one, two, three or six months. The        actual average interest rate under the Credit Facility was 9.14% per annum for the nine        months ended September 30, 2007.

The domestic revolving loan balances outstanding under the        Credit Facility were $1.8 million and $4.2 million at September 30, 2007 and December 31,        2006, respectively. There was a letter of credit outstanding under the Credit Facility of        approximately $453,000 at December 31, 2006 and there was no letter of credit outstanding        as of September 30, 2007. As of September 30, 2007, the SPAR Group had unused availability        under the Credit Facility of $329,000 out of the remaining maximum $5.2 million unused        revolving line of credit after reducing the borrowing base by outstanding loans.

----

**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 September 30,        2007 and December 31, 2006, in accordance with EITF 95-22, *Balance Sheet Classification        of Borrowings Outstanding Under Revolving Credit Agreements That Include Both a Subjective        Acceleration Clause and a Lock-Box Agreement*.

The Company was in violation of its Minimum EBITDA        covenant at September 30, 2007, and on November 16, 2007 Webster amended the Credit        Facility to, among other things (see comment above), waive the violation and agreed to        reset the covenants for the three months ended December 31, 2007 and for 2008. The Company        does not expect to comply with the existing covenants in future periods, and there can be        no assurances that if the Company violates such covenants, Webster will continue to issue        waivers. In addition, Mr. Robert G. Brown, a Director, the Chairman (former President and        Chief Executive Officer) and a major stockholder of SGRP, and Mr. William H. Bartels, a        Director, the Vice Chairman and a major stockholder of SGRP, have provided personal        guarantees of the Credit Facility totaling $1.0 million.

The Japanese subsidiary SPAR FM Japan, Inc. has line of        credit agreements totaling 100 million Yen or approximately $871,000 (based upon the        exchange rate at September 30, 2007). The outstanding balances under the line of credit        agreements were 90 million Yen or approximately $784,000 at September 30, 2007 and 70        million Yen or approximately $588,000 at December 31, 2006 (based upon the exchange rate at        those dates). The interest rate was 1.88% per annum for the nine months ended September 30,        2007. In addition, the Japan subsidiary had cash balances totaling 121 million Yen or        approximately $1.1 million and 97 million Yen or approximately $812,000 at September 30,        2007 and December 31, 2006 respectively (based upon the exchange rates at those        dates).

In 2006, the Australian subsidiary SPARFACTS Australia Pty.        Ltd. entered into a revolving line of credit arrangement with Oxford Funding Pty. Ltd. for        $1.1 million (Australian) or approximately $977,000 (based upon the exchange rate at        September 30, 2007). The outstanding balances under the line of credit agreement were        $150,000 (Australian) or approximately $133,000 at September 30, 2007 and $429,000        (Australian) or approximately $339,000 at December 31, 2006 (based upon the exchange rate        at those dates). The interest rate was 10.60% per annum for the nine months ended September        30, 2007.

In 2006, SPAR Canada Company, a wholly owned subsidiary,        entered into a credit agreement with Royal Bank of Canada providing for a Demand Operating        Loan for a maximum borrowing of $1.0 million (Canadian) or approximately $1.0 million        (based upon the exchange rate at September 30, 2007). The Demand Operating Loan provides        for borrowings based upon a borrowing base formula as defined in the agreement (principally        75% of eligible accounts receivable less certain deductions). The outstanding balances        under the line of credit agreement were $298,000 (Canadian) or approximately $301,000 and        $238,000 (Canadian) or approximately $204,000 at September 30, 2007 and December 31, 2006,        respectively (based upon the exchange rate at those dates). The average interest rate was        7.08% per annum for the nine months ended September 30, 2007.

**5.     Capital Lease Obligations**

In 2007, the Company capitalized certain equipment leases.        The economic substance of the leases is such that the Company is financing the acquisition        of the assets through the leases. The equipment has cost of $442,000, accumulated        depreciation of $92,000 and a net book value of $350,000 at September 30, 2007.

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**SPAR Group, Inc.        Notes to Consolidated Financial Statements**

**(unaudited) (continued)**

         

Annual future minimum lease payments required under the        leases together with their present value as of September 30, 2007are as follows:

     

| Year Ending

December 31                                                        |                                   Amount |
|---------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
| 2007                                                                            | $42,000                                                                                                        |
| 2008                                                                            | 167,000                                                                                                        |
| 2009                                                                            | 167,000                                                                                                        |
| 2010                                                                            | 55,000                                                                                                         |
|                                                                            | 431,000                                                                                                        |
| Less amount representing interest                                               | 60,000                                                                                                         |
| Present value of net minimum lease                    payments                  | 371,000                                                                                                        |
| Less current portion included with other current                    liabilities | 131,000                                                                                                        |
| Long-term portion included with other long-term                    liabilities  | $240,000                                                                                                       |

**6.     Related-Party Transactions**

Mr. Robert G. Brown, a Director, the Chairman (former        President and Chief Executive Officer) and a major stockholder of SGRP, and Mr. William H.        Bartels, a Director, 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 field force (through independent contractors) for both        the nine months ended September 30, 2007 and 2006, and approximately 84% and 76% of the        Company's domestic field management at a total cost to the Company of approximately $13.0        million and $14.7 million for the nine months ended September 30, 2007 and 2006,        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 3,300 independent contractors to the Company. Pursuant to the        terms of the Amended and Restated Field Management Agreement dated as of January 1, 2004,        SMSI provides 53 full-time national, regional and district managers to the Company. For        those services, the Company has agreed to reimburse SMS and SMSI for all of their costs of        providing those services and to pay SMS and SMSI each a premium equal to 4% of their        respective costs. Total net premiums (4% of SMS and SMSI costs) paid to SMS and SMSI for        services rendered were approximately $498,000 and $567,000 for the nine months ended        September 30, 2007, and 2006, 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.

SIT provided substantially all of the Internet computer        programming services purchased by the Company at a total cost of approximately $481,000 and        $541,000 for the nine months ended September 30, 2007 and 2006, respectively. SIT provided        approximately 15,000 and 19,000 hours of Internet computer programming services to the        Company for the nine months ended September 30, 2007 and 2006, respectively. Pursuant to        the Amended and Restated Programming and Support Agreement dated as of September 15, 2007,        SIT continues to provide programming services to the Company for which the Company has        agreed to pay SIT competitive hourly wage rates for time spent on Company matters and to        reimburse the related out-of-pocket expenses of SIT and its personnel. The average hourly        billing rate was $33.02 and $28.39 for the nine months ended September 30, 2007 and 2006,        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 nine months ended        September 30, 2007 and 2006, 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.

