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

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

Overview

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

Critical Accounting Policies & Estimates

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

Consolidation of Subsidiaries

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

Revenue Recognition

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

Allowance for Doubtful Accounts

The Company continually monitors the validity of its accounts receivable based upon current client credit information and financial condition. Balances that are deemed to be uncollectible after the Company has attempted reasonable collection efforts are written off through a charge to the bad debt allowance and a credit to accounts receivable. Accounts receivable balances, net of any applicable reserves or allowances, are stated at the amount that management expects to collect from the outstanding balances. The Company provides for probable uncollectible amounts through a charge to earnings and a credit to bad debt allowance based in part on management's assessment of the current status of individual accounts. Based on management's assessment, the Company established an allowance for doubtful accounts of $292,000 and $163,000 at December 31, 2008, and 2007, respectively. Bad debt expenses (recovery) were $284,000 and $(164,000) in 2008, and 2007, respectively.

Internal Use Software Development Costs

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

The Company capitalized $448,000 and $328,000 of costs related to software developed for internal use in 2008, and 2007, respectively, and recognized approximately $333,000 and $292,000 of amortization of capitalized software for the years ended December 31, 2008, and 2007, respectively.

Results of operations

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

                                                      Year Ended December 31,
                                               2008         %        2007         %
Net revenues                                $  69.6     100.0 % $    60.7     100.0 %
Cost of revenues                               48.7      69.9        41.5      68.3
Selling, general & administrative expenses     18.5      26.6        20.5      33.7
Depreciation & amortization                     0.9       1.3         0.7       1.3
Interest expense                                0.3       0.5         0.3       0.5
Other expense (income)                          0.7       1.0         0.0       0.0

Income (loss) before income tax
provision and minority interest                 0.4       0.7        (2.3 )    (3.8 )
Provision for income taxes                      0.5       0.8         0.2       0.3

Loss before minority interest                  (0.1 )    (0.1 )      (2.5 )    (4.1 )
Minority interest                              (0.2 )    (0.2 )         -         -
Net income (loss)                           $   0.1       0.1 % $   (2.5)      (4.1 )%

Net Revenues

Net revenues for the twelve months ended December 31, 2008, were $69.6 million, compared to $60.7 million for the twelve months ended December 31, 2007, an increase of $8.9 million.

International net revenues totaled $38.8 million for 2008, increasing 24.0% from $31.3 million in 2007. The following subsidiaries recorded 2008 increases in net revenues over 2007 results: Canada $2.2 million; China $2.0 million; Japan $1.7 million; India $1.5 million; Turkey $516,000 and Australia $268,000. The following subsidiaries reported declines in net revenues below 2007 results:
Romania $354,000; Lithuania $162,000 and South Africa $152,000.

Domestic net revenues increased $1.4 million or 4.7% to $30.8 million in 2008 from $29.4 million in 2007.

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 69.9% of net revenues for the twelve months ended December 31, 2008, compared to 68.3% for the twelve months ended December 31, 2007.

Internationally, the cost of revenues as a percentage of net revenues were 74.2% and 68.9% for the twelve months ended December 31, 2008, and 2007, respectively. The international cost of revenues percentage increase was primarily attributable to lower margin revenues in Canada, Australia and China accounting for a greater portion of revenues in the twelve months ended December 31, 2008, compared to the prior year.

Domestic cost of revenues as a percentage of net revenues were 64.6% and 67.6% for the twelve months ended December 31, 2008, and 2007, respectively. The decrease was primarily attributable to non-recurring cost concessions totaling $900,000 that were provided in 2008 by the Company's affiliates, SPAR Marketing Services, Inc. ("SMS") and SPAR Management Services, Inc. ("SMSI") (See Item 13
- Certain Relationships and Related Transactions, and Director Independence, and Note 9 - Related Party Transactions, below).

