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

                                    FORM 10-K

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

(Mark One)
X       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 for the fiscal year ended December 31, 2004
                                                               OR
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 for the transition period from        to

                         Commission file number 0-27824

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

           Delaware                                             33-0684451
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                             Identification No.)

 580 White Plains Road, Tarrytown, New York                        10591
  (Address of principal executive offices)                       (Zip Code)

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

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

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

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

         YES  [X]      NO     [_]

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

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Rule 12b-2 of the Act.)   YES  [ ]      NO     [X]

     The aggregate  market value of the Common Stock of the  Registrant  held by
non-affiliates of the Registrant on June 30, 2004, based on the closing price of
the Common  Stock as reported by the Nasdaq  Small Cap Market on such date,  was
approximately $4,799,006.

     The number of shares of the  Registrant's  Common Stock  outstanding  as of
December 31, 2004, was 18,858,972 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.


<PAGE>



                                SPAR GROUP, INC.


                           ANNUAL REPORT ON FORM 10-K


                                      INDEX

                                     PART I
                                                                            Page
 Item 1.   Business                                                            2
 Item 2.   Properties                                                         14
 Item 3.   Legal Proceedings                                                  15
 Item 4.   Submission of Matters to a Vote of Security Holders                15

                                        PART II

 Item 5.   Market for Registrant's Common Equity and Related
           Shareholder Matters                                                16
 Item 6.   Selected Financial Data                                            16
 Item 7.   Management's  Discussion and Analysis of Financial Condition
           and Results of Operations                                          19
 Item 7A.  Quantitative and Qualitative Disclosures about Market Risk         26
 Item 8.   Financial Statements and Supplementary Data                        26
 Item 9.   Changes  in  and  Disagreements   with  Accountants  on
           Accounting  and Financial Disclosure                               26
 Item 9A.  Controls and Procedures                                            26
 Item 9B.  Other Information                                                  27
                                       PART III

 Item 10.  Directors and Executive Officers of the Registrant                 28
 Item 11.  Executive Compensation and Other Information of SPAR Group, Inc.   31
 Item 12.  Security Ownership of Certain Beneficial Owners and Management     35
 Item 13.  Certain Relationships and Related Transactions                     36
 Item 14.  Principal Accountant Fees and Services                             37

                                        Part IV

 Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K    38
           Signatures                                                         43






<PAGE>

                                     PART I

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

        Although  the  Company   believes   that  its  plans,   intentions   and
expectations  reflected in or suggested by such  forward-looking  statements are
reasonable, it cannot assure that such plans, intentions or expectations will be
achieved  in whole or in part.  You should  carefully  review  the risk  factors
described  herein and any other cautionary  statements  contained in this Annual
Report on Form 10-K. All forward-looking  statements attributable to the Company
or persons acting on its behalf are expressly qualified by the risk factors (see
Item 1 - Certain Risk  Factors) and other  cautionary  statements in this Annual
Report on Form 10-K. 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.


Item 1.  Business.

GENERAL

        The  SPAR  Group,  Inc.,  a  Delaware  corporation  ("SGRP"),   and  its
subsidiaries  (together  with SGRP,  the "SPAR  Group" or the  "Company"),  is a
supplier of  merchandising  and other marketing  services  throughout the United
States and  internationally.  In 2002, the Company sold its Incentive  Marketing
Division,  SPAR Performance Group, Inc. ("SPGI").  The Company's  operations are
divided into two divisions: the Domestic Merchandising Services Division and the
International   Merchandising  Services  Division.  The  Domestic  Merchandising
Services  Division  provides  merchandising  services,  in-store event staffing,
product sampling,  database  marketing,  technology  services,  teleservices and
marketing  research to  manufacturers  and retailers in the United  States.  The
various  services  are  primarily  performed in mass  merchandisers,  drug store
chains, convenience and grocery stores. The International Merchandising Services
Division  established in July 2000,  currently  provides  similar merchandising
services  through a wholly owned  subsidiary in Canada,  through 51% owned joint
venture  subsidiaries in India, South Africa and Turkey, and through a 50% owned
joint  venture in Japan.  The  Company  recently  established  a 50% owned joint
venture in China and a 51% owned joint venture subsidiary in Romania and expects
to offer merchandising services in these countries in 2005.

Continuing Operations

Domestic Merchandising Services Division

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

        Merchandising   services   primarily  consist  of  regularly   scheduled
dedicated routed services and special projects provided at the store level for a
specific retailer or single or multiple manufacturers  primarily under single or
multi-year   contracts  or   agreements.   Services  also  include   stand-alone
large-scale   implementations.   These  services  may  include  sales  enhancing
activities such as ensuring that client products authorized for distribution are
in  stock


                                      -2-
<PAGE>

and on the shelf, adding new products that are approved for distribution but not
presently on the shelf,  setting  category  shelves in accordance  with approved
store  schematics,  ensuring  that  shelf  tags are in place,  checking  for the
overall  salability of client products and setting new and promotional items and
placing and/or  removing point of purchase and other related media  advertising.
Specific in-store  services can be initiated by retailers or manufacturers,  and
include  new  store  openings,   new  product  launches,   special  seasonal  or
promotional  merchandising,  focused  product support and product  recalls.  The
Company also provides  in-store event  staffing  services,  database  marketing,
technology services, teleservices 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  services
business  worldwide.  The Company has  expanded  its  international  business as
follows:

May  2001,  the  Company  entered  Japan  through  a  50%  owned  joint  venture
headquartered in Osaka.

June 2003, the Company entered Canada by acquiring an existing  business through
its wholly-owned Canadian subsidiary, headquartered in Toronto.

July  2003,  the  Company  entered  Turkey  through  a 51% owned  joint  venture
subsidiary headquartered in Istanbul.

April 2004,  the Company  entered South Africa through a 51% owned joint venture
subsidiary headquartered in Durban.

April  2004,  the  Company  entered  India  through  a 51% owned  joint  venture
subsidiary headquartered in New Delhi.

December  2004,  the Company  established a 51% owned joint  venture  subsidiary
headquartered in Bucharest, Romania.

In February 2005, the Company  announced the  establishment of a 50% owned joint
venture headquartered in Hong Kong, China.

Discontinued Operations

Incentive Marketing Division

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

Technology Division

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


INDUSTRY OVERVIEW

Domestic Merchandising Services Division

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



                                      -3-
<PAGE>

products and providing  in-store event staffing  services.  The Company provides
other  marketing  services  such  as test  market  research,  mystery  shopping,
teleservices, database marketing and promotion planning and analysis.

        The Company believes  merchandising  services  previously  undertaken by
retailers and manufacturers have been increasingly  outsourced to third parties.
Historically,  retailers  staffed  their  stores as  needed to ensure  inventory
levels, the advantageous display of new items on shelves, and the maintenance of
shelf  schematics.  In an effort to improve their margins,  retailers  decreased
their own store  personnel  and increased  their  reliance on  manufacturers  to
perform such services.  Initially,  manufacturers  attempted to satisfy the need
for  merchandising  services  in  retail  stores  by  utilizing  their own sales
representatives.  However,  manufacturers  discovered that using their own sales
representatives  for this  purpose was  expensive  and  inefficient.  Therefore,
manufacturers have increasingly  outsourced the merchandising  services to third
parties  capable of operating at a lower cost by (among  other  things)  serving
multiple manufacturers simultaneously.

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

International Merchandising Services Division

        The Company believes another current trend in business is globalization.
As companies  expand into foreign markets they will need assistance in marketing
their  products.  As evidenced in the United States,  retailer and  manufacturer
sponsored merchandising programs are both expensive and inefficient. The Company
also  believes  that the  difficulties  encountered  by these  programs are only
exacerbated by the logistics of operating in foreign  markets.  This environment
has  created  an  opportunity  for the  Company to  exploit  its  Internet-based
technology and business model that are successful in the United States.  In July
2000, the Company established its International  Merchandising Services Division
to cultivate  foreign  markets,  modify the necessary  systems and implement the
Company's  business  model  worldwide by expanding  its  merchandising  services
business off shore. The Company formed an International  Merchandising  Services
Division  task  force  consisting  of  members  of  the  Company's   information
technology,  operations  and  finance  groups to evaluate  and  develop  foreign
markets.  In  2001,  the  Company  and  a  leading  Japanese  based  distributor
established  a joint  venture  to  provide  the  latest  in-store  merchandising
services to the Japanese market. In 2003, the Company expanded its international
presence  to  Canada  and  Turkey  by  acquiring  the  business  of  a  Canadian
merchandising  company and entering into a start-up joint venture  subsidiary in
Turkey. In 2004, the Company established 51% owned joint venture subsidiaries in
South  Africa,  India and Romania and in early 2005 a 50% owned joint venture in
China. Key to the Company's international strategy is the translation of several
of its  proprietary  Internet-based  logistical,  communications  and  reporting
software applications into the native language of any market the Company enters.
As a  result  of this  requirement  for  market  penetration,  the  Company  has
developed translation software that can quickly convert its proprietary software
into  various  languages.  Through  its  computer  facilities  in Auburn  Hills,
Michigan,  the Company provides worldwide access to its proprietary  logistical,
communications  and  reporting  software.  In  addition,  the Company  maintains
personnel in Greece and Australia to assist in its  international  efforts.  The
Company is actively pursuing expansion into various other markets.


PIA ACQUISITION

        SPAR Acquisition,  Inc., and its subsidiaries (the "SPAR Companies") are
the original  predecessor  of the current  Company and were founded in 1967.  On
July 8, 1999,  the Company  completed a reverse  merger with the SPAR  Companies
(the "PIA Acquisition"), and then changed its name to SPAR Group, Inc., from PIA
Merchandising  Services, Inc. (prior to such merger, "PIA"). Pursuant to the PIA
Acquisition,  the SPAR  Companies  were  deemed to have  "acquired"  PIA and its
subsidiaries  prior to the PIA  Acquisition  (the  "PIA  Companies")  which  was
treated as a purchase of the PIA Companies  for  accounting  purposes,  with the
books and  records of the  Company  being  adjusted  to reflect  the  historical
operating results of the SPAR Companies.




                                      -4-
<PAGE>



BUSINESS STRATEGY

        As the marketing  services industry  continues to grow,  consolidate and
expand  both in the  United  States and  internationally,  large  retailers  and
manufacturers are increasingly  outsourcing their marketing needs to third-party
providers.  The Company believes that offering  marketing services on a national
and global basis will provide it with a  competitive  advantage.  Moreover,  the
Company  believes  that  successful  use of  and  continuous  improvements  to a
sophisticated    technology    infrastructure,    including   its    proprietary
Internet-based  software,  is key to  providing  clients  with a high  level  of
customer service while maintaining efficient, low cost operations. The Company's
objective  is to become an  international  retail  merchandising  and  marketing
service  provider by pursuing its  operating and growth  strategy,  as described
below.

        Increased Sales Efforts:

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

        New Products:

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

        Acquisitions:

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

        In December of 2003,  the Company  entered into an agreement to purchase
the business and certain  assets of Bert Fife &  Associates,  Inc.,  and related
Companies   ("Fife"),   which   specialized   in  providing   in-store   product
demonstrations.  As part of the  agreement  the Company  entered into a one year
consulting  agreement  with the President of Fife. The purchase was completed in
January 2004. In April 2004, the Company  established a joint venture subsidiary
in South Africa.  The joint venture subsidiary is headquartered in Durban and is
owned  51% by the  Company.  Also in  April  2004,  the  Company  announced  the
establishment  of a joint  venture  subsidiary  in India and started  operations
during the third quarter.  The joint venture  subsidiary is headquartered in New
Delhi and is 51% owned by the Company.  In January 2005,  the Company  announced
the  establishment of a joint venture  subsidiary in Romania and is owned 51% by
the Company.  In February 2005,  the Company  announced the  establishment  of a
joint venture in China which is 50% owned by the Company.

        Improve Operating Efficiencies:

        The Company will continue to seek greater  operating  efficiencies.  The
Company believes that its existing field force and technology infrastructure can
support additional customers and revenue in the Domestic  Merchandising Services
Division.  At the  corporate  level,  the Company  will  continue to  streamline
certain  administrative  functions,  such as accounting and finance,  insurance,
strategic marketing and legal support.



                                      -5-
<PAGE>

        Leverage and Improve Technology:

        The Company intends to continue to utilize computer (including hand-held
computers), Internet, and other technology to enhance its efficiency and ability
to provide  real-time data to its customers,  as well as,  maximize the speed of
communication,  and  logistical  deployment  of its  merchandising  specialists.
Industry sources  indicate that customers are increasingly  relying on marketing
service providers to supply rapid, value-added information regarding the results
of marketing  expenditures  on sales and  profits.  The Company  (together  with
certain of its  affiliates)  has developed and owns  proprietary  Internet-based
software  technology that allows it to utilize the Internet to communicate  with
its  field  management,   schedule  its  store-specific  field  operations  more
efficiently, receive information and incorporate the data immediately,  quantify
the benefits of its services to customers  faster,  respond to customers'  needs
quickly and implement  programs rapidly.  The Company has successfully  modified
and is currently  utilizing  certain of its software  applications in connection
with its  international  ventures.  The Company believes that it can continue to
improve,  modify and adapt its  technology  to support  merchandising  and other
marketing  services for  additional  customers and projects in the United States
and in other foreign  markets.  The Company also  believes that its  proprietary
Internet-based  software  technology  gives it a  competitive  advantage  in the
marketplace.


DESCRIPTION OF SERVICES

        The Company currently  provides a broad array of merchandising and other
marketing  services on a  national,  regional  and local  basis to leading  home
entertainment,  general merchandise, consumer goods, food, and health and beauty
care  manufacturers  and retail  companies  through its  Domestic  Merchandising
Services Division.

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

Domestic Merchandising Services Division

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

        Syndicated Services

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

          o    Reordering and replenishment of products
          o    Ensuring that the clients'  products  authorized for distribution
               are in stock and on the shelf
          o    Adding new products  that are approved for  distribution  but not
               yet  present  on the shelf
          o    Designing and implementing store planogram schematics
          o    Setting  product  category  shelves in  accordance  with approved
               store schematics
          o    Ensuring that product shelf tags are in place
          o    Checking for overall salability of the clients' products
          o    Placing new product and promotional items in prominent positions

        Dedicated Services

        Dedicated  services  consist of  merchandising  services,  generally  as
described above,  which are performed for a specific retailer or manufacturer by
a dedicated  organization,  including a management team working  exclusively



                                      -6-
<PAGE>

for that  retailer or  manufacturer.  These  services  include many of the above
activities detailed in syndicated services, as well as, new store set-ups, store
remodels  and fixture  installations.  These  services  are  primarily  based on
agreed-upon rates and fixed management fees.

        Project Services

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

        Other Marketing Services

        Other marketing services performed by the Company include:

         Event Staffing Services - Performing in-store product demonstrations or
         product sampling.

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

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

         Database  Marketing - Managing  proprietary  information to permit easy
         access,   analysis  and   manipulation  for  use  in  direct  marketing
         campaigns.

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

         Teleservices - Maintaining a  teleservices  center in its Auburn Hills,
         Michigan,  facility  that performs  inbound and outbound  telemarketing
         services,  including  those  on  behalf  of  certain  of the  Company's
         manufacturing clients.

        The Company  believes that providing  merchandising  and other marketing
services timely,  accurately and efficiently,  as well as, delivering timely and
accurate reports to its clients, are two key components that will be critical to
its  success.  The Company has  developed  Internet-based  logistic  deployment,
communications,  and  reporting  systems  that improve the  productivity  of its
merchandising  specialists and provide timely data and reports to its customers.
The  Company's  merchandising  specialists  use  hand-held  computers,  personal
computers  and laptop  computers to report the status of each store they service
upon completion  either through the Internet or using Interactive Voice Response
("IVR")  through  its  Auburn  Hills  telecommunication  center.   Merchandising
specialists  report on a variety of issues such as store conditions (e.g. out of
stocks,  inventory,  display  placement) or they may scan and process new orders
for products. This information is reported,  analyzed and displayed in a variety
of reports  that can be accessed by both the Company and its  customers  via the
Internet.  These reports can depict the status of every merchandising project in
real time.