----

**SPAR Group, Inc.        Notes to Consolidated Financial Statements**

**(unaudited) (continued)**

             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****September****30,**                                            |                                                                          | **Nine****Months Ended****September****30,** |
|----------------------------------------------------------|---------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|----------------------------------------------|
|                                                     | **2007**                                                                              | **2006**                                                                      |                                         | **2007** | **2006** |
| Services provided by affiliates:                         |                                                                                  |                                                                          |                                         |   |   |
| Independent contractor services (SMS)                    | **$     ****2,866**                                          | $     3,098                                          |                                         | $**     ****9,783** | $     11,915 |
|                                                     |                                                                                  |                                                                          |                                         |   |   |
| Field management services (SMSI)                         | **$     1,044**                                              | $                           937            |                                         | $**     ****3,168** | $                          2,831 |
|                                                     |                                                                                  |                                                                          |                                         |   |   |
| Handheld computer leases (SMS)                           | **$                             ****70** | $                             70 |                                         | $**                           ****209** | $                             209 |
|                                                     |                                                                                  |                                                                          |                                         |   |   |
| Internet and software program

Consulting services (SIT) | **$                           ****143**            | $       178                                |                                         | $**                           ****481** | $                             541 |

|                                                        | **September****30****,**                     |  | **December 31,**                     |
|-------------------------------------------------------------|----------------------------------------------|--|--------------------------------------|
|  Accrued expenses                due to affiliates:    | **2007**                                     |  | **2006**                             |
|                                                        |                                         |  |                                 |
| SPAR Marketing Services, Inc.(SMS)                          | **$     ****1,482** |  | $     1,238 |
|                                                        |                                         |  |                                 |
| SPAR Management Services, Inc. (SMSI)                       | **     ****480**    |  |      346    |
|                                                        |                                         |  |                                 |
| SPAR Infotech, Inc. (SIT)                                   | **     ****196**    |  |      168    |
|                                                        |                                         |  |                                 |
| Total accrued expenses due to                    affiliates | **$     ****2,158** |  | $     1,752 |

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. TheCompany'sChairmanand Vice        Chairman own, through SMSI, a minority (less than 5%) equity interest in        Affinity.

----

**SPAR Group, Inc.        Notes to Consolidated Financial Statements**

**(unaudited) (continued)**

**7.      Stock-Based Compensation**

The Company grants options to purchase shares of the        Company's common stock to its employees and certain employees of its affiliates. Under SFAS        No. 123(R), the Company accounts for its employee and affiliate employee stock option        expense as compensation expense in the Company's financial statements when the 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 requisite        service period, which generally is the options' vesting period. Fair value is calculated        using the Black-Scholes option pricing model. 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.

Based upon the Black-Scholes calculation, share-based        compensation expense related to employee stock option grants totaled approximately $215,000        and $233,000 for the nine months ended September 30, 2007 and 2006 respectively. Basic and        diluted earnings per share were impacted by approximately $0.01 for both the nine month        periods ended September 30, 2007 and 2006.

Compensation expense related to non-employee stock options        awarded to the employees of the Company's affiliates, was approximately $36,000 and $74,000        for the nine months ended September 30, 2007 and 2006, respectively.

**8.     Customer Deposits**

Customer deposits at September 30, 2007, were approximately        $694,000 (approximately $255,000 from domestic operations and approximately $439,000 from        international operations) compared to approximately $560,000 at December 31, 2006        (approximately $214,000 from domestic operations and approximately $346,000 from        international operations).

**9.     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 Japanese subsidiary to provide the        latest in-store merchandising and marketing services to the Japanese market. Since 2003,        the Company has expanded its international presence to Canada, Turkey, South Africa, India,        Romania, China, Lithuania, Latvia, Australia, and New Zealand. Today the Company has nine        subsidiaries operating in 12 countries whose population represents approximately 48% of the        total world population.

Certain of these subsidiaries are profitable, while others        are operating at a loss. In the event certain subsidiaries have continued losses, the        Company may be required to make additional cash infusions into those        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.

----

**SPAR Group, Inc.        Notes to Consolidated Financial Statements**

**(unaudited) (continued)**

On May 26, 2006, the jury in this case returned a verdict        resulting in a net award of $1,307,700 to Pivotal, a SGRP subsidiary. This net award is to        be paid by Safeway and resulted from separate jury findings that awarded damages to those        SGRP subsidiaries on certain claims and damages to Safeway on other claims. In particular,        the jury awarded damages to Pivotal of $5,760,879 for Safeway's interference with Pivotal's        contractual relationships with third party manufacturers and also awarded $782,400 to        Pivotal and PIA for Safeway's breach of contract with those SGRP subsidiaries. The jury        awarded damages to Safeway of $5,235,579 for breach of contract by SGRP and those SGRP        subsidiaries. Judgment was entered in favor of Pivotal in September 2006 for $1,307,700.        Both parties filed post trial motions but all post trial motions were denied. Notices of        Appeal were thereafter filed by both Safeway and Pivotal. Pivotal/SGRP is seeking to have        Safeway's judgment overturned, thereby increasing the award to Pivotal by over $5 million.        Safeway has asked for a new trial on the judgment found against it. The appellate process        is expected to take fourteen to twenty four months to complete. In the interim, the court        ordered a mediation of the dispute, which took place but was not successful in resolving        the matter. Accordingly, the appeals will proceed. The Company has recorded the net $1.3        million settlement award in other assets.

Briefing on the appeals will commence in January 2008. It is        expected that opposition and reply briefs will be completed by July, 2008. Thereafter, an        oral argument hearing date will be assigned by the court of appeal.