Approximately 85% and 88% of the Company's domestic cost of revenue in both the twelve months ended December 31, 2008, and 2007, respectively, resulted from in-store merchandiser and field management services purchased from the Company's affiliates, SMS and SMSI, respectively. (See Item 13 - Certain Relationships and Related Transactions, and Director Independence, and Note 9 - Related Party Transactions, below)

Operating Expenses

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

                                                                                                          Increase
                                                         Year Ended December 31,                        (decrease)
                                                2008           %            2007         %                %

Selling, general & administrative           $     18.5        26.6 %    $     20.5       33.7 %       (9.5 )%
Depreciation and amortization                      0.9         1.3             0.7        1.3         22.2 %

Total operating expenses                    $     19.4        27.9 %    $     21.2       35.0 %        8.4 %

Selling, general and administrative expenses decreased by approximately $2.0 million, or 9.5%, for the twelve months ended December 31, 2008, to $18.5 million compared to $20.5 million for the twelve months ended December 31, 2007.

Domestic selling, general and administrative expenses totaled $9.1 million for 2008 compared to $10.3 million in 2007. The 2008 reduction in selling, general and administrative expenses of $1.2 million was a result of the Company's continued focus on cost reduction efforts.

Depreciation and amortization charges were $939,000 for the twelve months ended December 31, 2008, compared to $768,000 for the twelve months ended December 31, 2007. The increase of approximately $171,000, or 22.2%, was due to higher purchases of property and equipment in recent years.

Other Expense

Other expense, net was approximately $671,000 for twelve months ended December 31, 2008, compared to other expense, net of approximately $39,000 for the twelve months ended December 31, 2007. The increase of approximately $632,000 was due primarily to one time litigation expense in 2008.

Interest Expense

Interest expense totaled approximately $320,000 for 2008, compared to interest expense of approximately $315,000 for 2007. The increase was a compilation of lower debt levels and higher interest rates in 2008.

Income Taxes

The provision for income taxes was $532,000 and $157,000 for 2008 and 2007, respectively. The increase in income tax provision of approximately $375,000 was primarily due to additional tax expense resulting from a change in tax filing status in Japan. The domestic tax provisions for both 2008 and 2007 were primarily for minimum domestic state tax liabilities.

Minority Interest

Minority interest income of $163,000 and expense of $47,000 resulted from the net operating profits and losses of the Company's 51% owned subsidiaries and its 50% owned subsidiaries for the twelve months ended December 31, 2008 and 2007, respectively.

Net Income (Loss)

The SPAR Group had a net income for 2008 of approximately $102,000, or $0.01 per share, compared to a net loss for 2007 of approximately $2.5 million, or $0.13 per share.

Off Balance Sheet Arrangements

None.

Liquidity and Capital Resources

For the twelve months ended December 31, 2008, the Company had a net income of $102,000, compared to a loss of approximately $2.5 million for the year ended December 31, 2007.

Net cash provided by operating activities for the year ended December 31, 2008 was $2.2 million, compared to net cash provided by operating activities of $12,000 in 2007. The change of approximately $2.2 million in cash provided by operating activities is primarily due to increased net income.

Net cash used in investing activities for the year ended December 31, 2008 and 2007, was $1.2 million and $814,000, respectively. The change in net cash used in investing activities was a result of increased purchases of property and equipment in 2008.

Net cash used in financing activities for the year ended December 31, 2008 was $279,000 compared with net cash provided by financing activities of $834,000 for the year ended December 31, 2007. The cash used in financing activities was a result of the Company payments on its lines of credit, partially offset by the issuance of preferred stock.

The above activity resulted in an increase in cash and cash equivalents for the twelve months ended December 31, 2008, of $439,000.

The Company had negative working capital of $635,000 and $450,000 as of December 31, 2008 and 2007, respectively. The Company's current ratio was 0.96 and 0.97 at December 31, 2008 and 2007, respectively. The decrease in working capital and current ratio were primarily due to increases in accounts payable and other current liabilities.

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 from $7.0 to $5.0 million. In February 2008, the Credit Facility was amended to establish monthly EBITDA covenants until September 30, 2008, and to set a Fixed Charge Coverage Ratio covenant for the year ended December 31, 2008. In January 2009 the Credit Facility was amended to extend the agreement until March 15, 2009, adjust the interest rate to the greater of 5%, the Alternative Base Rate or 30 day LIBOR plus 2.75% and to increase the limit on the capital expenditures to $1.3 million. In March 2009, the Credit Facility was further amended to extend the maturity until March 15, 2010, extend the monthly Fixed Charge Coverage Ratio covenant until March 15, 2010 and reset the limit on capital expenditures to $800,000.