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




                                      -7-
<PAGE>


International Merchandising Services Division

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

        In July 2000, the Company  established its  International  Merchandising
Services Division to cultivate foreign markets, modify the necessary systems and
implement the Company's  business model worldwide by expanding its merchandising
services  business off shore. The Company formed an International  Merchandising
Services Division task force consisting of members of the Company's  information
technology,  operations  and  finance  groups to evaluate  and  develop  foreign
markets.  In  2001,  the  Company  and  a  leading  Japanese  based  distributor
established  a joint  venture  to  provide  the  latest  in-store  merchandising
services to the Japanese market. In 2003, the Company expanded its international
presence to Canada by acquiring a Canadian  merchandising  company and Turkey by
entering into a start-up joint venture.  In 2004,  the Company  established  51%
owned joint venture subsidiaries in South Africa, India and Romania and in early
2005, a 50% owned joint venture in China.

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


SALES AND MARKETING

Domestic Merchandising Services Division

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

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

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



                                      -8-
<PAGE>



International Merchandising Services Division

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


CUSTOMERS

Domestic Merchandising Services Division

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

           o    Mass Merchandisers
           o    Drug
           o    Grocery
           o    Other retail trade groups (e.g. Discount, Home Centers)

        The  Company  also  provides  database,  research  and  other  marketing
services to the consumer packaged goods industry.

        One customer accounted for 14%, 8%, and 6% of the Company's net revenues
for the years ended  December  31,  2004,  2003,  and 2002,  respectively.  This
customer  also  accounted  for  approximately  29%,  13%,  and  4%  of  accounts
receivable at December 31, 2004, 2003, and 2002, respectively.

        In  addition,  approximately  16%,  17%, and 24% of net revenues for the
years ended  December 31, 2004,  2003,  and 2002,  respectively,  resulted  from
merchandising services performed for manufacturers and others in stores operated
by Kmart.  These  customers  also  accounted for  approximately  22% of accounts
receivable at December 31, 2004. While the Company's customers and the resultant
contractual  relationships  are with  various  manufacturers  and not  Kmart,  a
significant  reduction of this retailer's stores or cessation of this retailer's
business would negatively impact the Company.

        Another  customer,  a division of a major  retailer,  accounted for 26%,
30%, and 26% of the  Company's  net  revenues  for the years ended  December 31,
2004,   2003,  and  2002,   respectively.   This  customer  also  accounted  for
approximately  4%, 30%,  and 43% of accounts  receivable  at December  31, 2004,
2003, and 2002,  respectively.  On August 2, 2004, this customer was sold by its
parent.

International Merchandising Services Division

        The Company believes that the potential international customers for this
division have similar profiles to its Domestic  Merchandising  Services Division
customers.  The Company is currently operating in Japan,  Canada,  Turkey, South
Africa and India. The Company  announced the  establishment of a 51% owned joint
venture  subsidiary  in  Romania in late 2004 and a 50% owned  joint  venture in
China in early 2005. The Company is actively pursuing  expansion into Europe and
other markets.




                                      -9-
<PAGE>


COMPETITION

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


TRADEMARKS

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


EMPLOYEES

        Worldwide  the  Company  utilizes a labor force of  approximately  7,700
people.

        As of December 31, 2004, the Company's Domestic  Merchandising  Services
Division's  labor force consisted of approximately  6,500 people.  Approximately
150 were full-time  employees and 15 were part-time employees of the Company. Of
the 150 full-time Company  employees,  143 were engaged in operations and 7 were
engaged  in  sales.  The  Company's  Domestic  Merchandising  Services  Division
utilizes the services of its affiliate, SPAR Management Services, Inc. ("SMSI"),
to schedule and supervise  its field force,  which  consists of the  independent
contractors furnished by another affiliate SPAR Marketing Services, Inc. ("SMS")
(see Item 13 - Certain Relationships and Related Transactions, below) as well as
the Company's field employees.  Approximately 6,300 independent  contractors and
approximately 50 full-time field managers are furnished  principally through SMS
and SMSI, respectively.

        As of December  31,  2004,  the  Company's  International  Merchandising
Services  Division's  labor  force  consisted  of  approximately  1,200  people.
Approximately  50  full-time  employees  were engaged in  operations  and 3 were
engaged  in  sales.  The  International  Division's  field  force  consisted  of
approximately 700 full time employees,  70 part time employees and approximately
380 independent contractors.

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

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

CERTAIN RISK FACTORS

        There  are  various  risks  associated  with the  Company's  growth  and
operating strategy. Certain (but not all) of these risks are discussed below.



                                      -10-
<PAGE>

Dependency on Largest Customers

        As discussed above in Customers,  the Company does a significant  amount
of business with one customer and performs a  significant  amount of services in
Kmart.  The loss of this customer or the loss of Kmart related  business and the
failure  to  attract  new large  customers,  could  significantly  decrease  the
Company's  revenues and such decreased  revenues  could have a material  adverse
effect on the Company's business, results of operations and financial condition.

Dependence on Trend Toward Outsourcing

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

Failure to Successfully Compete

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

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

Variability of Operating Results and Uncertainty in Customer Revenue

        The  Company  has  experienced  and,  in  the  future,   may  experience
fluctuations  in  quarterly  operating  results.  Factors  that  may  cause  the
Company's  quarterly  operating  results  to vary and from  time to time and may
result in reduced revenue include:  (i) the number of active customer  projects;
(ii)  seasonality  of customer  products;  (iii)  customer  delays,  changes and
cancellations in projects;  (iv) the timing  requirements of customer  projects;
(v)  the  completion  of  major  customer  projects;  (vi)  the  timing  of  new
engagements;  (vii) the timing of personnel cost increases;  and (viii) the loss
of major  customers.  In  particular,  the timing of  revenues is  difficult  to
forecast for the home entertainment  industry because timing is dependent on the
commercial  success  of  particular  product  releases.  In  the  event  that  a
particular  release is not widely accepted by the public,  the Company's revenue
could be significantly  reduced. In addition,  the Company is subject to revenue
uncertainties  resulting from factors such as unprofitable customer work and the
failure of  customers to pay.  The Company  attempts to mitigate  these risks by
dealing primarily with large credit-worthy  customers,  by entering into written
or oral  agreements with its customers and by using project  budgeting  systems.
These revenue  fluctuations  could materially and adversely affect the Company's
business, results of operations and financial condition or the desired increases
in the Company's business, revenues and profits.

Failure to Develop New Products

        A key element of the Company's  growth  strategy is the  development and
sale of new products.  While several new products are under current development,
there can be no assurance that the Company will be able to successfully  develop
and market new  products.  The  Company's  inability or failure to devise useful
merchandising   or  marketing

                                      -11-
<PAGE>

products  or to complete  the  development  or  implementation  of a  particular
product for use on a large  scale,  or the  failure of such  products to achieve
market  acceptance,  could adversely  affect the Company's  ability to achieve a
significant  part of its growth  strategy  and the absence of such growth  could
have a material adverse effect on the Company's business,  results of operations
and  financial  condition or the desired  increases in the  Company's  business,
revenues and profits.

Inability to Identify, Acquire and Successfully Integrate Acquisitions

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

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

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

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

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

Reliance on the Internet

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




                                      -12-
<PAGE>


Economic and Retail Uncertainty

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

Significant Stockholders: Voting Control and Market Illiquidity

        Mr. Robert G. Brown, founder,  director,  Chairman,  President and Chief
Executive Officer of the Company,  beneficially owns approximately  45.5% of the
Company's  outstanding  Common  Stock,  and Mr.  William  H.  Bartels,  founder,
director, and Vice Chairman of the Company beneficially owns approximately 29.4%
of the Company's  outstanding Common Stock. These stockholders have, should they
choose to act together,  and under certain  circumstances Mr. Brown acting alone
has,  the  ability  to  control  all  matters  requiring  stockholder  approval,
including  the  election  of  directors  and the  approval  of mergers and other
business combination transactions.

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

Dependence Upon and Potential Conflicts in Services Provided by Affiliates

        The success of the  Company's  domestic  business is dependent  upon the
successful  execution of its field  services by SPAR  Marketing  Services,  Inc.
("SMS"), and SPAR Management Services, Inc. ("SMSI"), as well as the programming
services provided by SPAR Infotech, Inc. ("SIT"), each of which is an affiliate,
but not a subsidiary,  of the Company,  and none of which is consolidated in the
Company's  financial  statements.  SMS provides  substantially  all of the field
representatives  used by the Company in conducting its domestic business (87% of
field  expense  in  2004),  and SMSI  provides  substantially  all of the  field
management  services  used by the  Company in  conducting  its  business.  These
services  provided  to the  Company  by SMS and  SMSI are on a  cost-plus  basis
pursuant to contracts that are cancelable on 60 days notice prior to December 31
of each year, commencing in 1997, or with 180 days notice at any other time. SIT
provides  substantially  all of the  Internet  programming  services  and  other
computer  programming  needs used by the Company in conducting its business (see
Item 13 - Certain  Relationships  and Related  Transactions,  below),  which are
provided to the Company by SIT on an hourly charge basis  pursuant to a contract
that is  cancelable  on 30 days  notice.  The  Company has  determined  that the
services provided by SMS, SMSI and SIT are at rates favorable to the Company.

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

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


                                      -13-
<PAGE>

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

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

Risks Associated with International Joint Ventures

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

Risks Associated with Foreign Currency

        The  Company  also has foreign  currency  exposure  associated  with its
international  joint venture  subsidiaries  and joint ventures.  In 2004,  these
exposures are primarily  concentrated in the Canadian  dollar,  Japanese yen and
South African rand.

Risks Associated with International Business

        The  Company's   expansion  strategy  includes  expansion  into  various
countries around the world. While the Company endeavors to limit its exposure by
entering only countries  where the political,  social and economic  environments
are conducive to doing business in that country there can be no assurances  that
the respective business environments will remain favorable.

Item 2.  Properties.

        The Company maintains its corporate  headquarters in approximately 6,000
square feet of leased office space located in Tarrytown, New York, under a lease
with a term expiring in May 2006.

        The  Company  leases  certain  office  and  storage  facilities  for its
corporate headquarters, divisions and subsidiaries under operating leases, which
expire at various dates during the next five years. Most of these leases require
the Company to pay minimum rents,  subject to periodic  adjustments,  plus other
charges, including utilities, real estate taxes and common area maintenance.



                                      -14-
<PAGE>

        The  following is a list of the  locations  where the Company  maintains
leased facilities for its division offices and subsidiaries:

<TABLE>
<CAPTION>
        Location                   Office Use                             Approximate Square Footage
        -------------------------- -------------------------------------- ---------------------------------
        Domestic:
<S>                                <C>                                               <C>
        Tarrytown, NY              Corporate Headquarters                             6,000
        Auburn Hills, MI           Regional Office and Warehouse                     27,000
        Cincinnati, OH             Regional Office                                    5,300

        International:
        Canada
        Toronto, Ontario           Headquarters                                       4,000
        Japan
        Osaka                      Headquarters                                       1,200
        Tokyo                      Regional Office                                    1,000
        Nagoya                     Regional Office                                      600
        Hukuoka                    Regional Office                                      400
        Turkey
        Istanbul                   Headquarters                                       4,600
        South Africa
        Durban                     Headquarters                                       3,100
        Port Elizabeth             Regional Office                                      900
        Western Cape               Regional Office                                    2,900
        Johannesburg               Regional Office                                    2,000
        India
        New Delhi                  Headquarters                                       4,300
</TABLE>

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

Item 3.  Legal Proceedings.

        Safeway   Inc.   ("Safeway"),   filed  a   Complaint   against  the  PIA
Merchandising  Co., Inc. ("PIA Co."), a wholly owned  subsidiary of the Company,
and Pivotal Sales Company ("Pivotal"), a wholly owned subsidiary of PIA Co., and
SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has
subsequently  amended  it.  Safeway  alleges  causes  of  action  for  breach of
contract,  breach of implied  contract,  breach of fiduciary  duty,  conversion,
constructive fraud,  breach of trust,  unjust enrichment,  and accounting fraud.
Safeway has most  recently  alleged  monetary  damages in the  principal  sum of
$3,000,000 and probable interest of $1,000,000 and has also demanded unspecified
costs. PIA Co., Pivotal and SGRP 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 them  against  Safeway for breach of  contract,  interference  with
economic relationship,  unfair trade practices and unjust enrichment and seeking
damages and injunctive  relief.  Mediation between the parties occurred in 2004,
but did not result in a  settlement.  PIA Co.,  Pivotal and SGRP are  vigorously
defending  Safeway's  allegations.  It is not possible at this time to determine
the  likelihood of the outcome of this  lawsuit.  However,  if Safeway  prevails
respecting  its  allegations,  and PIA  Co.,  Pivotal  and  SGRP  lose on  their
cross-claims and counterclaims, that result could have a material adverse effect
on the  Company.  The Company  anticipates  that this matter will be resolved in
2005.

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

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

        None.



                                      -15-
<PAGE>



                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters.

Price Range of Common Stock

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

                                      2004                        2003
                            ------------------------   -------------------------
                                  High       Low             High         Low
        First Quarter        $  3.44       $  2.30      $  3.60       $  2.42
        Second Quarter          2.33          0.85         5.55          3.05
        Third Quarter           1.50          0.75         5.32          3.17
        Fourth Quarter          1.80          0.36         4.57          3.00

        As of  December  31,  2004,  there  were  approximately  700  beneficial
shareholders of the Company's Common Stock.

Dividends

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

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

Item 6.  Selected Financial Data.

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




                                      -16-
<PAGE>


                                SPAR Group, Inc.
                 Condensed Consolidated Statements of Operations
                 -----------------------------------------------

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                      ---------------------------------------------------------------------
                                                          2004          2003          2002         2001          2000
                                                      ---------------------------------------------------------------------

STATEMENT OF OPERATIONS DATA:
<S>                                                    <C>          <C>             <C>         <C>          <C>
Net revenues                                           $   51,370   $     64,859    $   69,612  $   70,891    $  81,459
Cost of revenues                                           33,644         42,338        40,331      40,883       50,278
                                                      ---------------------------------------------------------------------
Gross profit                                               17,726         22,521        29,281      30,008       31,181
Selling, general and administrative expenses               20,222         20,967        18,804      19,380       24,761
Impairment charges                                          8,141              -             -           -            -
Depreciation and amortization                               1,399          1,529         1,844       2,682        2,383
                                                      ---------------------------------------------------------------------
Operating (loss) income                                   (12,036)            25         8,633       7,946        4,037
Other (income) expense                                       (754)           237           (26)        107         (790)
Interest expense                                              220            269           363         561        1,326
                                                      ---------------------------------------------------------------------
(Loss) income from continuing operations before
   provision for income taxes and minority interest       (11,502)          (481)        8,296       7,278        3,501
Income tax provision                                          853             58         2,998       3,123          780
                                                      ---------------------------------------------------------------------
(Loss) income from continuing operations before
minority interest                                         (12,355)          (539)        5,298       4,155        2,721
                                                      ---------------------------------------------------------------------
Minority interest                                              87              -             -           -            -

Discontinued operations:
Loss from discontinued operations net of tax
   benefits of $935 and $858, respectively                      -              -             -      (1,597)      (1,399)
Estimated loss on disposal of discontinued
   operations, including provision of $1,000 for
   losses during phase-out period and disposal
   costs net of tax benefit of $2,618                           -              -             -      (4,272)           -
                                                      ---------------------------------------------------------------------
Net (loss) income                                     $   (12,268)  $       (539)   $    5,298  $   (1,714)   $    1,322
                                                      =====================================================================

Basic/diluted net (loss) income per common share:

Net (loss) income from continuing operations          $     (0.65)  $      (0.03)   $     0.28  $     0.23    $    0.15
                                                      ---------------------------------------------------------------------
Discontinued operations:
Loss from discontinued operations                             -                -             -       (0.09)       (0.08)
Estimated loss on disposal of discontinued
   operations                                                 -                -             -       (0.23)           -
                                                      ---------------------------------------------------------------------
Net loss from discontinued operations                         -                -             -       (0.32)       (0.08)
                                                      ---------------------------------------------------------------------
Basic/diluted net (loss) income                       $     (0.65)  $      (0.03)    $    0.28  $    (0.09)   $    0.07
                                                      =====================================================================

Weighted average shares outstanding
     - basic                                              18,859          18,855        18,761      18,389       18,185
     - diluted                                            18,859          18,855        19,148      18,467       18,303
</TABLE>



                                      -17-
<PAGE>

<TABLE>
<CAPTION>

                                                                       December 31,
                                               -------------------------------------------------------------
                                                   2004       2003        2002         2001         2000
                                               -----------  ---------  -----------  -----------  -----------
BALANCE SHEET DATA:

<S>                                             <C>         <C>         <C>          <C>         <C>
Working capital (deficiency)                    $      962  $   4,085   $    6,319   $    8,476  $   (2,273)
Total assets                                    $   15,821  $  28,137   $   28,800   $   41,155  $   48,004
Lines of credit, current                        $    4,956  $   4,084   $        -   $       57  $    1,143
Lines of credit and other long-term debt(1)     $      218  $     270   $      383   $   13,287  $   10,093
Total stockholders' equity                      $    3,714  $  16,023   $   16,592   $   10,934  $   12,240

</TABLE>


(1)  Prior to 2003,  the  Company's  lines of credit were  charged to  long-term
     liabilities (net of current portion).