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

**10.     Geographic Data**

A summary of the Company's net revenues, operating loss and        long lived assets by geographic area for the three and nine months ended September 30, 2007        and 2006, respectively, and at September 30, 2007and        December 31, 2006, are as follows (in thousands):

|               | **Three Months Ended****September****30,**                                             |                                                                     | **Nine****Months Ended****September****30,** |
|--------------------|----------------------------------------------------------------------------------------|--------------------------------------------------------------------------|----------------------------------------------|
|               | **2007**                                                                               | **2006**                                                                 |                                         | **2007** | **2006** |
| Net revenues:      |                                                                                   |                                                                     |                                         |   |   |
| United States      | **$****                           ****5,631 ** | $**                          **6,689  |                                         | **$****     ****19,976 ** | $**     **25,376  |
| International      | **     ****8,734 **                                      | **     **6,020                             |                                         | **     ****22,308 ** |      16,101  |
| Total net revenues | **$****     ****14,365 **                                | $**     **12,709                           |                                         | **$****     ****42,284 ** | $**     **41,477  |

|                     | **Three Months Ended****September****30,**  |                                                           | **Nine****Months Ended****September****30,** |
|--------------------------|---------------------------------------------|----------------------------------------------------------------|----------------------------------------------|
|                     | **2007**                                    | **2006**                                                       |                                         | **2007** | **2006** |
| Operating (loss) income: |                                        |                                                           |                                         |   |   |
| United States            | **$     (1,570)**  | $**                         **(1,165) |                                         | **$                         (3,168)** | $**                           **(426) |
| International            | **     164 ** |      (7)                              |                                         | **     (197)** |      (309) |
| Total operating loss     | **$     (1,406)**  | $**                         **(1,172) |                                         | **$                         (3,365)** | $**                           **(735) |

 

----

**SPAR Group, Inc.        Notes to Consolidated Financial Statements**

**(unaudited) (continued)**

 

|                    | **September                    30****,** |  | **December 31,**                     |
|-------------------------|------------------------------------------|--|--------------------------------------|
| Long lived assets:      | **2007**                                 |  | **2006**                             |
|                    |                                     |  |                                 |
| United States           | **$     3,563** |  | $     3,141 |
| International           | **243**                                  |  | 253                                  |
| Total long lived assets | **$     3,806** |  | $     3,394 |

International revenues disclosed above were based upon        revenues reported by the Company's nine international subsidiaries. The Japan subsidiary        contributed 18.3% and 19.3% of the consolidated net revenues of the Company for the three        months ended September 30, 2007 and 2006, respectively, and 17.1% and 17.0% of the        Company's net revenues for the nine months ended September 30, 2007 and 2006, respectively.        Included in the international revenues for the nine months ended September 30, 2006, was an        additional quarter of revenues, totaling approximately $1.3 million or 3.2% of the        consolidated net revenues of the Company, associated with the change in reporting year of        the Company's subsidiary in Japan. The Canadian subsidiary contributed 8.0% and 7.3% of the        consolidated net revenues of the Company for the three months ended September 30, 2007 and        2006, respectively, and 8.6% and 7.3% of the Company's net revenues for the nine months        ended September 30, 2007 and 2006, respectively. The Australian subsidiary that began        operations in May 2006, contributed 18.1% and 9.6% of the consolidated net revenues of the        Company for the three months ended September 30, 2007 and 2006, respectively and 13.3% and        4.6% of the Company's net revenues for the nine months ended September 30, 2007 and 2006,        respectively. Each of the remaining foreign subsidiaries contributed less than 6.4% of the        consolidated net revenues of the Company for both the three and nine months ended September        30, 2007 and 2006.

**11.     Supplemental Balance Sheet        Information**

|                                                                                   | **September****30****,**                        | **December 31,**                            |
|----------------------------------------------------------------------------------------|-------------------------------------------------|---------------------------------------------|
| Accounts receivable, net, consists of the                    following (in thousands): | **2007**                                        | **2006**                                    |
|                                                                                   |                                            |                                        |
| Trade                                                                                  | **$     7,323 **  | $     10,112  |
| Unbilled                                                                               | **2,345 **                                 | 2,774                                  |
| Non-trade                                                                              | **799 **                                   | 496                                    |
|                                                                                   | **10,467 **                                | 13,382                                 |
| Less allowance for doubtful accounts                                                   | **(421)**                                       | (400)                                       |
| Accounts receivable, net                                                               | **$     10,046 ** | $     12,982  |

|                                                                                      | **September 30,**                            | **December 31,**                                                   |
|-------------------------------------------------------------------------------------------|----------------------------------------------|--------------------------------------------------------------------|
| Property and equipment, net, consists of the                    following (in thousands): | **2007**                                     | **2006**                                                           |
|                                                                                      |                                         |                                                               |
| Equipment                                                                                 | **$     ****6,538** | $     5,810                               |
| Furniture and fixtures                                                                    | **621**                                      | 606                                                                |
| Leasehold improvements                                                                    | **239**                                      | 138                                                                |
| Capitalized software development costs                                                    | **1,757**                                    | 1,508                                                              |
|                                                                                      | **9,155**                                    | 8,062                                                              |
| Less accumulated depreciation and                    amortization                         | **7,744**                                    | 7,161                                                              |
| Property and equipment, net                                                               | **$     ****1,411** | $                           901 |

----

**SPAR Group, Inc.        Notes to Consolidated Financial Statements**

**(unaudited) (continued)**

|                                                                                                       | **September****30****,**                                     | **December 31,**                                                         |
|------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|--------------------------------------------------------------------------|
| Accrued expenses and other current liabilities                    consist of the following (in thousands): | **2007**                                                     | **2006**                                                                 |
|                                                                                                       |                                                         |                                                                     |
| Taxes payable                                                                                              | **$****                        ****669** | $                            489 |
| Accrued accounting and legal                    expense                                                    | **236**                                                      | 219                                                                      |
| Accrued salaries                    payable                                                                | **1,767**                                                    | 1,232                                                                    |
| Other                                                                                                      | **1,699**                                                    | 924                                                                      |
| Accrued expenses and other current                    liabilities                                          | **$   4,371**                                      | $     2,864                                     |

**12.     Foreign Currency Rate        Fluctuations**

The Company has foreign currency exposure associated with its        international subsidiaries. In both 2007 and 2006, these exposures are primarily        concentrated in the Canadian Dollar, Australian Dollar and Japanese Yen. At September 30,        2007, international assets totaled $8.4 million and international liabilities totaled $8.0        million. International revenues for the nine months ended September 30, 2007 and 2006 were        $22.3 million and $16.1 million, respectively. The international division reported a net        loss of approximately $620,000 and $365,000 for the nine months ended September 30, 2007        and 2006, respectively.