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's domestic subsidiaries. The Credit Facility also limits certain expenditures, including, but not limited to, capital expenditures and other investments.

In addition, Mr. Robert G. Brown, a Director, the Chairman 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 basic interest rate under the Credit Facility is the greater of 5%, Webster's "Alternative Base Rate" plus 1.0% per annum (a total of 5.1% per annum at December 31, 2008), which automatically changes with each change made by Webster in such Alternative Base Rate, or LIBOR plus 2.75%. The actual average interest rate under the Credit Facility was 4.3% per annum for the twelve months ended December 31, 2008. The Credit Facility is secured by substantially all of the assets of the Company (other than SGRP's foreign subsidiaries and their assets).

Because of the requirement to maintain a lock box arrangement with Webster and Webster's ability to invoke a subjective acceleration clause at its discretion, borrowings under the Credit Facility are classified as current at December 31, 2008 and 2007, 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.

At December 31, 2008, the Company was not in violation of its covenants and does not expect to be in violation at future measurement dates. However, there can be no assurances that the Company will not be in violation of certain covenants in the future and should the Company be in violation; there can be no assurances that Webster will issue waivers for any future violations.

The Japanese subsidiary SPAR FM Japan, Inc. has line of credit agreements totaling 100 million Yen or approximately $1.1 million (based upon the exchange rate at December 31, 2008). There were no outstanding balances under the line of credit agreements at December 31, 2008. The outstanding balance at December 31, 2007 was approximately 90 million Yen, or approximately $802,000 (based upon the exchange rate at that date). In addition, the Japanese subsidiary had cash balances totaling 105 million Yen, or approximately $1.2 million (based upon the exchange rate at December 31, 2008) and 137 million Yen, or approximately $1.2 million (based upon the exchange rate at December 31, 2007) at December 31, 2008 and 2007, respectively. The average interest rate was 2.3% per annum for 2008.

In 2008, the Australian subsidiary, SPARFACTS Australia Pty. Ltd., entered into a revolving line of credit arrangement with Commonwealth Bank of Australia (CBA) for $2.0 million (Australian), or approximately $1.4 million (based upon the exchange rate at December 31, 2008). At December 31, 2008, SPARFACTS Australia Pty. Ltd. had $1.4 million (Australian), or approximately $1.0 million, outstanding under the line of credit (based upon the exchange rate at that date). The average interest rate was 9.5% per annum for the twelve months ended December 31, 2008.

On October 20, 2006, SPAR Canada Company, a wholly owned subsidiary, entered into a secured credit agreement with Royal Bank of Canada providing for a Demand Operating Loan for a maximum borrowing of $750,000 (Canadian) or approximately $613,725 (based upon the exchange rate at December 31, 2008). The Demand Operating Loan provides for borrowing based upon a formula as defined in the agreement (principally 75% of eligible accounts receivable less certain deductions) and a minimum total debt to tangible net worth covenant. On March 28, 2008, Royal Bank of Canada amended the secured credit agreement to reduce the maximum borrowing to $500,000 (Canadian) however, in October 2008, Royal Bank of Canada reinstated the loan limit to $750,000 (Canadian). At December 31, 2008, SPAR Canada Company had $691,000 (Canadian), or approximately $565,000, outstanding under the line of credit (based upon the exchange rate at December 31, 2008). The average interest rate was 4.5% per annum for the twelve months ended December 31, 2008.

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

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

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

Certain Contractual Obligations

The following table contains a summary of certain of the Company's contractual
obligations by category as of December 31, 2008 (in thousands).

  Contractual Obligations                         Payments due by Period
                             Total   Less than 1 year  1-3 years   3-5 years  More than 5 years

Credit Facilities            $ 5,494           $5,494           -           - -
Capital Lease Obligations        325              223        $102           - -
Operating Lease Obligations    1,808              607       1,165        $ 36 -
Total                        $ 7,627           $6,324     $ 1,267        $ 36 -