                                      -18-
<PAGE>


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

Overview
--------

        In the United States,  the Company  provides  merchandising  services to
manufacturers  and  retailers  principally  in mass  merchandiser,  drug  store,
grocery,  and other retail  trade  classes  through its  Domestic  Merchandising
Services Division. Internationally,  the Company provides in-store merchandising
services  through a wholly owned  subsidiary in Canada,  51% owned joint venture
subsidiaries in Turkey,  South Africa and India and a 50% owned joint venture in
Japan.  In December  2004,  the Company  established  a 51% owned joint  venture
subsidiary in Romania.  In February  2005,  the Company  established a 50% owned
joint venture in China. In 2004, the Company consolidated Canada,  Turkey, South
Africa, India and Japan into the Company's financial statements. Romania did not
have operations in 2004.

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

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

        SIM's  results   (including   those  of  SPGI)  were   reclassified   as
discontinued operations for all periods presented.  The results of operations of
the  discontinued  business  segment are shown  separately below net income from
continuing  operations.   Accordingly,   the  2002  consolidated  statements  of
operations of the Company have been prepared, and its 2001 and 2000 consolidated
statement  of  operations   have  been  restated,   to  report  the  results  of
discontinued  operations of SIM (including  those of SPGI)  separately  from the
continuing  operations  of the Company  (see Item 6 - Selected  Financial  Data,
above).

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

        Consolidation of subsidiaries

        The Company  consolidates its 100% owned subsidiaries.  The Company also
        consolidates its 51% owned joint venture  subsidiaries and its 50% owned
        joint ventures where the Company is the primary  beneficiary because the
        Company believes this  presentation is fairer and more meaningful.  Rule
        3A-02  of  Regulation  S-X,  Consolidated  Financial  Statements  of the
        Registrant and its Subsidiaries, states that consolidated statements are
        presumed to be more meaningful,  that majority owned  subsidiaries (more
        than 50%) generally should be consolidated,  and that  circumstances may
        require   consolidation  of  other  subsidiaries  to  achieve  a  fairer
        presentation of its financial  condition and results.  In addition,  the
        Company has determined that under Financial  Accounting  Standards Board
        Interpretation  Number 46, as revised  December 2003,  Consolidation  of
        Variable  Interest  Entities ("FIN  46(R)"),  the Company is the primary
        beneficiary  of its 51% owned  joint  venture  subsidiaries  and its 50%
        owned joint ventures,  which accordingly requires consolidation of those
        entities into the Company's financial statements.

        Revenue Recognition

        The Company's  services are provided under  contracts or agreements that
        consist  primarily  of  service  fees  and per  unit  fee  arrangements.
        Revenues under service fee  arrangements are recognized when the service
        is performed.


                                      -19-
<PAGE>

        The  Company's per unit  contracts or agreements  provide for fees to be
        earned based on the retail sales of client's products to consumers.  The
        Company  recognizes  per unit fees in the  period  such  amounts  become
        determinable and are reported to the Company.

        Allowance for Doubtful Accounts and Sales Allowances

        The Company continually monitors the validity of its accounts receivable
        based upon current customer 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 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 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 $761,000 and $515,000
        at December 31, 2004 and 2003, respectively. The Company also recorded a
        reserve for sales allowances for potential  customer credits of $448,000
        at  December  31,  2003.  Bad debt and  sales  allowance  expenses  were
        $366,000, $825,000, and $262,000 in 2004, 2003, and 2002, 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,  write program code and payroll,  related  benefits and travel
        expenses  for those  employees  who are directly  involved  with and who
        devote time to its software development  projects.  Capitalized software
        development costs are amortized over three years.

        The Company  capitalized  $559,000,  $1,004,000,  and  $772,000 of costs
        related to software  developed for internal use in 2004, 2003, and 2002,
        respectively.

        The  Company  also  recorded  a net  impairment  charge  of  capitalized
        software  related to lost  clients  totaling  approximately  $442,000 in
        2004.

Results of operations

        The following table sets forth selected  financial data and such data as
a percentage of net revenues for the periods indicated.


<TABLE>
<CAPTION>
                                                          Year Ended                 Year Ended                Year Ended
                                                      December 31, 2004          December 31, 2003          December 31, 2002
                                                  --------------------------------------------------------------------------------
                                                                               (dollars in millions)
                                                     Dollars          %         Dollars          %         Dollars          %
                                                  --------------  -----------  -----------   -----------  -----------  -----------
<S>                                                <C>              <C>         <C>            <C>         <C>           <C>
Net revenues                                       $   51.4         100.0%      $   64.9       100.0%      $   69.6      100.0%
Cost of revenues                                       33.6          65.5           42.3        65.3           40.3       57.9
Selling, general & administrative expenses             20.2          39.4           21.0        32.3           18.8       27.0
Impairment charges                                      8.1          15.8              -           -              -          -
Depreciation & amortization                             1.4           2.7            1.5         2.3            1.8        2.6
Other (income) expenses, net                           (0.4)         (1.0)           0.5         0.8            0.4        0.6
                                                  --------------  -----------  -----------   -----------  -----------  -----------
(Loss) income before income tax provision             (11.5)        (22.4)          (0.4)       (0.7)           8.3       11.9
Provision for income taxes                              0.9           1.7            0.1         0.1            3.0        4.3
                                                  --------------  -----------  -----------   -----------  -----------  -----------
(Loss) income before minority interest                (12.4)        (24.1)%         (0.5)       (0.8)%          5.3        7.6%
Minority interest                                       0.1           0.2              -           -              -          -
                                                  --------------               -----------                -----------
Net (loss) income                                  $  (12.3)        (23.9)%     $   (0.5)       (0.8)%      $   5.3        7.6%
                                                  ==============               ===========                ===========
</TABLE>



                                      -20-
<PAGE>


Results from  continuing  operations  for the twelve  months ended  December 31,
--------------------------------------------------------------------------------
2004, compared to twelve months ended December 31, 2003
-------------------------------------------------------

Net Revenues

        Net revenues from  operations  for the twelve months ended  December 31,
2004, were $51.4 million,  compared to $64.9 million for the twelve months ended
December 31, 2003, a decrease of $13.5  million or 20.8%.  The decrease of $13.5
million in net  revenues  consists of a decrease  in  domestic  revenue of $21.1
million or 32.9% partially offset by increases in international  revenue of $7.7
million.  The  decrease in  domestic  revenue is a result of the loss of several
significant  customers  partially  offset by revenue from new customers in 2004.
The international revenue increase of $7.7 million was primarily a result of the
South African  acquisition,  the Japan consolidation and a full year of Canadian
operations.

Cost of Revenues

        Cost of revenues from  operations  consists of in-store  labor and field
management  wages,  related  benefits,  travel  and other  direct  labor-related
expenses. Cost of revenues decreased by $8.7 million in 2004 and as a percentage
of net revenues was 65.5% for the twelve months ended  December 31, 2004,  which
was  consistent  with 65.3% for the  twelve  months  ended  December  31,  2003.
Approximately  87%  and  85% of the  field  services  were  purchased  from  the
Company's affiliate,  SMS, in 2004 and 2003, respectively (see Item 13 - Certain
Relationships and Related  Transactions,  below). SMS's increased share of field
services resulted from its more favorable cost structure

Operating Expenses

        Operating expenses include selling, general and administrative expenses,
impairment  charges,   depreciation  and  amortization.   Selling,  general  and
administrative   expenses  include  corporate   overhead,   project  management,
information  technology,  executive  compensation,  human  resource,  legal  and
accounting expenses.  The following table sets forth the operating expenses as a
percentage of net revenues for the time periods indicated:


<TABLE>
<CAPTION>
                                                 Year Ended                      Year Ended               Increase
                                              December 31, 2004               December 31, 2003          (decrease)
                                         ----------------------------   ------------------------------  -------------
                                                            (dollars in millions)
                                            Dollars           %            Dollars            %              %
                                         --------------  ------------   ---------------  -------------  -------------

<S>                                        <C>               <C>           <C>               <C>           <C>
Selling, general & administrative          $  20.2           39.4%         $ 21.0            32.3%         (3.6)%
Impairment charges                             8.1           15.8               -               -             -
Depreciation and amortization                  1.4            2.8             1.5             2.3          (8.5)%
                                         --------------  ------------   ---------------  -------------

Total operating expenses                   $  29.7           58.0%         $ 22.5            34.6%         32.3%
                                         ==============  ============   ===============  =============
</TABLE>

        Selling,  general and administrative expenses decreased by $0.8 million,
or 3.6%,  for the twelve  months  ended  December  31,  2004,  to $20.2  million
compared  to $21.0  million  for the twelve  months  ended  December  31,  2003.
Domestic selling,  general and administrative expenses totaled $16.7 million for
2004 and were reduced $3.3 million from $19.9 million in 2003.  The reduction of
16.1% was a result of cost reduction  programs  initiated in 2004 as a result of
the loss of certain large  customers  partially  offset by restructure  costs of
$480,000  expensed  in 2004  compared to no expense in 2003.  Restructure  costs
included office lease and employee severance costs. The domestic cost reductions
were  partially  offset by increases of $2.5 million in  international  selling,
general and  administrative  expenses resulting from the consolidation of Japan,
the acquisition of South Africa, and a full year of Canadian operations, as well
as, the Turkey and India joint venture startups.

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

        Depreciation  and  amortization  charges  of $1.4  million  in 2004  was
consistent with $1.5 million in 2003.



                                      -21-
<PAGE>

Other Income/Other Expense

        Other income was approximately $754,000 for 2004 versus other expense of
$237,000 for 2003. In 2004,  other income  consisted of  approximately  $640,000
resulting from the release of specific  reserves  related to the  refinancing of
the SPGI notes and approximately $114,000 of foreign currency translation gains.
In 2003,  other expense  consisted  primarily of the Company's  share of its 50%
owned Japan joint venture losses  accounted for on the equity  method.  In 2004,
the  Japan  joint  venture  was  consolidated   into  the  Company's   financial
statements.

Interest Expense

        Interest  expense  totaled  $220,000  for 2004 and was  consistent  with
interest expense of $269,000 for 2003.

Income Taxes

        The  provision  for income  taxes was  $853,000 and $58,000 for 2004 and
2003, respectively.  During 2004, as a result of the loss of several significant
clients,  current  year  losses  and  the  lack  of  certainty  of a  return  to
profitability  in the next twelve months,  the Company recorded a full valuation
allowance  against its net  deferred tax assets  resulting in a charge  totaling
approximately  $750,000.  The 2004 tax  provision  of  $853,000  consists of the
valuation allowance and minimum state taxes of approximately  $103,000.  The tax
provision for 2003 reflects minimum tax requirements for state filings.

Net (Loss) Income

        The SPAR Group had a net loss of  approximately  $12.3  million or $0.65
per basic and diluted  share for 2004,  compared to a net loss of  approximately
$539,000 or $0.03 per basic and diluted shares for 2003.

Off Balance Sheet Arrangements

None.



                                      -22-
<PAGE>



Results from  continuing  operations  for the twelve  months ended  December 31,
--------------------------------------------------------------------------------
2003, compared to twelve months ended December 31, 2002
-------------------------------------------------------


Net Revenues

        Net revenues from  operations  for the twelve months ended  December 31,
2003, were $64.9 million,  compared to $69.6 million for the twelve months ended
December  31,  2002,  a 6.8%  decrease.  The decrease of 6.8% in net revenues is
primarily  attributed to decreased  business in mass  merchandiser  chains.  The
decrease in net revenues was caused by decreased per unit fee revenue  resulting
from  lower  retail  sales of  customer  products  and the loss of a  particular
client, partially offset by increases in service fee revenue.

Cost of Revenues

        Cost of revenues from  operations  consists of in-store  labor and field
management  wages,  related  benefits,  travel  and other  direct  labor-related
expenses. Cost of revenues increased by $2.0 million in 2003 and as a percentage
of net  revenues  was 65.3% for the  twelve  months  ended  December  31,  2003,
compared  to 57.9%  for the  twelve  months  ended  December  31,  2002,  a 5.0%
increase.  Approximately  85% and 76% of the field  services were purchased from
the  Company's  affiliate,  SMS, in 2003 and 2002,  respectively  (see Item 13 -
Certain Relationships and Related Transactions, below). SMS's increased share of
field services resulted from its more favorable cost structure.  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  above under Critical  Accounting  Policies/Revenue  Recognition,  the
Company's revenue consists of: (1) service fee revenue, which is earned when the
merchandising services are performed and, therefore,  has proportionate costs in
the period the services are  performed;  and (2) 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 and, therefore,  does not have proportionate costs in the
period the revenue is earned.  Since the  merchandising  service and the related
costs  associated with per unit fee revenue are normally  performed prior to the
retail sale, and the retail sales of client  products are influenced by numerous
factors  including  consumer  tastes  and  preferences,  and not  solely  by the
merchandising  service performed,  in any given period, the cost of per unit fee
revenues may not be directly proportionate to the per unit fee revenue.

Operating Expenses

        Operating expenses include selling,  general and administrative expenses
as well as depreciation and amortization.  Selling,  general and  administrative
expenses include corporate overhead,  project management,  information  systems,
executive  compensation,  human  resource,  legal and accounting  expenses.  The
following  table  sets  forth the  operating  expenses  as a  percentage  of net
revenues for the time periods indicated:


<TABLE>
<CAPTION>
                                                 Year Ended                      Year Ended               Increase
                                              December 31, 2003               December 31, 2002          (decrease)
                                         ----------------------------   ------------------------------  -------------
                                                            (dollars in millions)
                                            Dollars           %            Dollars            %              %
                                         --------------  ------------   ---------------  -------------  -------------

<S>                                        <C>               <C>           <C>               <C>           <C>
Selling, general & administrative          $  21.0           32.3%         $ 18.8            27.0%         12.0%
Depreciation and amortization                  1.5            2.3             1.8             2.6         (17.1)%
                                         --------------  ------------   ---------------  -------------

Total operating expenses                   $  22.5           34.6%         $ 20.6            29.6%          9.4%
                                         ==============  ============   ===============  =============
</TABLE>

        Selling,  general and administrative expenses increased by $2.2 million,
or 12.0%,  for the twelve  months  ended  December 31,  2003,  to $21.0  million
compared to $18.8  million for the twelve months ended  December 31, 2002.  This
increase  was due  primarily  to  increases  in travel  related  expense of $0.4
million,  postage and material expense of $0.6 million, stock option expense for
non-employees of $0.4 million and increase in bad debt expense of $0.6 million.

        Depreciation  and  amortization  decreased  by  $315,000  for the twelve
months ended  December 31, 2003,  primarily  due to older,  higher priced assets
becoming fully depreciated.