In those countries where the Company had the greater risk for        currency exposure, the total assets and liabilities are as follows (in        thousands):

| Country   | Total Assets                        | Total Liabilities                                                   |
|-----------|-------------------------------------|---------------------------------------------------------------------|
| Canada    | $      723 | $     1,302                                |
| Australia |      2,148 |                            1,561 |
| Japan     |      3,201 |                            3,089 |

**13.     Interest Rate Fluctuations**

The Company is exposed to market risk related to the variable        interest rate on its lines of credit. At September 30, 2007, the Company's outstanding debt        totaled approximately $3.0 million, as noted in the table below (in thousands):

| Location      | Variable Interest Rate (1) | Local Currency Amount | US Dollars Equivalent                    (2) |
|---------------|----------------------------|-----------------------|----------------------------------------------|
| United States | 8.75%                      | USD                   | $1,803                                       |
| Japan         | 1.88%                      | YEN                   |     784                       |
| Canada        | 7.25%                      | CAD                   |      301                 |
| Australia     | 10.60%           | AUS                   |     133                       |
|          |                       |                  | $3,021                                  |

         

(1)     Based on interestrate at September 30, 2007.

(2)     Based on exchange rate at        September 30, 2007.

Based on the 2007 average outstanding borrowings under        variable-rate debt, a one-percentage point increase in interest rates would negatively        impact pre-tax earnings and cash flows for the nine months ended September 30, 2007 by        approximately $26,000.

----

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

**14.     Recently        Issued Accounting Standards**

In February 2007, the FASB issued SFAS No. 159*The Fair        Value Option for Financial Assets and Financial Liabilities — including an Amendment        of SFAS No. 115* (SFAS No. 159), which permits an entity to measure many financial        assets and financial liabilities at fair value that are not currently required to be        measured at fair value. Entities that elect the fair value option will report unrealized        gains and losses in earnings at each subsequent reporting date. The fair value option may        be elected on an instrument-by-instrument basis, with few exceptions. SFAS No. 159 amends        previous guidance to extend the use of the fair value option to available-for-sale and        held-to-maturity securities. The Statement also establishes presentation and disclosure        requirements to help financial statement users understand the effect of the election. SFAS        No. 159 is effective as of the beginning of the first fiscal year beginning after November        15, 2007. Management has reviewed SFAS No. 159 and determined that there is no impact of        this standard on SPAR’s financial condition and results of operations.

     

**15.    Taxes**

In July 2006, the FASB issued FASB interpretation No. 48        ("FIN 48"), *Accounting for Uncertainty in Income Taxes*. FIN 48 prescribes detailed        guidance for the financial statement recognition, measurement and disclosure of uncertain        tax positions recognized in an enterprise's financial statements in accordance with FASB        Statement No. 109, *Accounting for Income Taxes*. Tax positions must meet a        more-likely-than-not recognition threshold at the effective date to be recognized upon the        adoption of FIN 48 and in subsequent periods. FIN 48 is effective for fiscal years        beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax        positions upon initial adoption of the Interpretation. The Company has adopted FIN 48 as of        January 1, 2007.

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

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

In management's view, the Company's tax reserves at December        31, 2006, totaling $144,000 for potential domestic state tax liabilities were sufficient to        meet the requirements of FIN 48. However, the reserve for potential international tax        liabilities totaling $146,000 was deemed insufficient to satisfy FIN 48, and therefore, in        March 2007, the Company recorded an adjustment increasing the total FIN 48 international        tax reserve by $145,000 to $291,000.

Details of the Company's FIN 48 reserves at September 30,        2007 are outlined in the table below (in thousands):

|                 | Taxes                              | Interest                          | Penalty                           | Total Tax Liability                |
|----------------------|------------------------------------|-----------------------------------|-----------------------------------|------------------------------------|
| Domestic             |                               |                              |                              |                               |
| State                | $     105 | $     19 | $     20 | $     144 |
| Federal              | –                            | –                           | –                           | –                            |
| International        | 251                                | 14                                | 26                                | 291                                |
| Total FIN 48 Reserve | $     356 | $     33 | $     46 | $     435 |

----

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

**16.     Reclassifications**

Certain reclassifications have been made to the prior period        financials to conform to the current presentation.

----

**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 nine months ended September 30, 2007 (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, 2006 , as        filed with the Securities and Exchange Commission (the "SEC ") on April 2, 2007 and as        amended on Form 10-K/A filed with the SEC on April 13, 2007 (the "Company 's Annual Report        for 2006 on Form 10-K As Amended" ), including the risk factors described in Item 1A 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 2006 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**

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

----

**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, electronics store        chains, drug store chains and grocery stores. Included in its clients are home        entertainment, general merchandise, health and beauty care, consumer goods and food 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. Currently, the Company's international subsidiaries are as        follows:

| Headquarter

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 2006 on Form 10-K as        amended.

----

**SPAR Group, Inc.**

**Results of Operations**

**Three months ended September 30, 2007, compared to        three months ended September 30, 2006**

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 EndedSeptember 30,        |
|-----------------------------------------------------|----------------------------------------|
|                                                | 2007                                   | 2006 | Increase/ |
|                                                | $                                      | % | $ | % | (decrease) % |
| Net revenues                                        | $     14,365  | 100.0% | $     12,709  | 100.0% | 13.0% |
| Cost of revenues                                    | 10,483                            | 73.0      | 8,856  | 69.7    | 18.4     |
| Selling, general &administrative expense        | 5,108                             | 35.6      | 4,855  | 38.2    | 5.2     |
| Depreciation and amortization                       | 180                               | 1.3      | 170  | 1.3    | 5.9     |
| Interest expense                                    | 66                                | 0.5      | 65  | 0.5    | 1.1     |
| Otherexpense                                        | 77                                | 0.5      | 48  | 0.4     | 63.9     |
| Lossbeforeincome taxprovision and minority interest | (1,549)                                | (10.9)     | (1,285) | (10.1)   | 20.5     |
| Provision for income taxes                          | 79                                | 0.5      | 73  | 0.6     | 9.9     |
| Lossbefore                    minority interest     | (1,628)                                | (11.4)     | (1,358) | (10.7)    | 19.8     |
| Minority interest                                   | 119                               | 0.8      | 34  | 0.3     | 244.5     |
| Net loss                                            | $     (1,747)      | (12.2)% | $     (1,392) | (11.0)% | 25.5% |

**Net Revenues**

Net revenues for the three months ended September 30, 2007,        were $14.4 million, compared to $12.7 million for the three months ended September 30,        2006, an increase of $1.7 million or 13.0%.