                                      -23-
<PAGE>


Interest Expense

        Interest  expense  decreased  $94,000 to $269,000 for the twelve  months
ended December 31, 2003,  from $363,000 for the twelve months ended December 31,
2002, due to decreased  average debt levels as well as decreased  interest rates
in 2003.

Income Taxes

        The  provision  for income  taxes was $58,000  and $3.0  million for the
twelve months ended December 31, 2003 and December 31, 2002,  respectively.  The
tax provision for 2003 reflects minimum tax requirements for state filings.  The
effective tax rate was 36.1% for 2002.

Net (Loss) Income

        The SPAR  Group had a net loss of  approximately  $539,000  or $0.03 per
basic and diluted share for the twelve months ended December 31, 2003,  compared
to a net income of  approximately  $5.3  million or $0.28 per basic and  diluted
shares for the twelve  months  ended  December  31, 2002  because of the factors
described above.

Off Balance Sheet Arrangements

None.

Liquidity and Capital Resources

        In 2004,  the Company had a net loss of $12.3  million.  Included in the
net loss were non-cash charges of $8.1 million for impairment,  $0.7 million for
deferred tax asset valuation adjustments, $1.4 million for depreciation and $0.1
million for minority interests in losses of subsidiaries.

        Net cash provided by operating  activities  for 2004,  was $1.4 million,
compared  with net cash  provided by  operations  of $3.4 million for 2003.  The
decrease of $2.0 million in cash  provided by operating  activities is primarily
due  to  net  operating  losses  offset  by  decreases  in  deferred  taxes  and
restructuring charges.

        Net cash  used in  investing  activities  for  2004,  was $1.3  million,
compared  with net cash used of $2.9 million for 2003.  The decrease in net cash
used in investing  activities resulted was a result of fewer acquisitions of new
businesses and lower purchases of property and equipment in 2004.

        Net cash provided by financing  activities  for 2004,  was $0.9 million,
compared  with net cash used in financing  activities  of $0.5 million for 2003.
The increase in net cash provided by financing  activities in 2004 was primarily
a result of the  consolidation  of our Japan joint  venture  into the  Company's
financial statements in 2004.

        The above activity resulted in a change in cash and cash equivalents for
2004 of $0.9 million.

        At December 31, 2004, the Company had positive  working  capital of $1.0
million as  compared to $4.1  million at  December  31,  2003.  The  decrease in
working  capital is due to decreases in accounts  receivable and deferred taxes,
increases in accounts payable,  customer deposits and lines of credit, partially
offset by increases in cash and decreases in accrued  expenses and other current
liabilities,  accrued expenses due to affiliates and restructuring  charges. The
Company's  current  ratio  was 1.08  and 1.34 at  December  31,  2004 and  2003,
respectively.

        In January 2003, the Company and Webster  Business  Credit  Corporation,
then known as Whitehall  Business Credit Corporation  ("Webster"),  entered into
the Third  Amended and  Restated  Revolving  Credit and Security  Agreement  (as
amended,  collectively,  the "Credit Facility").  The Credit Facility provided a
$15.0 million  revolving  credit  facility that matures on January 23, 2006. The
Credit  Facility  allowed the Company to borrow up to $15.0 million based upon a
borrowing  base  formula  as  defined  in  the  agreement  (principally  85%  of
"eligible"  accounts  receivable).  On May 17,  2004,  the Credit  Facility  was
amended to among other things,  reduce the revolving  credit facility from $15.0
million to $10.0 million, change the interest rate and increase reserves against
collateral. The amendment provides for interest to be charged at a rate based in
part upon the earnings before interest,  taxes,  depreciation and  amortization.
The average  interest rate for 2004 was 5.1%.  At December 31, 2004,  the Credit
Facility bears interest at Webster's "Alternative Base Rate" plus 0.75% (a total
of 6.0% per annum),  or LIBOR plus 3.25%.  The Credit Facility is secured by all
of the assets of the Company and its domestic  subsidiaries.  In connection with
the May 17,  2004,  amendment,  Mr.  Robert  Brown,  a



                                      -24-
<PAGE>

Director,  the  Chairman,  President  and Chief  Executive  Officer  and a major
stockholder of theCompany and Mr. William Bartels, a Director, the Vice Chairman
and a major stockholder of the Company,  provided personal  guarantees  totaling
$1.0  million to Webster.  On August 20, 2004,  the Credit  Facility was further
amended  in  connection  with the  waiver of certain  covenant  violations  (see
below). The amendment, among other things, reduced the revolving credit facility
from $10.0 million to $7.0 million,  changed the covenant compliance testing for
certain  covenants from quarterly to monthly and reduced  certain advance rates.
On November 15,  2004,  the Credit  Facility  was further  amended to delete any
required  minimum Net Worth and minimum  Fixed Charge  Coverage  Ratio  covenant
levels for the period ending  December 31, 2004.  The  amendments did not change
the future covenant levels. The Credit Facility also limits certain expenditures
including, but not limited to, capital expenditures and other investments.

        The Company was in  violation of certain  monthly  covenants at December
31, 2004, and expects to be in violation at future  measurement  dates.  Webster
issued a waiver for the December 31, 2004 covenant  violations.  However,  there
can be no assurances that Webster will issue such waivers in the future.

        Because  of the  requirement  to  maintain a lock box  arrangement  with
Webster,  Webster's  ability to invoke a subjective  acceleration  clause at its
discretion and the expected future  covenant  violations,  borrowings  under the
Credit Facility are classified as current at December 31, 2004, and December 31,
2003, in accordance with EITF 95-22.  Balance Sheet Classification of Borrowings
Outstanding  Under  Revolving  Credit  Agreements That Include Both a Subjective
Acceleration Clause and a Lock-Box Agreement.

        The revolving loan balances  outstanding  under the Credit Facility were
$4.1 million at December 31, 2004, and December 31, 2003.  There were letters of
credit  outstanding  under the Credit  Facility of $0.7  million at December 31,
2004,  and December 31,  2003.  As of December 31, 2004,  the Company had unused
availability  under the Credit  Facility of $1.4  million  out of the  remaining
maximum  $2.2  million  unused  revolving  line of  credit  after  reducing  the
borrowing base by outstanding loans and letters of credit.

        In 2001, the Japanese joint venture SPAR FM Japan,  Inc.  entered into a
revolving line of credit  arrangement with Japanese banks for 300 million yen or
$2.7 million (based upon the exchange rate at September 30, 2004).  At September
30, 2004, SPAR FM Japan, Inc. had 100 million yen or approximately $900,000 loan
balance  outstanding under the line of credit. The line of credit is effectively
guarantied by the Company and the joint venture partner, Paltac Corporation. The
average  interest rates on the borrowings  under the Japanese line of credit for
its short-term  bank loans at September 30, 2004 and 2003 were 1.375% and 1.375%
per annum, respectively.

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

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

        Management believes that based upon the results of Company's cost saving
initiatives and the existing  credit  facilities,  sources of cash  availability
will be sufficient to support  ongoing  operations  over the next twelve months.
However, delays in collection of receivables due from any of the Company's major
clients,  or a significant  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  for  future  covenant
violations  could have a material adverse effect on the Company's cash resources
and its ongoing ability to fund operations.




                                      -25-
<PAGE>


Certain Contractual Obligations

        The  following  table  contains a summary  of  certain of the  Company's
contractual obligations by category as of December 31, 2004 (in thousands).

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
              Contractual Obligations                                   Payments due by Period
--------------------------------------------------------------------------------------------------------------------
                                               Total       Less than 1    1-3 years      3-5 years    More than 5
                                                              year                                       years
--------------------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>           <C>           <C>         <C>
        Credit Facilities                      $ 4,956       $ 4,956       $     -       $     -     $        -
--------------------------------------------------------------------------------------------------------------------
        Operating Lease Obligations              1,468           776           651            41              -
--------------------------------------------------------------------------------------------------------------------
        Total                                  $ 6,424       $ 5,732         $ 651       $    41     $        -
--------------------------------------------------------------------------------------------------------------------
</TABLE>

        In addition to the above table,  at December  31, 2004,  the Company had
$737,337 in outstanding Letters of Credit.

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

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

        The Company is exposed to market risk related to the  variable  interest
rate on its lines of credit. As of December 31, 2004, the variable interest rate
on the  Company's  lines of credit were 6.0% on its domestic  line of credit and
1.4% on its Japanese line of credit.

        The  Company  has  foreign   currency   exposure   associated  with  its
international  100% owned subsidiary,  its 51% owned joint venture  subsidiaries
and its 50%  owned  joint  ventures.  In 2004,  these  exposures  are  primarily
concentrated  in the Canadian  dollar,  Japanese yen and South  African rand. At
December 31, 2004,  international  assets totaled $2.8 million and international
liabilities totaled $3.8 million. For 2004,  international revenues totaled $8.2
million and the Company's share of the net losses was approximately $500,000.

        Investment Portfolio

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

Item 8.  Financial Statements and Supplementary Data.

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

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

        None.

Item 9A.  Controls and Procedures.

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



                                      -26-
<PAGE>

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

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

Item 9B.  Other Information.

        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"). Each lease has a 36 month term and has representations,  covenants and
defaults  customary  for the  leasing  industry.  The  leases  are for  handheld
computers  to be used by  field  merchandisers  in the  performance  of  various
merchandising  services  in the United  States and Canada (see Item 13 - Certain
Relationships and Related Transactions).




                                      -27-
<PAGE>


                                    PART III

Item 10.   Directors and Executive Officers of the Registrant.


Directors and Executive Officers
--------------------------------

        The following  table sets forth certain  information in connection  with
each person who is or was at December 31,  2004,  an  executive  officer  and/or
director for the Company.

Name                                 Age     Position with SPAR Group, Inc.
----                                 ---     ------------------------------

Robert G.  Brown.  . . . . . . .     62      Chairman, Chief Executive Officer,
                                             President and Director


William  H.  Bartels . . . . . .     61      Vice Chairman and Director
.. .

Robert O.  Aders  (1). . . . . .     77      Director, Chairman Governance
                                             Committee


Jack W.  Partridge (1) . . . . .     59      Director, Chairman Compensation
                                             Committee


Jerry B.  Gilbert  (1) . . . . .     70      Director


Lorrence  T.  Kellar (1) . . . .     67      Director, Chairman Audit Committee


Charles Cimitile.  . . . . . . .     50      Chief Financial Officer, Treasurer
                                             and Secretary

Kori G. Belzer . . . . . . . . .     39      Chief Operating Officer

Patricia Franco. . . . . . . . .     44      Chief Information Officer

James R. Segreto . . . . . . . .     56      Vice President, Controller
__________________________
(1) Member of the Board's Governance, Compensation and Audit Committees


        Robert  G.  Brown  serves  as the  Chairman,  Chief  Executive  Officer,
President and a Director of SGRP and has held such positions since July 8, 1999,
the  effective  date of the  merger  of the SPAR  Marketing  Companies  with PIA
Merchandising Services,  Inc. (the "Merger").  Mr. Brown served as the Chairman,
President  and  Chief  Executive   Officer  of  the  SPAR  Marketing   Companies
(SPAR/Burgoyne  Retail Services,  Inc.  ("SBRS") since 1994, SPAR, Inc. ("SINC")
since 1979,  SPAR  Marketing,  Inc.  ("SMNEV")  since  November  1993,  and SPAR
Marketing Force, Inc. ("SMF") since 1996).

        William H.  Bartels  serves as the Vice  Chairman and a Director of SGRP
and has held  such  positions  since  July 8, 1999  (the  effective  date of the
Merger).  Mr.  Bartels  served as the Vice  Chairman,  Secretary,  Treasurer and
Senior Vice President of the SPAR  Marketing  Companies  (SBRS since 1994,  SINC
since 1979, SMNEV since November 1993 and SMF since 1996).

        Robert O. Aders  serves as a Director of SGRP and has done so since July
8, 1999. He has served as the Chairman of the Governance  Committee since May 9,
2003.  Mr.  Aders  has  served as  Chairman  of The  Advisory  Board,  Inc.,  an
international consulting organization since 1993, and also as President Emeritus
of the Food Marketing  Institute  ("FMI") since 1993.  Immediately  prior to his
election to the  Presidency  of FMI in 1976,  Mr. Aders was Acting  Secretary of
Labor in the Ford  Administration.  Mr. Aders was the Chief Executive Officer of
FMI from 1976 to 1993.  He also served in The Kroger  Co., in various  executive
positions from 1957 to 1974 and was Chairman of the Board from 1970 to 1974. Mr.
Aders  also  serves  as a  Director  of  Checkpoint  Systems,  Inc.,  Sure  Beam
Corporation and Telepanel Systems, Inc.




                                      -28-
<PAGE>

        Jack W.  Partridge  serves as a  Director  of SGRP and has done so since
January 29, 2001. He has served as the Chairman of the Compensation Committee of
SGRP since May 9, 2003.  Mr.  Partridge  is  President  of Jack W.  Partridge  &
Associates.  He  previously  served as Vice  Chairman  of the Board of The Grand
Union  Company  from 1998 to 2000.  Mr.  Partridge's  service  with Grand  Union
followed a distinguished 23-year career with The Kroger Company, where he served
as Group  Vice  President,  Corporate  Affairs,  and as a member  of the  Senior
Executive Committee, as well as various other executive positions. Mr. Partridge
has been a leader in industry and community affairs for over two decades. He has
served  as  Chairman  of the Food  Marketing  Institute's  Government  Relations
Committee,  the Food and Agriculture  Policy Task Force,  and as Chairman of the
Board of The Ohio Retail Association. He has also served as Vice Chairman of the
Cincinnati  Museum  Center  and a member  of the  boards  of the  United  Way of
Cincinnati, the Childhood Trust, Second Harvest and the Urban League.

        Jerry B. Gilbert serves as a Director of SGRP and has done so since June
4, 2001. Mr. Gilbert served as Vice President of Customer  Relations for Johnson
& Johnson's Consumer and Personal Care Group of Companies from 1989 to 1997. Mr.
Gilbert  joined  Johnson  & Johnson  in 1958 and from 1958 to 1989 held  various
executive positions.  Mr. Gilbert also served on the Advisory Boards of the Food
Marketing  Institute,  the  National  Association  of Chain Drug  Stores and the
General Merchandise  Distributors  Council (GMDC) where he was elected the first
President  of the GMDC  Educational  Foundation.  He was honored  with  lifetime
achievement  awards from GMDC,  Chain Drug Review,  Drug Store News and the Food
Marketing Institute. He is the recipient of the prestigious National Association
of Chain Drug Stores  (NACDS)  Begley Award,  as well as the National  Wholesale
Druggists Association (NWDA) Tim Barry Award. In June 1997, Mr. Gilbert received
an Honorary Doctor of Letters Degree from Long Island University.

        Lorrence T. Kellar  serves as a Director  and the  Chairman of the Audit
Committee of SGRP and has done so since April 2, 2003.  Mr. Kellar had a 31-year
career with The Kroger  Co.,  where he served in various  financial  capacities,
including  Group Vice  President  for real estate and finance,  and earlier,  as
Corporate  Treasurer.  He was  responsible  for  all  of  Kroger's  real  estate
activities,  as  well as  facility  engineering,  which  coordinated  all  store
openings and remodels.  Mr. Kellar subsequently  served as Vice President,  real
estate,  for Kmart.  He currently is Vice  President of  Continental  Properties
Company,  Inc. Mr. Kellar also serves on the boards of Frisch's  Restaurants and
Multi-Color  Corporation and is a trustee of the Acadia Realty Trust. He also is
a major  patron  of the arts and has  served  as  Chairman  of the  Board of the
Cincinnati Ballet.

         Charles Cimitile serves as the Chief Financial  Officer,  Secretary and
Treasurer of SGRP and has done so since November 24, 1999. Mr.  Cimitile  served
as Chief  Financial  Officer for GT Bicycles from 1996 to 1999 and Cruise Phone,
Inc.  from 1995 through  1996.  Prior to 1995,  he served as the Vice  President
Finance,  Secretary and Treasurer of American Recreation Company Holdings,  Inc.
and its predecessor company.