International net revenues totaled $8.7 million for        the three months ending September 30, 2007, compared to $6.0 million for the same period in        2006, an increase of $2.7 million or 45.1%. The increase in 2007 international net revenues        was due to revenues from Australia $1.4 million, India $428,000, Turkey $366,000, Canada        $224,000, Japan $181,000, Lithuania $134,000 and China $75,000, partially offset by net        revenue decreases in South Africa $75,000.

Domestic net revenues totaled $5.7 million in the three        months ending September 30, 2007, compared to $6.7 million for the same period in 2006.        Domestic net revenues decreased $1.0 million primarily as a result of the loss of a        significant client and reduced business from a client that was in the process of selling        its US operation, partially offset by revenue from new clients that started doing business        with the Company in the fourth quarter of 2006.

Approximately 11.1% and 9.8% of the Company's net revenues        for the three months ended September 30, 2007 and 2006, respectively, 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 7.0% of the Company's accounts receivable at both September 30, 2007 and        December 31, 2006. The Company's contractual relationships or agreements are with various        clients and not that retail electronics chain.

The loss of the ability to provide merchandising and        marketing services in the above and/or other chains or the loss of other clients could        significantly decrease the Company's revenues and could have a material adverse effect on        the Company's business, results of operations and financial condition.

----

**SPAR Group, Inc.**

**Cost of Revenues**

Cost of revenues consists of in-store labor and field        management wages, related benefits, travel and other direct labor-related expenses. Cost of        revenues was 73.0% of net revenues for the three months ended September 30, 2007 and 69.7%        for the three months ended September 30, 2006.

Domestic cost of revenues was 78.6% of net revenues for the        three months ended September 30, 2007 and 73.6% of net revenues for the three months ended        September 30, 2006. The increase in cost as a percentage of net revenues is primarily a        result of a decrease in per unit fee revenues that do not have a proportionate decrease in        cost. As discussed in the Company's 10-K/A under Item 3, Critical Accounting        Policies/Revenue Recognition, the Company's revenue consists of per unit fee revenue, which        is earned when the client's product is sold to the consumer at retail, not when the        services are performed. Retail sales of client products are influenced by numerous factors        including consumer tastes and preferences, and not solely by the merchandising and        marketing service performed, in any given period, the cost of per unit fee revenues may not        be directly proportionate to the per unit fee revenue.

Internationally, the cost of revenues was 69.4% of net        revenues for the three months ended September 30, 2007 and 65.3% of net revenues for the        three months ended September 30, 2006. The international cost of revenues percentage        increase was primarily attributed to higher cost of revenues in Japan as well as the mix of        business in other countries.

Approximately 88% and 82% of the Company's domestic cost of        revenues in the three months ended September 30, 2007 and 2006, respectively, resulted from        in-store independent contractor and field management services purchased from certain of the        Company's affiliates, SPAR Marketing Services, Inc. ("SMS"), and SPAR Management Services,        Inc. ("SMSI"), respectively (see Note 6 - 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        increased by $253,000, or 5.2%, for the three months ended September 30, 2007, to $5.1        million compared to $4.9 million for the same period in 2006.

International selling, general and administrative expenses        totaled $2.5 million for the three months ended September 30, 2007, compared to $2.1        million for the same period in 2006. The $432,000 increase in international selling,        general and administrative expenses was primarily due to Australia $314,000, Canada        $245,000, partially offset by decreased expenses from Japan of $184,000. All other        international subsidiaries resulted in a net increase of $58,000.

Domestic selling, general and administrative expenses totaled        $2.6 million the three months ended September 30, 2007, compared to $2.8 million for the        same period in 2006. The decrease in domestic selling, general and administrative expenses        of $180,000 was primarily due to decreases in building related expenses of $165,000, I.T.        expenses of $93,000, other expenses of $62,000 partially offset by increases in corporate        expense of $140,000 mainly related to legal.

**Depreciation and Amortization**

     Depreciation and amortization        charges for the three months ended September 30, 2007, totaled $180,000 and were comparable        to $170,000 for the same period in 2006.     

----

**SPAR Group, Inc.**

**Interest Expense**

Interest expense totaled $66,000 and $65,000 for the three        months ended September 30, 2007 and 2006, respectively.

**Other Expense**

Other expense totaled $77,000 and $48,000 for the three        months ended September 30, 2007 and September 30, 2006, respectively.

**Income Taxes**

**     **

Income taxes were approximately $79,000 and $73,000 for the        three months ended September 30, 2007 and 2006, respectively. The tax provisions were        primarily for minimum state taxes due. There were no tax provisions for federal tax as the        Company reported a loss for the three months ended September 30, 2007, and in 2006 the        Company was projecting to use net operating loss carryforwards to offset projected federal        income taxes.

**Minority Interest**

Minority interest of approximately $119,000 and $34,000        resulted from the net operating profits of the Company's 51% owned subsidiaries and 50%        owned subsidiaries for the three months ended September 30, 2007 and 2006,        respectively.

**Net Loss**

**     **

The Company had a net loss of $1.7 million for the three        months ended September 30, 2007, or $0.09 per diluted share, compared to a net loss of $1.4        million, or $0.07 per diluted share, for the corresponding period last year.

----

 

**SPAR Group, Inc.**

**Results of Operations**

**Nine months ended September 30, 2007, compared to nine        months ended September 30, 2006**

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).