         Kori G. Belzer  serves as the Chief  Operating  Officer of SGRP and has
done so since January 1, 2004. Ms. Belzer also serves as Chief Operating Officer
of SPAR Management Services,  Inc. ("SMSI"),  and SPAR Marketing Services,  Inc.
("SMS"),  each an  affiliate  of SGRP (see Item 13 - Certain  Relationships  and
Related  Transactions,  below),  and has done so since 2000. The Audit Committee
determined  that Ms.  Belzer  also  served  during  2003 as the de  facto  chief
operating  officer of SGRP  through her position as Chief  Operating  Officer of
SMSI and SMS. Prior to 2000,  Ms. Belzer served as Vice President  Operations of
SMS from 1997 to 2000, and as Regional  Director of SMS from 1995 to 1997. Prior
to 1995, she served as Client Services Manager for SPAR/Servco, Inc.




                                      -29-
<PAGE>

        Patricia  Franco  serves as the Chief  Information  Officer  of SGRP and
President of the SPAR International Merchandising Services Division and has done
so since  January 1, 2004.  Ms.  Franco also serves as Senior Vice  President of
SPAR  Infotech,  Inc.  ("SIT"),  an  affiliate  of SGRP  (see  Item 13 - Certain
Relationships and Related Transactions, below), and has done so since January 1,
2003. The Audit Committee  determined that Ms. Franco also served during 2003 as
the de  facto  chief  information  officer  of  SGRP as well  as,  the de  facto
President of the SPAR International Merchandising Services Division, through her
position as Senior Vice  President of SIT.  Prior to 2003,  Ms. Franco served in
various management capacities with SIT, SMS and their affiliates.

        James R. Segreto  serves as Vice  President,  Controller of SGRP and has
done so since July 8, 1999, the effective date of the Merger.  From 1997 through
the Merger,  he served in the same capacity for SMS. Mr. Segreto served as Chief
Financial Officer for Supermarket Communications Systems, Inc. from 1992 to 1997
and LM Capital, LLP from 1990 to 1992. Prior to 1992, he served as Controller of
Dorman Roth Foods, Inc.

Audit Committee Composition and Financial Expert

        The Audit Committee currently consists of Messrs. Kellar (its Chairman),
Aders, Gilbert and Partridge, each of whom has been determined by the Governance
Committee  and the  Board  to  meet  the  independence  requirements  for  audit
committee  members  under  Nasdaq  Rule  4200(a)(14).  In  connection  with  his
re-nomination   as  a  Director,   the   Governance   Committee  and  the  Board
re-determined that Mr. Kellar was qualified to be the "audit committee financial
expert" as required by applicable law and the SEC Rules.

Section 16(a) Beneficial Ownership Reporting Compliance.

        Section  16(a)  of the  Exchange  Act  ("Section  16(a)")  requires  the
Company's  directors  and certain of its  officers and persons who own more than
10% of the Company's Common Stock (collectively, "Insiders"), to file reports of
ownership and changes in their ownership of the Company's  Common Stock with the
Commission.  Insiders  are  required by  Commission  regulations  to furnish the
Company with copies of all Section 16(a) forms they file.

        Based  solely on its review of the copies of such forms  received  by it
for the year ended  December 31, 2004, or written  representations  from certain
reporting persons for such year, the Company believes that its Insiders complied
with all applicable  Section 16(a) filing  requirements  for such year, with the
exception that Robert G. Brown, William H. Bartels, Jack W. Partridge and Robert
O. Aders untimely filed certain Statements of Changes in Beneficial Ownership on
Form 4. Kori Belzer and Patricia Franco became filers in March of 2004. All such
Section  16(a)  filing  requirements  have since been  completed  by each of the
aforementioned individuals.

Ethics Codes

        The Company has adopted  codes of ethical  conduct  applicable to all of
its directors,  officers and employees, as approved and recommended by the Audit
Committee and  Governance  Committee and adopted by the Board on May 3, 2004, in
accordance  with Nasdaq Rules.  These codes of conduct  consist of: (1) the SPAR
Group Code of Ethical Conduct for its Directors, Senior Executives and Employees
Dated (as of) May 1, 2004; and (2) the SPAR Group Statement of Policy  Regarding
Personal Securities  Transaction in SGRP Stock and Non-Public Information Dated,
Amended and Restated as of May 1, 2004,  which amends,  restates and  completely
replaces its existing similar statement of policy. Both Committees were involved
because  authority  over ethics codes  shifted  from the Audit  Committee to the
Governance  Committee  with the  adoption of the  committee  charters on May 18,
2004.   Copies  of  these  codes  and  policies  are  posted  and  available  to
stockholders and the public on the Company's web site (www.SPARinc.com).




                                      -30-
<PAGE>

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


Executive Compensation
----------------------

        The following  table sets forth all  compensation  received for services
rendered to the Company in all capacities for the years ended December 31, 2004,
2003,  and 2002  (except for amounts  paid to SMS,  SMSI and SIT,  see Item 13 -
Certain  Relationships  and Related  Transactions,  below) (i) by the  Company's
Chief Executive Officer, and (ii) each of the other four most highly compensated
executive  officers  of the  Company  and its  affiliates  who were  serving  as
executive  officers of the Company or  performing  equivalent  functions for the
Company  through an affiliate,  at December 31, 2004  (collectively,  the "Named
Executive Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                                             Long Term
                                                                         Annual Compensation            Compensation Awards
                                                                         -------------------            -------------------
                                                                                                     Securities
                                                                                                     Underlying      All Other
                                                                                                      Options      Compensation
Name and Principal Positions                               Year           Salary ($)    Bonus ($)      (#)(1)         ($)(2)
----------------------------                               ----           ----------    ---------      ------         ------

<S>                                                        <C>            <C>            <C>           <C>              <C>
Robert G. Brown                                            2004           114,000 (3)         --             --          1,800
     Chief  Executive  Officer,  Chairman  of the          2003           180,000 (3)         --             --          2,200
     Board, President, and Director                        2002           164,340 (3)         --             --          2,040

William H. Bartels                                         2004           114,000 (3)         --             --          1,620
     Vice Chairman and Director                            2003           180,000 (3)         --             --          2,007
                                                           2002           164,340 (3)         --             --          2,040

Charles Cimitile                                           2004           220,000             --         25,000          1,800
     Chief Financial Officer,  Treasurer and               2003           221,700         20,000         20,000          2,200
     Secretary                                             2002           215,564         15,000         20,000          2,040

Kori G. Belzer                                             2004           147,990             --         25,000          1,495
     Chief Operating Officer                               2003           147,067         19,000         26,750          1,843


Patricia Franco                                            2004           147,900         10,000         25,000          1,493
     Chief Information Officer                             2003           145,875         20,000         37,500          1,718
</TABLE>
________________________

(1)  In June  2004,  Mr.  Brown  and Mr.  Bartels  voluntarily  surrendered  for
     cancellation  their  options for the  purchase of the  following  shares of
     common stock under the 2000 Plan: 382,986 and 235,996, respectively.

     In September  2004,  Mr.  Cimitile,  Ms. Belzer and Ms. Franco  voluntarily
     surrendered  for  cancellation  their  options  for  the  purchase  of  the
     following  shares of common stock under the 2000 Plan:  55,000,  76,140 and
     87,500  respectively.  Also  in  September  2004,  Ms.  Franco  voluntarily
     surrendered for  cancellation her options for the purchase 10,000 shares of
     common stock under the 1995 Plan.
(2)  Other compensation represents the Company's 401k contribution.
(3)  Does not include amounts paid to SMS, SMSI, SIT and Affinity Insurance Ltd.
     (see Item 13 - Certain Relationships and Related Transactions, below)





                                      -31-
<PAGE>


Stock Option Grants in Last Fiscal Year

        The following table sets forth information regarding each grant of stock
options  made  during the year ended  December  31,  2004,  to each of the Named
Executive  Officers.  No stock appreciation rights ("SAR's") were granted during
such period to such person.

<TABLE>
<CAPTION>
                                         Individual Grants
                     ----------------------------------------------------------
                        Number of      Percent of
                       Securities     Total Options
                       Underlying      Granted to                                Potential Realizable Value at
                         Options      Employees in    Exercise     Expiration    Assumed Annual Rates of Stock
Name                  Granted(2)(#)    Period (%)    Price ($/Sh)    Date        Price Appreciation for Option(1)
----                 ------------------------------------------------------------------------------------------
                                                                                   5% ($)          10% ($)
                     ------------------------------------------------------------------------------------------

<S>                      <C>               <C>          <C>         <C>            <C>            <C>
Charles Cimitile         25,000            16.1         2.39        3/31/14        37,596         95,226

Kori G. Belzer           25,000            16.1         2.39        3/31/14        37,596         95,226

Patricia Franco          25,000            16.1         2.39        3/31/14        37,596         95,226
</TABLE>
____________

(1)      The potential realizable value is calculated based upon the term of the
         option at its time of grant.  It is  calculated  by  assuming  that the
         stock price on the date of grant  appreciates  at the indicated  annual
         rate, compounded annually for the entire term of the option.
(2)      These  options vest over  four-year  periods at a rate of 25% per year,
         beginning on the first anniversary of the date of grant.


Aggregated Stock Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values

        The  following  table sets forth the number of shares of Common Stock of
the Company purchased by each of the Named Executive Officers in the exercise of
stock options during the year ended December 31, 2004, the value realized in the
purchase  of such shares  (the  market  value at the time of  exercise  less the
exercise  price to purchase such  shares),  and the number of shares that may be
purchased and value of the exercisable and unexercisable options held by each of
the Named Executive Officers at December 31, 2004.

<TABLE>
<CAPTION>
                                                                Number of Securities Underlying        Value of Unexercised
                                                                 Unexercised Options at Fiscal    In-the-Money Options at Fiscal
                                                                         Year-End (#)                       Year-End ($)
                                                               ---------------------------------- --------------------------------
                           Shares Acquired        Value
Name                       on Exercise (#)     Realized ($)      Exercisable      Unexercisable    Exercisable     Unexercisable
----                       -----------------  ---------------  ----------------  ---------------- --------------  ----------------

<S>                                 <C>                 <C>             <C>                 <C>            <C>            <C>
Robert G. Brown                      --                 --               --              95,746             --              --
William H. Bartels                   --                 --               --              58,999             --              --
Charles Cimitile                     --                 --           25,000              85,000         10,625              --
Kori G. Belzer                       --                 --           11,500              94,500          4,513              88
Patricia Franco                      --                 --           11,500              79,500          4,513              88
</TABLE>


Stock Option and Purchase Plans

        The Company has four stock option  plans:  the Amended and Restated 1995
Stock Option Plan ("1995 Plan"),  the 1995 Director's Plan ("Director's  Plan"),
the Special Purpose Stock Option Plan (the "Special Purpose Plan"), and the 2000
Stock Option Plan ("2000 Plan").

        The  1995  Plan  provided  for  the  granting  of  either  incentive  or
nonqualified stock options to specific employees,  consultants, and directors of
the Company for the purchase of up to 3,500,000  shares of the Company's  common
stock. The options had a term of ten years from the date of issuance,  except in
the case of incentive stock options granted to greater than 10% stockholders for
which the term was five years. The exercise price of nonqualified  stock options
must have been equal to at least 85% of the fair market  value of the  Company's
common stock at the date of grant.  Since 2000,  the Company has not granted any
new options under this plan.  During 2004,  1,500 options to purchase  shares of
the Company's  common stock were exercised and options to purchase 26,625 shares
of the  Company's  stock were  cancelled




                                      -32-
<PAGE>

under this plan. At December 31, 2004,  options to purchase 15,125 shares of the
Company's  common stock remain  outstanding  under this plan.  The 1995 Plan was
superseded by the 2000 Plan with respect to all new options issued.

        The Director's Plan was a stock option plan for  non-employee  directors
and provided for the purchase of up to 120,000  shares of the  Company's  common
stock.  Since 2000, the Company has not granted any new options under this plan.
During 2004, no options to purchase  shares of the  Company's  common stock were
exercised  under this plan.  At December  31, 2004,  20,000  options to purchase
shares of the Company's common stock remained  outstanding  under this plan. The
Director's  Plan has been  replaced  by the 2000  Plan with  respect  to all new
options issued.

        On July 8, 1999, in connection with the merger, the Company  established
the Special Purpose Plan of PIA Merchandising  Services, Inc. to provide for the
issuance of substitute options to the holders of outstanding  options granted by
SPAR  Acquisition,  Inc. There were 134,114  options granted at $0.01 per share.
Since July 8, 1999, the Company has not granted any new options under this plan.
During 2004,  21,000  options to purchase  shares of the Company's  common stock
were exercised under this plan. At December 31, 2004,  options to purchase 4,750
shares of the Company's common stock remain outstanding under this plan.

        On December 4, 2000, the Company adopted the 2000 Plan, as the successor
to the 1995 Plan and the Director's Plan with respect to all new options issued.
The 2000 Plan  provides  for the granting of either  incentive  or  nonqualified
stock options to specified employees,  consultants, and directors of the Company
for the purchase of up to 3,600,000 (less those options still  outstanding under
the 1995 Plan or  exercised  after  December 4, 2000 under the 1995  Plan).  The
options have a term of ten years,  except in the case of incentive stock options
granted to greater than 10%  stockholders  for whom the term is five years.  The
exercise  price of  nonqualified  stock options must be equal to at least 85% of
the  fair  market  value  of the  Company's  common  stock  at the date of grant
(although  typically  the options are issued at 100% of the fair market  value),
and the exercise price of incentive  stock options must be equal to at least the
fair market value of the  Company's  common  stock at the date of grant.  During
2004,  options to purchase  476,417  shares of the  Company's  common stock were
granted,  options to purchase  53,302 shares of the Company's  common stock were
exercised and options to purchase  1,345,542  shares of the Company's stock were
voluntarily  surrendered  and  cancelled  under this plan. At December 31, 2004,
options to  purchase  1,251,383  shares of the  Company's  common  stock  remain
outstanding  under this plan and  options to  purchase  1,618,719  shares of the
Company's common stock were available for grant under this plan.

        In 2001,  SGRP adopted its 2001 Employee  Stock  Purchase Plan (the "ESP
Plan"),  which replaced its earlier existing plan, and its 2001 Consultant Stock
Purchase  Plan (the "CSP Plan").  These plans were each  effective as of June 1,
2001.  The ESP Plan allows  employees  of the  Company,  and the CSP Plan allows
employees of the affiliates of the Company (see Item 13 - Certain  Relationships
and Related  Transactions,  below),  to purchase  SGRP's  Common Stock from SGRP
without having to pay any brokerage commissions. On August 8, 2002, SGRP's Board
approved a 15%  discount  for  employee  purchases of Common Stock under the ESP
Plan and  recommended  that its  affiliates  pay a 15% cash bonus for  affiliate
consultant purchases of Common Stock under the CSP Plan.

Compensation of Directors

        The Company's  Compensation  Committee administers the compensation plan
for its outside  Directors as well as the compensation for its executives.  Each
member of the Company's Board who is not otherwise an employee or officer of the
Company or any  subsidiary  or  affiliate  of the Company  (each,  an  "Eligible
Director") is eligible to receive the compensation contemplated under such plan.

        In January  2001,  SGRP adopted the Director  Compensation  Plan for its
outside  Directors,  as  approved  by the  Board,  as  amended  (the  "Directors
Compensation  Plan").  SGRP's Compensation  Committee  administers the Directors
Compensation Plan as well as the compensation for SGRP's executives.

        Under the Directors  Compensation  Plan, each member of SGRP's Board who
is not  otherwise an employee or officer of SGRP or any  subsidiary or affiliate
of SGRP (each, a "Non-Employee Director") is eligible to receive director's fees
of  $30,000  per  annum  (plus an  additional  $5,000  per  annum  for the Audit
Committee  Chairman),  payable  quarterly.  Each  quarterly  installment of such
director's  fees  ($7,500  plus an  additional  $1,250  for the Audit  Committee
Chairman) is paid half in cash and half in stock  options to purchase  shares of
SGRP's common stock.  Prior to May 2004,  SGRP issued such stock options with an
exercise  price of $0.01 per  share.  The  number of option  shares  issued  was
calculated by dividing the amount of compensation to be paid in stock options by
the  closing  stock  price  at the  end  of  each  quarter.  In  May  2004,  the
Compensation  Committee  approved and recommended and the Board adopted a change
in this policy to instead  issue such stock  options for the  purchase of common
stock with an exercise  price  equal to 100% of the fair


                                      -33-
<PAGE>

market value of SGRP's  common stock at the end of each  quarter.  The number of
option  shares to be issued  will be equal to three  times the  quotient  of the
amount of  compensation to be paid in stock options divided by the closing stock
price at the end of each  quarter.  The  Compensation  Committee  and the  Board
determined  that this revised policy more fairly  compensated  the  Non-Employee
Directors.