         

|                                                 | NineMonths                    Ended September 30, |
|------------------------------------------------------|---------------------------------------------------|
|                                                 | 2007                                              | 2006 | Increase/ |
|                                                 | $                                                 | % | $ | % | (decrease)% |
| Net revenues                                         | $   42,284                    | 100.0% | $   41,477 | 100.0% | 1.9% |
| Cost of revenues                                     | 29,738                                  | 70.3 | 27,853 | 67.1     | 6.8     |
| Selling, general &administrative expense         | 15,340                                  | 36.3 | 13,794  | 33.2     | 11.2     |
| Depreciation and amortization                        | 571                                     | 1.3 | 565  | 1.4     | 0.6     |
| Interest expense                                     | 247                                     | 0.6 | 162  | 0.4     | 52.2     |
| Otherexpense (income)                                | 27                                      | 0.1 | (542) | (1.3)    | (105.0)    |
| Loss beforeincome taxprovision and minority interest | (3,639)                                           | (8.6) | (355) | (0.8)    | –     |
| Provision for income taxes                           | 220                                          | 0.5 | 172  | 0.4     | 27.7     |
| Lossbefore                    minority interest      | (3,859)                                           | (9.1) | (527) | (1.2)    | –     |
| Minority interest                                    | 135                                     | 0.3 | (11) | –      | –     |
| Net loss                                             | $   (3,994)                        | (9.4)% | $   (516) | (1.2)% | –     |

**Net Revenues**

Net revenues for the nine months ended September 30, 2007,        was $42.3 million, compared to $41.5 million for the same period in 2006, an increase of        $800,000 or 1.9%.

International net revenues totaled $22.3 million for the nine        months ended September 30, 2007, compared to $16.1 million for the same period in 2006.        Included in the 2006 international revenues was an additional quarter of revenues totaling        $1.3 million resulting from the change in the reporting year for the Japanese subsidiary.        Excluding the $1.3 million of additional revenues for 2006, 2007 international net revenues        increased $7.5 million or 51.1% from 2006. The increase in international net revenues was        due to the Australian $3.7 million and Lithuanian subsidiaries $483,000, that started        operations during the second quarter of 2006 as well as increased revenue in Japan $1.5        million, India $931,000, Turkey $650,000, Canada $590,000 and China $168,000, partially        offset by net revenue decreases in South Africa of $507,000 and Romania of        $17,000.

Domestic net revenues totaled $20.0 million for the nine        months ended September 30, 2007, compared to $25.4 million for the same period in 2006.        Included in 2006 domestic revenue was $770,000 from the termination of a customer service        agreement. Excluding the $770,000, domestic net revenues decreased $4.6 million, primarily        as a result of the loss of a significant client and reduced business from a client that was        in the process of selling its US operation, partially offset by revenue from new clients        that started doing business with the Company in the fourth quarter of 2006.

Approximately 12.1% and 10.1% of the Company's net revenues        for the nine months ended September 30, 2007 and 2006, respectively, 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 7.0% of the Company's accounts receivable at both September 30, 2007 and        December 31, 2006. The Company's contractual relationships or agreements are with various        clients and not that retail electronics chain.

----

**SPAR Group, Inc.**

The loss of the ability to provide merchandising and        marketing services in the above and/or other chains or the loss of other clients could        significantly decrease the Company's revenues and 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 was 70.3% of net revenues for the nine months ended September 30, 2007, compared        to 67.1% for the nine months ended September 30, 2006.

Domestic cost of revenues was 72.6% and 68.6% of net revenues        for the nine months ended September 30, 2007, and 2006, respectively. The 2006 cost of        revenue percentage includes $770,000 attributed to the termination of a client service        agreement. When this one time additional revenue is excluded, domestic cost of revenues was        70.7% of net revenues.

Internationally, the cost of revenues as a percentage of net        revenues was 68.3% and 64.9% for the nine months ended September 30, 2007 and 2006,        respectively. The international cost of revenues percentage increase was primarily        attributed to higher cost revenues in Japan.

Approximately 89% and 85% of the Company's domestic cost of        revenues in the nine months ended September 30, 2007 and 2006, respectively, resulted from        in-store independent contractor and field management services purchased from certain of the        Company's affiliates, SPAR Marketing Services, Inc. ("SMS"), and SPAR Management Services,        Inc. ("SMSI"), respectively (see Note 6 - 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        increased by approximately $1.5 million, or 11.2%, for the nine months ended September 30,        2007 to $15.3 million compared to $13.8 million for the nine months ended September 30,        2006.

International selling, general and administrative expenses        totaled $7.2 million for the nine months period ended September 30, 2007, compared to $5.9        million for the same period in 2006. Included in that 2006 period was an additional quarter        of selling, general, and administrative expenses totaling $544,000 resulting from the        change in the reporting year for the Japanese subsidiary. Excluding the $544,000,        international 2007 selling, general, and administrative expenses increased $1.9 million or        35.4% from 2006. The increase in international selling, general and administrative expense        was due to Australia $943,000 and Lithuania $94,000, that both started operations during        the second quarter of 2006 as well as from increases in Canada $544,000, India $107,000,        China $83,000, Turkey $36,000 and $181,000 in corporate international business development        expenses, partially offset by decreases in selling, general and administrative expenses in        South Africa $54,000, Romania $28,000 and Japan $22,000.

Domestic selling, general and administrative expenses totaled        $8.1 million in the nine months ended September 30, 2007 and were comparable to last year.        Selling, general and administrative expenses in 2006 were $7.9 million which included an        unpaid bonus accrual that reduced selling, general and administrative expenses by        approximately $300,000. Excluding the $300,000 adjustment, 2006 selling, general and        administrative expenses totaled $8.2 million.

----

**SPAR Group, Inc.**

**Depreciation and Amortization**

Depreciation and amortization charges for the nine months        ended September 30, 2007 totaling $571,000 were comparable with $565,000 for the nine        months ended September 30, 2006.

**Interest Expense**

Interest expense totaled $247,000 and $162,000 for the nine        months ended September 30, 2007 and 2006, respectively. The increase in interest expense        was a result of higher debt levels and higher interest rates in the first nine months ended        September 30, 2007 compared to the same period in 2006.

**Other Expense (Income)**

Other expense totaled$27,000 for the nine months ended September 30, 2007 compared        to income of $542,000 for the nine months ended September 30, 2006. 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 $1.1 million, and a favorable settlement of a vendor lawsuit of approximately        $175,000.

**Income Taxes**

Income taxes were approximately $220,000 and $172,000 for the        nine months ended September 30, 2007 and 2006, respectively. The tax provisions were        primarily for minimum state taxes due. There were no tax provisions for federal tax as the        Company reported a loss for the nine months ended September 30, 2007, and in 2006 the        Company was projecting to use net operating loss carryforwards to offset projected federal        income taxes.

**Minority Interest**

Minority interest of approximately $135,000 and ($11,000)        resulted from the net operating profits and losses of the Company's 51% owned subsidiaries        and 50% owned subsidiaries for the nine months ended September 30, 2007 and 2006,        respectively.