        In addition  upon  acceptance  of the  directorship,  each  Non-Employee
Director  receives options to purchase 10,000 shares of SGRP's common stock with
an exercise  price equal to 100% of the fair market value of SGRP's common stock
at the date of grant,  options to purchase  10,000  additional  shares of SGRP's
common  stock with an exercise  price equal to 100% of the fair market  value of
SGRP's  common  stock at the date of grant after one year of service and options
to purchase  10,000  additional  shares of SGRP's  common stock with an exercise
price equal to 100% of the fair market value of SGRP's  common stock at the date
of grant for each additional year of service thereafter.

        All of those  options to  Non-Employee  Directors  have been and will be
granted  under the 2000 Plan  described  above,  under  which each member of the
Board is eligible to participate.  Non-Employee Directors will be reimbursed for
all reasonable expenses incurred during the course of their duties.  There is no
additional  compensation for committee  participation,  phone meetings, or other
Board activities.

Severance Agreements

        The  Company has entered  into a Change of Control  Severance  Agreement
with each of Patricia Franco, the Company's Chief Information  Officer, and Kori
G. Belzer, the Company's Chief Operating Officer,  each providing for a lump sum
severance  payment and other  accommodations  from the  Company to the  employee
under certain  circumstances  if, pending or following a change in control,  the
employee leaves for good reason or is terminated other than in a termination for
cause. The payment is equal to the sum of the employee's  monthly salary times a
multiple  equal to 24 months less the number of months by which the  termination
of  employment  followed the change in control plus the maximum bonus that would
have  been paid to the  employee  (not to exceed  25% of the  employee's  annual
salary).

Compensation Committee Interlocks and Insider Participation

        No member of the Board's  Compensation  Committee was at any time during
the year ended December 31, 2004, or at any other time an officer or employee of
the  Company.  No executive  officer or board member of the Company  serves as a
member of the board of directors or compensation  committee of any other entity,
that has one or more  executive  officers  serving as a member of the  Company's
Board or Compensation  Committee,  except for the positions of Messrs. Brown and
Bartels  as  directors  and  officers  of the  Company  (including  each  of its
subsidiaries) and each of its affiliates,  including SMS, SMSI and SIT (see Item
13 - Certain Relationships and Related Transactions, below).




                                      -34-
<PAGE>


Item 12.   Security Ownership of Certain Beneficial Owners and Management.

Security Ownership of Certain Beneficial Owners of the Company

        The following table sets forth certain information  regarding beneficial
ownership of the Company's common stock as of March 15, 2005 by: (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more  than  5% of the  Company's  common  stock;  (ii)  each  of  the  Company's
directors;   (iii)  each  of  the  Named  Executive   Officers  in  the  Summary
Compensation  Table;  and (iv) the Company's  directors and such Named Executive
Officers as a group.  Except as  indicated in the  footnotes to this table,  the
persons named in the table, based on information provided by such persons,  have
sole voting and sole investment power with respect to all shares of common stock
shown as beneficially  owned by them,  subject to community  property laws where
applicable.

<TABLE>
<CAPTION>
                                                                                    Number of Shares
               Title of Class            Name and Address of Beneficial Owner      Beneficially Owned   Percentage

<S>                                  <C>                                              <C>                 <C>
        Common Shares                Robert G. Brown (1)                               8,622,407 (2)       45.5%
        Common Shares                William H. Bartels (1)                            5,549,842 (3)       29.4%
        Common Shares                Robert O. Aders (1)                                 134,543 (4)         *
        Common Shares                Jack W. Partridge (1)                                78,633 (5)         *
        Common Shares                Jerry B. Gilbert (1)                                 71,974 (6)         *
        Common Shares                Lorrence T. Kellar (1)                               68,602 (7)         *
        Common Shares                Charles Cimitile (1)                                107,500 (8)         *
        Common Shares                Kori G. Belzer (1)                                   97,951 (9)         *
        Common Shares                Patricia Franco (1)                                 141,998 (10)        *
        Common Shares                Richard J. Riordan (11)
                                     300 South Grand Avenue, Suite 2900
                                     Los Angeles, California 90071                     1,209,922            6.4%
        Common Shares                Heartland Advisors, Inc. (12)
                                     790 North Milwaukee Street
                                     Milwaukee, Wisconsin 53202                        1,300,000            6.9%
        Common Shares                Executive Officers and Directors                 14,873,450           79.0%
</TABLE>

* Less than 1%

(1)      The  address of such owners is c/o SPAR Group,  Inc.  580 White  Plains
         Road, Tarrytown, New York 10591.
(2)      Includes  1,800,000  shares held by a grantor  trust for the benefit of
         certain  family  members of Robert G. Brown over which Robert G. Brown,
         James R. Brown,  Sr. and  William H.  Bartels  are  trustees.  Includes
         95,747 shares issuable upon exercise of options.
(3)      Excludes  1,800,000  shares held by a grantor  trust for the benefit of
         certain  family  members of Robert G. Brown over which Robert G. Brown,
         James R. Brown,  Sr. and William H.  Bartels are  trustees,  beneficial
         ownership  of which are  disclaimed  by Mr.  Bartels.  Includes  58,999
         shares issuable upon exercise of options.
(4)      Includes 62,889 shares issuable upon exercise of options.
(5)      Includes 67,665 shares issuable upon exercise of options.
(6)      Includes 71,974 shares issuable upon exercise of options.
(7)      Includes 62,454 shares issuable upon exercise of options.
(8)      Includes 107,500 shares issuable upon exercise of options.
(9)      Includes 96,000 shares issuable upon exercise of options.
(10)     Includes 88,500 shares issuable upon exercise of options.
(11)     Share  ownership was confirmed with the Company's  stock transfer agent
         and the principal.
(12)     All  information  regarding share ownership is taken from and furnished
         in reliance upon the Schedule 13G (Amendment No. 9), filed by Heartland
         Advisors,  Inc. with the Securities and Exchange Commission on December
         31, 2004.



                                      -35-
<PAGE>


Equity Compensation Plans

        The following table contains a summary of the number of shares of Common
Stock of the Company to be issued upon the  exercise  of options,  warrants  and
rights outstanding at December 31, 2004, the weighted-average  exercise price of
those  outstanding  options,  warrants and rights,  and the number of additional
shares of Common Stock  remaining  available for future issuance under the plans
as at December 31, 2004.
<TABLE>
<CAPTION>
                                                      Equity Compensation Plan Information
    ----------------------------- -------------------------- ------------------------- -------------------------
                                   Number of securities to       Weighted average        Number of securities
                                   be issued upon exercise      exercise price of      remaining available for
                                   of outstanding options,     outstanding options,       future issuance of
                                   warrants and rights (#)   warrants and rights ($)    options, warrants and
           Plan category                                                                      rights (#)
    ----------------------------- -------------------------- ------------------------- -------------------------

<S>                                       <C>                           <C>                   <C>
    Equity compensation plans             1,291,258                     $1.66                 1,618,719
    approved by security
    holders
    ----------------------------- -------------------------- ------------------------- -------------------------
    Equity compensation plans
    not approved by security
    holders                                      --                        --                        --
    ----------------------------- -------------------------- ------------------------- -------------------------
    Total                                 1,291,258                     $1.66                 1,618,719
    ----------------------------- -------------------------- ------------------------- -------------------------
</TABLE>

Item 13.   Certain Relationships and Related Transactions.

        Mr.  Robert G. Brown,  a Director,  the  Chairman,  President  and Chief
Executive  Officer and a major  stockholder  of the Company,  and Mr. William H.
Bartels,  a Director,  the Vice Chairman and a major stockholder of the Company,
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  field
representatives   (through   its   independent   contractor   field  force)  and
approximately  92%  of  the  Company's  field  management  at a  total  cost  of
approximately  $24.0 million,  $36.0 million,  and $30.5 million for 2004, 2003,
and 2002, 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 field force of approximately 6,300 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  approximately 50 full-time national,
regional and district managers to the Company.  For those services,  the Company
has agreed to reimburse  SMS and SMSI for all of their costs of providing  those
services and to pay SMS and SMSI each a premium equal to 4% of their  respective
costs,  except that for 2004 SMSI agreed to concessions that reduced the premium
paid by approximately  $640,000 for 2004. Total net premiums (4% of SMS and SMSI
costs less 2004  concessions)  paid to SMS and SMSI for services  rendered  were
approximately  $320,000,  $1,350,000,  and $1,100,000 for 2004,  2003, and 2002,
respectively.  The Company has been advised  that Messrs.  Brown and Bartels are
not  paid any  salaries  as  officers  of SMS or SMSI so  there  were no  salary
reimbursements  for them included in such costs or premium.  However,  since SMS
and SMSI are "Subchapter S" corporations, Messrs. Brown and Bartels benefit from
any income of such companies allocated to them.

        SIT  provided  substantially  all of the Internet  computer  programming
services to the Company at a total cost of approximately $1,170,000, $1,610,000,
and  $1,630,000  for  2004,   2003,   and  2002,   respectively.   SIT  provided
approximately 34,000,  47,000, and 46,000 hours of Internet computer programming
services to the Company for 2004, 2003, and 2002, respectively.  Pursuant to the
Amended and Restated  Programming  and Support  Agreement dated as of January 1,
2004, SIT continues to provide programming services to the Company for which the
Company  has agreed to pay SIT  competitive  hourly wage rates for time spent on
Company matters and to reimburse the related  out-of-pocket  expenses of SIT and
its personnel.  The average hourly billing rate was $34.71,  $34.24,  and $35.10
for 2004,  2003,  and 2002,  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  2004.  However,  since  SIT  is a  "Subchapter  S"
corporation,  Messrs.  Brown and Bartels benefit from any income of such company
allocated to them.

        In November  2004 and January  2005,  the Company  entered into separate
operating  lease   agreements   between  SMS  and  the  Company's  wholly  owned
subsidiaries,  SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR
Canada"). Each lease has a 36 month term and has representations,  covenants and
defaults customary for the leasing industry. The SMF lease has a monthly payment
of $20,318 and is for handheld  computers to be used by field  merchandisers  in
the performance of various  merchandising  services in the United States.  These
handheld  computers had an original purchase price of $632,200.  The SPAR Canada
lease has a monthly payment of $3,326 and is for handheld



                                      -36-
<PAGE>

computers  to be used by  field  merchandisers  in the  performance  of  various
merchandising  services  in Canada.  These  handheld  computers  had an original
purchase price of $105,000.

        The  Company's  agreements  with  SMS,  SMSI  and SIT  are  periodically
reviewed by the Company's Audit Committee,  which includes an examination of the
overall  fairness of the  arrangements.  In February 2004,  the Audit  Committee
approved  separate  amended and restated  agreements  with each of SMS, SMSI and
SIT,  effective  as of January  1,  2004.  The  restated  agreements  extend the
contract maturities for four years,  strengthened various contractual provisions
in each  agreement  and  continued  the  basic  economic  terms of the  existing
agreements,  except that the restated agreement with SMSI provides for temporary
concessions to the Company by SMSI totalling approximately $640,000 for 2004.

        In July  1999,  SMF,  SMS  and SIT  entered  into a  Software  Ownership
Agreement with respect to Internet job scheduling  software jointly developed by
such parties. In addition,  SPAR Trademarks,  Inc. ("STM"),  SMS and SIT entered
into  trademark  licensing  agreements  whereby  STM has  granted  non-exclusive
royalty-free  licenses to SIT, SMS and SMSI for their  continued use of the name
"SPAR" and certain other  trademarks  and related  rights  transferred to STM, a
wholly owned subsidiary of the Company.

        Messrs.  Brown and  Bartels  also  collectively  own,  through  SMSI,  a
minority  (less than 5%) equity  interest  in  Affinity  Insurance  Ltd.,  which
provides certain insurance to the Company.

        In  April  2003,   all  previously   outstanding   amounts  due  certain
stockholders under certain notes were paid in full.

        In the  event of any  material  dispute  in the  business  relationships
between the Company and SMS, SMSI, or SIT, it is possible that Messrs.  Brown or
Bartels  may  have one or more  conflicts  of  interest  with  respect  to these
relationships  and such  dispute  could  have a material  adverse  effect on the
Company.

Item 14. Principal Accountant Fees and Services.

        On  October  4,  2004,  Ernst  &  Young  LLP  ("E&Y")  resigned  as  the
independent   registered   public  accounting  firm  for  the  Company  and  its
subsidiaries.  The  resignation was effective upon completion of E&Y's review of
the interim  financial  information for the Company's third fiscal quarter ended
September  30, 2004,  and the filing of the Company's  quarterly  report on Form
10-Q for such period.

        In January 2005, the Company,  with the approval of the Company's  Audit
Committee,  appointed Rehmann Robson  ("Rehmann") as its independent  registered
public accounting firm to audit the financial  statements of the Company for its
year ending December 31, 2004.

        The  Company  and its  subsidiaries  did not  engage  Rehmann  or E&Y to
provide advice regarding financial information systems design or implementation,
but did engage E&Y for tax consulting  services  related to the PHI/SPGI ESOP in
2003  (for  which  E&Y was paid  $3,778),  due  diligence  services  for the IMS
acquisition during 2003 (for which E&Y was paid $14,334) and for tax services in
2003 (for which E&Y was paid $2,295). No other non-audit services were performed
by  Rehmann  or E&Y in 2004 or  2003.  Since  2003,  as  required  by law,  each
non-audit  service performed by the Company's auditor either (i) was approved in
advance on a case-by-case  basis by the Company's Audit  Committee,  or (ii) fit
within a pre-approved  "basket" of non-audit  services of limited amount,  scope
and  duration  established  in  advance by the  Company's  Audit  Committee.  In
connection  with the standards  for  independence  of the Company's  independent
public accountants  promulgated by the Securities and Exchange  Commission,  the
Audit  Committee  considers  (among other things)  whether the provision of such
non-audit  services would be compatible  with  maintaining  the  independence of
Rehmann or E&Y.

Audit Fees

        During the  Company's  fiscal  year ended  December  31,  2004 and 2003,
respectively,  fees billed by E&Y for all audit services rendered to the Company
and its subsidiaries  were $100,203 and $179,362,  respectively.  Audit services
principally include fees for the Company's audits and 10-Q filing reviews. Since
2003,  as required  by law,  the choice of the  Company's  auditor and the audit
services to be  performed by it have been  approved in advance by the  Company's
Audit Committee.



                                      -37-
<PAGE>


                                     PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) 1. Index to Financial Statements filed as part of this report:

       Reports of Independent Registered Public Accounting Firms
                                                  - Rehmann Robson.         F-1

                                                  - Ernst & Young LLP.      F-2

       Consolidated Balance Sheets as of December 31, 2004, and
        December 31, 2003.                                                  F-3

       Consolidated Statements of Operations for the years ended
       December 31, 2004, December 31, 2003, and December 31, 2002.         F-4

       Consolidated Statements of Stockholders' Equity for the years
       ended December 31, 2004, December 31, 2003, and December 31, 2002.   F-5

       Consolidated Statements of Cash Flows for the years ended
       December 31, 2004, December 31, 2003, and December 31, 2002.         F-6

       Notes to Financial Statements.                                       F-7

2.     Financial Statement Schedules.

       Schedule II - Valuation and Qualifying Accounts for the three
        years ended December 31, 2004.                                      F-30

3.     Exhibits.

        Exhibit
        Number            Description
        ------            -----------

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

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

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

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

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

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



                                      -38-
<PAGE>

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

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

         10.1     2000 Stock Option Plan, as amended, (incorporated by reference
                  to the Company's  Proxy  Statement  for the  Company's  Annual
                  meeting held on August 2, 2001,  as filed with the SEC on July
                  12, 2001).