**Net Loss**

**     **

The Company had a net loss of $4.0 million for the nine        months ended September 30, 2007, or $0.21 per diluted share, compared to a net loss of        $516,000, or $0.03 per diluted share, for the corresponding period last year.

**Liquidity and Capital        Resources**

         

In the nine months ended September 30, 2007 the Company had a        net loss of $4.0 million.

Net cash provided by operating activities for the nine months        ended September 30, 2007 was $3.1 million compared to $117,000 for the prior year. The        increase in net cash provided by operating activities was primarily due to decreases in        accounts receivable, increases in accounts payable, accrued expense, other current        liabilities and accrued expenses due to affiliates.

Net cash used in investing activities for the nine months        ended September 30, 2007 and September 30, 2006, was approximately $639,000 and $363,000,        respectively. The increase in net cash used in investing activities was a result of        increased purchases of property and equipment.

----

**SPAR Group, Inc.**

Net cash used in financing activities for the nine months        ended September 30, 2007 and 2006, was approximately $2.2 million compared to net cash        provided by financing activities of $277,000 for the prior year. The increase of net cash        used in financing activities was primarily a result of increased payments on lines of        credit.

The above activity resulted in an increase in cash and cash        equivalents for the nine months ended September 30, 2007, of approximately        $355,000.

At September 30, 2007, the Company had negative working        capital of $1.8 million, as compared to a positive working capital of $1.6 million at        December 31, 2006. The Company's current ratio was 0.87 at September 30, 2007, and 1.13 at        December 31, 2006.

In January 2003, the Company (other than SGRP's foreign        subsidiaries) and Webster Business Credit Corporation, then known as Whitehall Business        Credit Corporation ("Webster"), entered into the Third Amended and Restated Revolving        Credit and Security Agreement (as amended, collectively, the "Credit Facility"). The Credit        Facility provides for a $7.0 million revolving line of credit maturing on January 23, 2009.        In March 2007 the credit facility was further amended to among other things, delay the        Minimum Fixed Coverage ratio until the fourth quarter 2007, establish an EBITDA covenant        and increase the interest rate by .25% beginning March 28, 2007. In May 2007 the credit        facility was amended to provide for an availability reserve of $500,000. In August 2007 the        credit facility was further amended to reduce the availability reserve to $250,000 until        November 30, 2007. On November 16, 2007 Webster amended the credit facility to extend the        availability reserve of $250,000 indefinitely and to reduce the revolving line of credit to        $5.0 million. Borrowings are based upon a borrowing base formula as defined in the        agreement (principally 85% of "eligible" domestic accounts receivable less certain        reserves). The Credit Facility is secured by all of the assets of the Company and its        domestic subsidiaries. The Credit Facility also limits certain expenditures, including, but        not limited to, capital expenditures and other investments.

The basic interest rate under the Credit Facility is        Webster's "Alternative Base Rate" plus 1.0% per annum (a total of 8.75% per annum at        September 30, 2007), which automatically changes with each change made by Webster in such        Alternative Base Rate. The Company at its option, subject to certain conditions, may elect        to have portions of its loans under the Credit Facility bear interest at various LIBOR        rates plus 3.5% per annum based on fixed periods of one, two, three or six months. The        actual average interest rate under the Credit Facility was 9.14% per annum for the nine        months ended September 30, 2007.

The domestic revolving loan balances outstanding under the        Credit Facility were $1.8 million and $4.2 million at September 30, 2007 and December 31,        2006, respectively. There was a letter of credit outstanding under the Credit Facility of        approximately $453,000 at December 31, 2006 and there was no letter of credit outstanding        as of September 30, 2007. As of September 30, 2007, the SPAR Group had unused availability        under the Credit Facility of $329,000 out of the remaining maximum $5.2 million unused        revolving line of credit after reducing the borrowing base by outstanding loans.

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 September 30,        2007 and December 31, 2006, in accordance with EITF 95-22, *Balance Sheet Classification        of Borrowings Outstanding Under Revolving Credit Agreements That Include Both a Subjective        Acceleration Clause and a Lock-Box Agreement*.

The Company was in violation of its Minimum EBITDA covenant        at September 30, 2007, and on November 16, 2007 Webster amended the Credit Facility to,        among other things (see comment above), waive the violation and agreed to reset the        covenants for the three months ended December 31, 2007 and for 2008. The Company does not        expect to comply with the existing covenants in future periods, and there can be no        assurances that if the Company violates such covenants, Webster will continue to issue        waivers. In addition, Mr. Robert G. Brown, a Director, the Chairman (former President and        Chief Executive Officer) and a major stockholder of SGRP, and Mr. William H. Bartels, a        Director, the Vice Chairman and a major stockholder of SGRP, have provided personal        guarantees of the Credit Facility totaling $1.0 million.

----

**SPAR Group, Inc.**

The Japanese subsidiary SPAR FM Japan, Inc. has line of        credit agreements totaling 100 million Yen or approximately $871,000 (based upon the        exchange rate at September 30, 2007). The outstanding balances under the line of credit        agreements were 90 million Yen or approximately $784,000 at September 30, 2007 and 70        million Yen or approximately $588,000 at December 31, 2006 (based upon the exchange rate at        those dates). The interest rate was 1.88% per annum for the nine months ended September 30,        2007. In addition, the Japan subsidiary had cash balances totaling 121 million Yen or        approximately $1.1 million and 97 million Yen or approximately $812,000 at September 30,        2007 and December 31, 2006 respectively (based upon the exchange rates at those        dates).

In 2006, the Australian subsidiary SPARFACTS Australia Pty.        Ltd. entered into a revolving line of credit arrangement with Oxford Funding Pty. Ltd. for        $1.1 million (Australian) or approximately $977,000 (based upon the exchange rate at        September 30, 2007). The outstanding balances under the line of credit agreement were        $150,000 (Australian) or approximately $133,000 at September 30, 2007 and $429,000        (Australian) or approximately $339,000 at December 31, 2006 (based upon the exchange rate        at those dates). The interest rate was 10.60% per annum for the nine months ended September        30, 2007.