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

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

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

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

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

         10.7     Trademark  License  Agreement dated as of July 8, 1999, by and
                  between SPAR Marketing  Services,  Inc., and SPAR  Trademarks,
                  Inc. (incorporated by reference to the Company's Form 10-K for
                  the fiscal year ended December 31, 2002).

         10.8     Trademark  License  Agreement dated as of July 8, 1999, by and
                  between  SPAR  Infotech,  Inc.,  and  SPAR  Trademarks,   Inc.
                  (incorporated  by reference to the Company's Form 10-K for the
                  fiscal year ended December 31, 2002).

         10.9     Stock  Purchase and Sale  Agreement  by and among  Performance
                  Holdings,  Inc. and SPAR Incentive Marketing,  Inc., effective
                  as  of  June  30,  2002  (incorporated  by  reference  to  the
                  Company's Form 10-Q for the quarter ended June 30, 2002).

         10.10    Revolving Credit, Guaranty and Security Agreement by and among
                  Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
                  effective  as of June 30, 2002  (incorporated  by reference to
                  the Company's Form 10-Q for the quarter ended June 30, 2002).

         10.11    Term  Loan,  Guaranty  and  Security  Agreement  by and  among
                  Performance Holdings, Inc. and SPAR Incentive Marketing, Inc.,
                  effective  as of June 30, 2002  (incorporated  by reference to
                  the Company's Form 10-Q for the quarter ended June 30, 2002).

         10.12    Promissory  Note in the  principal  amount of  $764,271.00  by
                  STIMULYS,  Inc., in favor of SPAR Incentive  Marketing,  Inc.,
                  dated as of September 10, 2004, as filed herewith.



                                      -39-
<PAGE>

         10.13    Payoff and Release Letter by and between  STIMULYS,  Inc., and
                  SPAR  Incentive  Marketing,  Inc.,  dated as of September  10,
                  2004, as filed herewith.

         10.14    Sales  Proceeds  Agreement by and between  STIMULYS,  Inc. and
                  SPAR  Incentive  Marketing,  Inc.,  dated as of September  10,
                  2004, as filed herewith.

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

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

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

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

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

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

         10.21    Waiver to the Third Amended and Restated  Revolving Credit and
                  Security Agreement among Webster Business Credit  Corporation,
                  SPAR Group,  Inc., and certain of its subsidiaries dated as of
                  March 31, 2004, as filed herewith.

         10.22    Consent,  Joinder, Release and Amendment Agreement dated as of
                  October  31,  2003,  by and among  the  Lender,  the  Existing
                  Borrowers  and SPAR All Store  Marketing,  Inc., as a Borrower
                  (incorporated  by reference to the Company's Form 10-K for the
                  fiscal year ended December 31, 2003).

         10.23    Change in Control Severance  Agreement between Kori Belzer and
                  SPAR Group, Inc., dated as of August 12, 2004 (incorporated by
                  reference  to the  Company's  quarterly  report of the quarter
                  ended June 30, 2004, as filed on August 23, 2004).

         10.24    Change in Control Severance  Agreement between Patricia Franco
                  and  SPAR   Group,   Inc.,   dated  as  of  August  12,   2004
                  (incorporated  by reference to the Company's  quarterly report
                  of the  quarter  ended June 30,  2004,  as filed on August 23,
                  2004).



                                      -40-
<PAGE>

         10.25    Master Lease Agreement by and between SPAR Marketing Services,
                  Inc. and SPAR Marketing Force,  Inc. dated as of November 2004
                  relating to lease of  handheld  computer  equipment,  as filed
                  herewith.

         10.26    Master Lease Agreement by and between SPAR Marketing Services,
                  Inc. and SPAR Canada Company dated as of January 2005 relating
                  to lease of handheld computer equipment, as filed herewith.

         10.27    Joint  Venture  Agreement  dated as of March 26, 2004,  by and
                  between Solutions  Integrated Marketing Services Ltd. and SPAR
                  Group International, Inc. as filed herewith.

         10.28    Joint Venture  Shareholders  Agreement between  Friedshelf 401
                  (Proprietary)  Limited, SPAR Group International,  Inc., Derek
                  O'Brien,  Brian  Mason,  SMD  Meridian  CC,  Meridian  Sales &
                  Mnrechandisign  (Western Cape) CC, Retail  Consumer  Marketing
                  CC,  Merhold   Holding  Trust  in  respect  of  SGRP  Meridian
                  (Proprietary)  Limited,  dated as of June 25,  2004,  as filed
                  herewith.

         10.29    Joint  Venture  Agreement  dated as of July 21,  2003,  by and
                  between CEO  Produksiyon  Tanitim ve Arastirma  Hizmetleri Ltd
                  Sti and SPAR Group International, Inc., as filed herewith.

         10.30    Joint  Venture  Agreement  dated  as of  May 1,  2001,  by and
                  between  Paltac  Corporation  and SPAR Group,  Inc.,  as filed
                  herewith.

         10.31    Agreement  on  Amendment  dated as of August 1,  2004,  by and
                  between  SPAR Group,  Inc. and SPAR FM Japan,  Inc.,  as filed
                  herewith.

         10.32    Joint Venture  Agreement  dated as of January 26, 2005, by and
                  between   Best  Mark   Investments   Holdings   Ltd  and  SPAR
                  International Ltd. as filed herewith.

         10.33    Joint Venture  Agreement dated as of December 14, 2004, by and
                  between Field Insights  S.R.L.  and SPAR Group  International,
                  Inc., as filed herewith.

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

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

         21.1     List of Subsidiaries.

         23.1     Consent of Rehmann Robson.

         23.2     Consent of Ernst & Young LLP.

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

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

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



                                      -41-
<PAGE>

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

(b)     Reports on Form 8-K.

        Form  8-K -  Changes  in  Registrant's  Certifying  Accountant  filed on
        October 8, 2004,  respecting the resignation of Ernst & Young LLP as the
        Company's Independent Auditors.

        Form 8-K -  Results  of  Operations  and  Financial  Condition  filed on
        November 12, 2004,  attaching press release respecting financial results
        for the third quarter ended September 30, 2004.

        Form 8-K -  Unscheduled  Material  Events  filed  on  February  4,  2005
        respecting,  appointment of Rehmann Robson as the Company's  Independent
        Auditors.





                                      -42-
<PAGE>

SIGNATURES

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


                                    SPAR Group, Inc.

                                    By:   /s/ Robert G. Brown
                                          --------------------------------------
                                          Robert G. Brown
                                          President, Chief Executive Officer and
                                          Chairman of the Board

                                    Date: April 12, 2005

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

SIGNATURE                           TITLE

/s/ Robert G. Brown          President, Chief Executive Officer, Director,
-----------------------      and Chairman of the Board
    Robert G. Brown
Date: April 12, 2005


/s/ William H. Bartels       Vice Chairman and Director
-----------------------
    William H. Bartels
Date: April 12, 2005

/s/ Robert O. Aders          Director
-----------------------
    Robert O. Aders
Date: April 12, 2005


/s/ Jack W. Partridge        Director
-----------------------
    Jack W. Partridge
Date: April 12, 2005


/s/ Jerry B. Gilbert         Director
-----------------------
    Jerry B. Gilbert
Date: April 12, 2005


/s/ Lorrence T. Kellar       Director
-----------------------
    Lorrence T. Kellar
Date: April 12, 2005

/s/ Charles Cimitile         Chief Financial Officer, Treasurer and
-----------------------      Secretary (Principal Financial and
    Charles Cimitile         Accounting Officer)
Date: April 12, 2005





                                      -43-
<PAGE>


                   Report of Registered Public Accounting Firm


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

We have  audited  the  consolidated  balance  sheet  of  SPAR  Group,  Inc.  and
Subsidiaries as of December 31, 2004, and the related consolidated statements of
operations,  stockholders'  equity,  and cash flows for the year then ended. Our
audit also included the financial  statement  schedule (2004  information  only)
listed in the Index at Item 15(a). These consolidated  financial  statements and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these consolidated financial statements and schedule
(2004 information only) based on our audit.

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

In our  opinion,  based on our  audit,  the  consolidated  financial  statements
referred to above present fairly,  in all material  respects,  the  consolidated
financial position of SPAR Group, Inc. and Subsidiaries as of December 31, 2004,
and the  consolidated  results of their  operations and their cash flows for the
year  then  ended,  in  conformity  with  U.S.  generally  accepted   accounting
principles.   Also,  in  our  opinion,  the  related  financial  schedule  (2004
information  only),  when considered in relation to the  consolidated  financial
statements  taken as a whole,  presents  fairly in all  material  respects,  the
information set forth therein.


                               /s/ Rehmann Robson

Troy, Michigan
February 28, 2005



                                      F-1
<PAGE>


                   Report of Registered Public Accounting Firm


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

We have  audited  the  consolidated  balance  sheet  of  SPAR  Group,  Inc.  and
Subsidiaries, as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 2003. Our audits also included the financial statement
schedule  listed  in the  Index  at Item  15(a).  These  consolidated  financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and schedule based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of SPAR
Group, Inc. and Subsidiaries at December 31, 2003, and the consolidated  results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2003, in conformity with U.S. generally  accepted  accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered  in  relation to the  consolidated  financial  statements  taken as a
whole,  present  fairly  in all  material  respects  the  information  set forth
therein.

As discussed in Note 2, the Company  adopted  Statement of Accounting  Standards
No. 142 effective January 1, 2002.





                                              /s/ Ernst & Young LLP


Minneapolis, Minnesota
February 13, 2004






                                      F-2
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

                           Consolidated Balance Sheets
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                              December 31,
                                                               --------------------------------------------
                                                                       2004                   2003
                                                               ----------------------  --------------------

<S>                                                            <C>                     <C>
 Assets
 Current assets:
    Cash and cash equivalents                                  $        887            $         24
    Accounts receivable, net                                         11,307                  13,942
    Prepaid expenses and other current assets                           657                     658
    Deferred income taxes                                                 -                   1,305
                                                               ----------------------  --------------------
 Total current assets                                                12,851                  15,929

 Property and equipment, net                                          1,536                   2,099
 Goodwill                                                               798                   8,749
 Deferred income taxes                                                    -                     434
 Other assets                                                           636                     926
                                                               ----------------------  --------------------
 Total assets                                                  $     15,821            $     28,137
                                                               ======================  ====================

 Liabilities and stockholders' equity
 Current liabilities:
    Accounts payable                                           $      2,158            $      1,373
    Accrued expenses and other current liabilities                    2,391                   4,081
    Accrued expenses due to affiliates                                  987                   1,091
    Restructuring charges                                               250                     685
    Customer deposits                                                 1,147                     530
    Lines of credit                                                   4,956                   4,084
                                                               ----------------------  --------------------
 Total current liabilities                                           11,889                  11,844

 Other long-term liabilities                                             12                     270
 Minority interest                                                      206                       -

                                                               ----------------------  --------------------
 Total liabilities                                                   12,107                  12,114

 Commitments and contingencies (Note - 7)

 Stockholders' equity:
    Preferred stock, $.01 par value:
      Authorized shares - 3,000,000
      Issued and outstanding shares - none                                -                       -
    Common stock, $.01 par value:
      Authorized shares - 47,000,000
      Issued and outstanding shares -
        18,858,972 - 2004 and 2003                                      189                     189
    Treasury stock                                                     (108)                   (384)
    Accumulated other comprehensive loss                                (86)                     (7)
    Additional paid-in capital                                       11,011                  11,249
    Accumulated (deficit) retained earnings                          (7,292)                  4,976
                                                               ----------------------  --------------------
 Total stockholders' equity                                           3,714                  16,023
                                                               ----------------------  --------------------
 Total liabilities and stockholders' equity                    $     15,821            $     28,137
                                                               ======================  ====================
</TABLE>

See accompanying notes.



                                      F-3
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

                      Consolidated Statements of Operations
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                      ------------------------------------------------------
                                                             2004             2003              2002
                                                      ------------------------------------------------------

<S>                                                   <C>               <C>              <C>
Net revenues                                          $      51,370     $      64,859    $      69,612
Cost of revenues                                             33,644            42,338           40,331
                                                      ------------------------------------------------------
Gross profit                                                 17,726            22,521           29,281

Selling, general and administrative expenses                 20,222            20,967           18,804
Impairment charges                                            8,141                 -                -
Depreciation and amortization                                 1,399             1,529            1,844
                                                      ------------------------------------------------------
Operating (loss) income                                     (12,036)               25            8,633

Interest expense                                                220               269              363
Other (income) expense                                         (754)              237              (26)
                                                      ------------------------------------------------------
(Loss) income before provision for income taxes and         (11,502)             (481)           8,296
minority interest
Provision for income taxes                                      853                58            2,998
                                                      ------------------------------------------------------
Net (loss) income before minority interest                  (12,355)             (539)           5,298
Minority interest                                                87                 -                -
                                                      ------------------------------------------------------
Net (loss) income                                     $     (12,268)    $        (539)   $       5,298
                                                      ======================================================

Basic/diluted net (loss) income per common share:

  Net (loss) income - basic/diluted                   $       (0.65)    $       (0.03)   $        0.28
                                                      ======================================================

Weighted average common shares - basic                       18,859            18,855           18,761
                                                      ======================================================

Weighted average common shares - diluted                     18,859            18,855           19,148
                                                      ======================================================
</TABLE>

See accompanying notes.



                                      F-4
<PAGE>


                        SPAR Group, Inc. and Subsidiaries

                 Consolidated Statement of Stockholders' Equity
                                 (In thousands)

<TABLE>
<CAPTION>
                                                      Common Stock
                                          -----------------------------------                           Accumulated
                                                                                Additional                 Other           Total
                                                                    Treasury     Paid-In     Earnings  Comprehensive   Stockholders'
                                             Shares      Amount      Stock       Capital     Retained      (Loss)         Equity
                                          ------------------------------------------------------------------------------------------

<S>                                          <C>      <C>          <C>          <C>          <C>          <C>         <C>
Balance at January 31, 2002                  18,583   $      186   $       -    $  10,531    $       -    $     -     $    10,934
                                                                           -                       217
   Stock options exercised and employee
     stock purchase plan purchases              242            2           -          388            -                        390
   Purchase of treasury stock                     -            -         (30)           -            -                        (30)
   Net income                                     -            -           -            -        5,298                      5,298
                                          ------------------------------------------------------------------------------------------
Balance at December 31, 2002                 18,825          188         (30)      10,919        5,515          -          16,592

   Stock options exercised and employee
     stock purchase plan purchases               34            1         570          (86)           -          -             485
   Issuance of stock options to non-
     employees for services                       -            -           -          416            -          -             416
   Purchase of treasury stock                     -            -        (924)           -            -          -            (924)
   Comprehensive loss:
   Foreign currency translation loss                                                                           (7)             (7)
   Net loss                                                                                       (539)                      (539)
                                                                                                                      --------------
Comprehensive loss                                                                                                           (546)
                                          ------------------------------------------------------------------------------------------
Balance at December 31, 2003                 18,859          189        (384)      11,249        4,976         (7)         16,023

   Stock options exercised and employee
     stock purchase plan purchases                -            -         276         (316)           -          -             (40)
   Issuance of stock options to non-
     employees for services                       -            -           -           78            -          -              78
   Comprehensive loss:
   Foreign currency translation loss                                                                          (79)            (79)
   Net loss                                                                                    (12,268)                   (12,268)
                                                                                                                      --------------
Comprehensive loss                                                                                                        (12,347)
                                          ------------------------------------------------------------------------------------------
Balance at December 31, 2004                 18,859   $      189   $    (108)   $  11,011     $ (7,292)   $   (86)    $     3,714
                                          ==========================================================================================
</TABLE>


See accompanying notes.