In 2006, SPAR Canada Company, a wholly owned subsidiary,        entered into a credit agreement with Royal Bank of Canada providing for a Demand Operating        Loan for a maximum borrowing of $1.0 million (Canadian) or approximately $1.0 million        (based upon the exchange rate at September 30, 2007). The Demand Operating Loan provides        for borrowings based upon a borrowing base formula as defined in the agreement (principally        75% of eligible accounts receivable less certain deductions). The outstanding balances        under the line of credit agreement were $298,000 (Canadian) or approximately $301,000 and        $238,000 (Canadian) or approximately $204,000 at September 30, 2007 and December 31, 2006,        respectively (based upon the exchange rate at those dates). The interest rate was 7.08% per        annum for the nine months ended September 30, 2007.

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 subsidiary in Japan and has        continued this strategy. As of this filing, the Company is currently operating in 12        countries and has 9 international subsidiaries. Certain of these subsidiaries are        profitable, while others are operating at a loss. In the event of continued losses, the        Company may be required to provide additional cash infusions into those subsidiaries with        losses.

Management believes that based upon the Company’s        existing credit facilities, projected results of operations and other financing available        to the Company (including amounts due to affiliates), sources of cash availability should        be sufficient to support ongoing operations over the next twelve months. However, continued        losses, delays in collection of receivables due from any of the Company's major clients, or        a significant reduction in business from such clients 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 September 30, 2007(in thousands).

| **Contractual Obligations** | **Period in****which payments are due** |
|-----------------------------|-----------------------------------------|
| Total                       | Less than 1 year                        | 1-3 years | 3-5 years | More than 5 years |
| Credit Facility             | $3,021                             | $  3,021 | $                          – | $      – | $ – |
| Capital Lease Obligations   | 431                                     | 42   | 389  | –  | –  |
| Operating Lease Obligations | 2,383                                   | 926   | 1,270  | 187  | –  |
| Total                       | $5,835                                  | $3,989   | $1,659  | $  187  | $ –  |

**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 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 asset or        liability and their expected realization or payment. The Company monitors the risks        associated with asset and liability positions, as well as interest rates. The Company's        investment policy objectives require the preservation and safety of the principal, and the        maximization of the return on investment based upon its safety and liquidity        objectives.

     The Company is exposed to        market risk related to the variable interest rate on its lines of credit. At September 30,        2007, the Company's outstanding debt totaled $3.0 million, as noted in the table below (in        thousands):

| Location      | Variable Interest Rate (1) | Local Currency Amount | US Dollars Equivalent (2)      |
|---------------|----------------------------|-----------------------|--------------------------------|
| United States | 8.75%                      | USD                   | $1,803     |
| Japan         | 1.88%                      | YEN                   | 784                            |
| Canada        | 7.25%                      | CAD                   | 301                            |
| Australia     | 10.60%           | AUS                   | 133                            |
|          |                       |                  | $3,021          |

         

(1)     Based on interestrate at September 30, 2007.

(2)     Based on exchange rate at        September 30, 2007.

Based on the 2007 average outstanding borrowings under        variable-rate debt, a one-percentage point increase in interest rates would negatively        impact pre-tax earnings and cash flows for the nine months ended September 30, 2007 by        approximately $26,000.

The Company has foreign currency exposure associated with its        international subsidiaries. In both 2007 and 2006, these exposures are primarily        concentrated in the Canadian Dollar, Australian Dollar and Japanese Yen. At September 30,        2007, international assets totaled $8.4 million and international liabilities totaled $8.0        million. International revenues for the nine months ended September 30, 2007 and 2006 were        $22.3 million and $16.1 million, respectively. The international division reported a net        loss of approximately $620,000 and $365,000 for the nine months ended September 30, 2007        and 2006, respectively.

----

     In those countries where the        Company had the greater risk for currency exposure, the total assets and liabilities are as        follows (in thousands):

         

         

| Country   | Total Assets | Total Liabilities |
|-----------|--------------|-------------------|
| Canada    | $            | 723          | $ |  1,302 |
| Australia |         | 2,148             |   | 1,561 |
| Japan     |         | 3,201             |   | 3,089 |

**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        three 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 internal controls over financial reporting for both its domestic and        international operations as required by Section 404 of the Sarbanes-Oxley Act of        2002.

----

**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 a net award of $1,307,700 to Pivotal, a SGRP subsidiary. This net award is to        be paid by Safeway and resulted from separate jury findings that awarded damages to those        SGRP subsidiaries on certain claims and damages to Safeway on other claims. In particular,        the jury awarded damages to Pivotal of $5,760,879 for Safeway's interference with Pivotal's        contractual relationships with third party manufacturers and also awarded $782,400 to        Pivotal and PIA for Safeway's breach of contract with those SGRP subsidiaries. The jury        awarded damages to Safeway of $5,235,579 for breach of contract by SGRP and those SGRP        subsidiaries. Judgment was entered in favor of Pivotal in September 2006 for $1,307,700.        Both parties filed post trial motions but all post trial motions were denied. Notices of        Appeal were thereafter filed by both Safeway and Pivotal. Pivotal/SGRP is seeking to have        Safeway's judgment overturned, thereby increasing the award to Pivotal by over $5 million.        Safeway has asked for a new trial on the judgment found against it. The appellate process        is expected to take fourteen to twenty four months to complete. In the interim, the court        ordered a mediation of the dispute, which took place but was not successful in resolving        the matter. Accordingly, the appeals will proceed. The Company has recorded the net $1.3        million settlement award in other assets.

Briefing on the appeals will commence in January 2008. It is        expected that opposition and reply briefs will be completed by July, 2008. Thereafter, an        oral argument hearing date will be assigned by the court of appeal.

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

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, 2006, as filed with the Securities and        Exchange Commission (the "SEC") on April 2, 2007, and amended on Form 10-K/A by Amendment        No. 1 filed with the SEC on April 13, 2007, (the "Company's Annual Report for 2006 on Form        10-K As Amended").

**Item 1A.             Risk Factors**

The Company's Annual Report for 2006 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 2006 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 applicable

Item 2(c): Not applicable

**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**

10.1             Waiver and Amendment No. 11 to        Third Amended and Restated Revolving Credit and Security        Agreement entered into as of November 16, 2007.

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.

----

**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: November 19, 2007   | SPAR Group, Inc., Registrant

                                                                            |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------|
|                                | By:/s/                    Charles Cimitile                                                                     |
|                                | Charles Cimitile                    Chief Financial Officer, Treasurer, Secretaryand duly authorized signatory |

31