                                      F-5
<PAGE>


                        SPAR Group, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                              ------------------------------------------------------
                                                                     2004             2003              2002
                                                              ------------------------------------------------------
<S>                                                             <C>                <C>              <C>
 Operating activities
 Net (loss) income                                              $  (12,268)        $    (539)       $   5,298
 Adjustments to reconcile net (loss) income to net cash
    provided by operating activities:
      Impairment charges                                             8,141                 -                -
      Minority interest earnings in subsidiaries                       (87)                -                -
      Share of loss in joint venture                                     -               270                -
      Deferred tax asset adjustments                                   710              (131)           2,022
      Depreciation                                                   1,399             1,529            1,844
      Issuance of stock options for service                             78               416                -

      Changes in operating assets and liabilities:
        Accounts receivable                                          2,635             2,516            4,686
        Prepaid expenses and other assets                             (126)             (330)            (354)
        Accounts payable, accrued expenses, other current
          liabilities and customer deposits                            756               422             (538)
        Accrued expenses due to affiliates                            (104)              133              347
        Restructuring charges                                          250              (904)            (593)
                                                              ------------------------------------------------------
 Net cash provided by operating activities                           1,384             3,382           12,712

 Investing activities
 Purchases of property and equipment                                (1,260)           (1,456)          (1,172)
 Deposit related to acquisition                                        350              (350)               -
 Acquisition of businesses                                            (399)           (1,091)               -
                                                              ------------------------------------------------------
 Net cash used in investing activities                              (1,309)           (2,897)          (1,172)

 Financing activities
 Net borrowings (payments) on lines of credit                          872             3,936          (11,139)
 Other long-term liabilities                                            35                 -              (57)
 Proceeds from employee stock purchase plan and exercised
    options                                                            (40)              485              390
 Payments to certain stockholders                                        -            (3,951)            (704)
 Purchase of treasury stock                                              -              (924)             (30)
                                                              ------------------------------------------------------
 Net cash provided by (used in) financing activities                   867              (454)         (11,540)

 Translation loss                                                      (79)               (7)               -

 Net change in cash                                                    863                24                -
 Cash at beginning of period                                            24                 -                -
                                                              ------------------------------------------------------
 Cash at end of period                                        $        887         $      24       $        -
                                                              ======================================================

 Supplemental disclosure of cash flows information
 Interest paid                                                $        180         $     241       $      686
                                                              ======================================================

 Income taxes paid                                            $          86        $     578       $      200
                                                              ======================================================
</TABLE>
See accompanying notes.



                                      F-6
<PAGE>


                        SPAR Group, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                December 31, 2004


1. Business and Organization

The SPAR Group,  Inc., a Delaware  corporation  ("SGRP"),  and its  subsidiaries
(together  with SGRP,  the "SPAR  Group" or the  "Company"),  is a  supplier  of
merchandising  and other  marketing  services  throughout  the United States and
internationally.  The  Company  also  provides  database  marketing,  technology
services, teleservices and marketing research.

SPAR  Acquisition,  Inc., and its  subsidiaries  (the "SPAR  Companies") are the
original  predecessor  of the Company and were founded in 1967. On July 8, 1999,
SGRP completed a reverse merger with the SPAR Companies (the "PIA Acquisition"),
and then changed its name to SPAR Group, Inc., from PIA Merchandising  Services,
Inc. (prior to such merger,  "PIA").  Pursuant to the PIA Acquisition,  the SPAR
Companies were deemed to have "acquired" PIA and its  subsidiaries  prior to the
PIA Acquisition  (the "PIA  Companies"),  which was treated as a purchase of the
PIA Companies for accounting purposes, with the books and records of the Company
being  adjusted  to  reflect  the  historical  operating  results  of  the  SPAR
Companies.  In 2002,  the Company sold its Incentive  Marketing  Division,  SPAR
Performance Group, Inc. ("SPGI").

The Company's  continuing  operations  are now divided into two  divisions:  the
Domestic  Merchandising  Services Division and the  International  Merchandising
Services  Division.   The  Domestic  Merchandising  Services  Division  provides
merchandising  services,  in-store  product  demonstrations,  product  sampling,
database marketing,  technology services, teleservices and marketing research to
manufacturers  and  retailers  in the United  States.  The various  services are
primarily  performed in mass merchandisers,  drug store chains,  convenience and
grocery stores. The International  Merchandising Services Division,  established
in July 2000, currently provides  merchandising  services through a wholly owned
subsidiary in Canada,  through 51% owned joint venture  subsidiaries  in Turkey,
South  Africa,  India and Romania and through 50% owned joint  ventures in Japan
and  China.  The  Company  continues  to focus on  expanding  its  merchandising
services business throughout the world.

Domestic Merchandising Services Division

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

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


                                      F-7
<PAGE>


                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


1. Business and Organization (continued)

International Merchandising Services Division

In July 2000, the Company established its International  Merchandising  Services
Division,  through a wholly owned  subsidiary,  SPAR Group  International,  Inc.
("SGI"), to focus on expanding its merchandising  services business worldwide as
follows:

May  2001,  the  Company  entered  Japan  through  a  50%  owned  joint  venture
headquartered in Osaka.

June 2003, the Company entered Canada by acquiring an existing  business through
its wholly owned Canadian subsidiary, headquartered in Toronto.

July  2003,  the  Company  entered  Turkey  through  a 51% owned  joint  venture
subsidiary headquartered in Istanbul.

April 2004,  the Company  entered South Africa through a 51% owned joint venture
subsidiary headquartered in Durban.

April  2004,  the  Company  entered  India  through  a 51% owned  joint  venture
subsidiary headquartered in New Delhi.

December  2004,  the Company  established a 51% owned joint  venture  subsidiary
headquartered in Bucharest, Romania.

In February 2005, the Company  announced the  establishment of a 50% owned joint
venture headquartered in Hong Kong, China.

Discontinued Operations - Incentive Marketing Division

In the fourth  quarter of 2001,  the  Company  made the  decision  to divest its
interest in SPGI.

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

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

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



                                      F-8
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


1. Business and Organization (continued)

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

On September  10, 2004,  in  consideration  for a new  Promissory  Note totaling
$764,271 (which  represented the amount  outstanding  under the SPGI Revolver at
that time) and in the event of a change in control of  STIMULYS,  a share in the
net proceeds  resulting from such change in control,  the Company terminated the
SPGI Revolver and the Term Loans.  SPAR also  released its security  interest in
any collateral  previously pledged by STIMULYS.  The first payment due under the
Promissory  Note was received on October 29, 2004.  Due to the  collection  risk
associated  with the Promissory  Note, the Company has established a reserve for
the  remaining  amount  due,  including  interest of  approximately  $355,000 at
December 31, 2004.

As a result of the termination of the SPGI Revolver,  the reserve for collection
of advances and accrued interest under the SPGI Revolver previously  established
by the Company  totaling  approximately  $984,000  was no longer  required.  The
release of this  reserve,  net of the new reserve  required  for the  Promissory
Note, resulted in Other Income totaling approximately $640,000 for 2004.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The  Company  consolidates  its  100%  owned  subsidiaries.   The  Company  also
consolidates  its 51% owned joint venture  subsidiaries  and its 50% owned joint
ventures  where the  Company is the  primary  beneficiary  because  the  Company
believes  this  presentation  is  fairer  and  more  meaningful.  Rule  3A-02 of
Regulation  S-X,  Consolidated  Financial  Statements of the  Registrant and its
Subsidiaries,  states  that  consolidated  statements  are  presumed  to be more
meaningful, that majority owned subsidiaries (more than 50%) generally should be
consolidated,   and  that  circumstances  may  require  consolidation  of  other
subsidiaries  to achieve a fairer  presentation  of its financial  condition and
results. In addition, the Company has determined that under Financial Accounting
Standards   Board   Interpretation   Number  46,  as  revised   December   2003,
Consolidation of Variable  Interest  Entities ("FIN 46(R)"),  the Company is the
primary  beneficiary  of its 51% owned joint  venture  subsidiaries  and its 50%
owned joint ventures, which accordingly requires consolidation of those entities
into the Company's financial statements.  All significant  intercompany accounts
and transactions have been eliminated.

In 2004, due to the amendment of a royalty agreement between the Company and its
50% owned Japanese joint venture,  the Company has determined that in accordance
with FIN 46(R) it is the primary beneficiary of the Japanese joint venture,  and
has consolidated the Japanese  financial results for 2004 in accordance with the
provisions  of FIN 46(R).  The  Japanese  joint  venture's  fiscal year ended on
September 30, 2004 and accordingly  its financial  statements were audited as of
that date. In connection with the  consolidation the Company began reporting the
Japanese  joint  venture's  financial  results as of and for the  period  ending
September 30, 2004. Therefore,  for 2004, the Company's  consolidated  financial
statements  only include the Japanese joint venture  financial  results for nine
months ended  September 30, 2004. In 2004, the Japanese  joint venture  recorded
revenue of approximately $2.6 million,  total assets of approximately  $822,000,
total  liabilities of approximately  $1.2 million and a deficit of approximately
$445,000. In 2003 and 2002, prior



                                      F-9
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

2. Summary of Significant Accounting Policies (continued)

to the amendment of the royalty agreement,  the investment in the Japanese joint
venture was  accounted  for using the equity method based upon the Company's 50%
ownership.

At  December  31,   2004,   international   assets   totaled  $2.8  million  and
international liabilities totaled $3.8 million. For 2004, international revenues
totaled $8.2 million and the Company's share of the net losses was approximately
$500,000.

Cash Equivalents

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

Revenue Recognition

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

Unbilled Accounts Receivable

Unbilled accounts receivable represent services performed but not billed.

Doubtful Accounts, Sales Allowances and Credit Risks

The Company  continually  monitors the validity of its accounts receivable based
upon current customer 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 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 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 $761,000 and $515,000
at December 31, 2004 and 2003, respectively. The Company also recorded a reserve
for sales allowances for potential  customer credits of $448,000 at December 31,
2003.  Bad debt and  sales  allowance  expenses  were  $366,000,  $825,000,  and
$262,000 in 2004, 2003, and 2002, respectively.

Property and Equipment

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



                                      F-10
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


2. Summary of Significant Accounting Policies (continued)

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,  payroll
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 $559,000,  $1,004,000,  and $772,000 of costs related to
software developed for internal use in 2004, 2003, and 2002, respectively.

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

Impairment of Long-Lived Assets

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

Fair Value of Financial Instruments

The  Company's  balance  sheets  include the  following  financial  instruments:
accounts  receivable,  accounts  payable  and a lines  of  credit.  The  Company
considers  the  carrying  amounts  of  current  assets  and  liabilities  in the
financial   statements  to  approximate  the  fair  value  for  these  financial
instruments,  because of the relatively short period of time between origination
of the  instruments  and their  expected  realization  or payment.  The carrying
amount of the lines of credit  approximates  fair value because the  obligations
bear  interest at a floating  rate.  The carrying  amount of  long-term  debt to
certain stockholders  approximated fair value because the then current effective
interest  rates  reflected the market rate for unsecured debt with similar terms
and remaining maturities.

Excess Cash

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

Major Customers

        One customer accounted for 14%, 8%, and 6% of the Company's net revenues
for the years ended  December  31,  2004,  2003,  and 2002,  respectively.  This
customer  also  accounted  for  approximately  29%,  13%,  and  4%  of  accounts
receivable at December 31, 2004, 2003, and 2002, respectively.

In addition, approximately 16%, 17%, and 24% of net revenues for the years ended
December 31, 2004,  2003, and 2002,  respectively,  resulted from  merchandising
services  performed for  manufacturers  and others in stores  operated by Kmart.
These customers also accounted for approximately  22% of accounts  receivable at
December 31, 2004. While the Company's  customers and the resultant  contractual



                                      F-11
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


2. Summary of Significant Accounting Policies (continued)

relationships  are with  various  manufacturers  and not  Kmart,  a  significant
reduction of this  retailer's  stores or cessation of this  retailer's  business
would negatively impact the Company.

Another  customer,  a division of a major retailer,  accounted for 26%, 30%, and
26% of the Company's net revenues for the years ended  December 31, 2004,  2003,
and 2002, respectively.  This customer also accounted for approximately 4%, 30%,
and  43%  of  accounts   receivable  at  December  31,  2004,  2003,  and  2002,
respectively. On August 2, 2004, this customer was sold by its parent.

As discussed above,  the Company does a significant  amount of business with one
customer and  performs a  significant  amount of services in Kmart.  The loss of
this customer or the loss of Kmart  related  business and the failure to attract
new large customers,  could  significantly  decrease the Company's  revenues and
such decreased  revenues  could have a material  adverse effect on the Company's
business, results of operations and financial condition.

Foreign Currency Rate Fluctuations

The Company has foreign  currency  exposure  associated  with its  international
wholly owned  subsidiaries,  51% owned joint venture  subsidiaries and 50% owned
joint  ventures.  In 2004,  these  exposures are primarily  concentrated  in the
Canadian  dollar,  South  African rand and  Japanese  yen. At December 31, 2004,
international assets totaled $2.8 million and international  liabilities totaled
$3.8  million.  For 2004,  international  revenues  totaled $8.2 million and the
Company's share of the net losses was approximately $500,000.

Interest Rate Fluctuations

At December 31, 2004 the Company's outstanding debt totaled $5.0 million,  which
consisted   of  domestic   variable-rate   (6.0%)  debt  of  $4.1   million  and
international  variable rate (1.4%) debt of $0.9 million.  Based on 2004 average
outstanding borrowings under variable-rate debt, a one-percentage point increase
in interest rates would negatively impact annual pre-tax earnings and cash flows
by approximately $50,000.

Income Taxes

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

Stock-Based Compensation

Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based  Compensation,  requires disclosure of the fair value method of accounting
for stock  options and other equity  instruments.  Under the fair value  method,
compensation  cost is  measured at the grant date based on the fair value of the
award and is recognized  over the service  period,  which is usually the vesting
period.  The  Company  has  chosen,  under the  provisions  of SFAS No.  123, to
continue to account  for  employee  stock-based



                                      F-12
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


2. Summary of Significant Accounting Policies (continued)

transactions under Accounting  Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees.

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

<TABLE>
<CAPTION>
                                                                     Twelve Months Ended December 31,
                                                               ----------------------------------------------
                                                                    2004           2003           2002
                                                               ----------------------------------------------

<S>                                                            <C>               <C>            <C>
    Net (loss) income, as reported                             $    (12,268)     $    (539)     $  5,298
    Stock based employee compensation expense
      under the fair market value method                                454          1,005          1,844
                                                               ----------------------------------------------
    Pro forma net (loss) income                                $    (12,722)     $  (1,544)     $  3,454

    Basic and diluted net (loss) income per share, as
      reported                                                 $      (0.65)     $   (0.03)     $    0.28
    Basic and diluted net (loss) income per share, pro forma   $      (0.67)     $   (0.08)     $    0.18
</TABLE>


The pro forma effect on net (loss) income is not representative of the pro forma
effect on net  (loss)  income in future  years  because  the  options  vest over
several years and additional awards may be made in the future.

The fair  value of each  option  grant is  estimated  based on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:  dividend yield of 0% for all years;  volatility factor of expected
market price of common stock of 150%,  154%, and 172% for 2004,  2003, and 2002,
respectively;  risk-free interest rate of 4.23%,  4.27%, and 4.03%; and expected
lives of six years.

Net (Loss) Income Per Share

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

Use of Estimates

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



                                      F-13
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


2. Summary of Significant Accounting Policies (continued)

Goodwill

The  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 142,
Goodwill and Other Intangible  Assets, in the first quarter of 2002.  Therefore,
goodwill is no longer  amortized  but is subject to annual  impairment  tests in
accordance  with that  Statement.  At June 30, 2004,  the Company  performed the
required  impairment test discussed in FAS 142. The Company  calculated the fair
value of each  business  unit for which  goodwill  was  recorded to determine if
there was an impairment. The fair value of each unit was based upon the estimate
of the  discounted  cash flow  generated by the  respective  business unit. As a
result of these  calculations,  it was determined that there were impairments to
the goodwill associated with the PIA Acquisition on July 8, 1999 and acquisition
of the  Company's  Canadian  subsidiary  in June 2003.  Therefore,  the  Company
recorded  an  impairment  charge of  approximately  $8.4  million  (see Note 3 -
Impairment Charges).

Changes to goodwill for the years ended  December 31, 2004,  2003, and 2002 were
as follows:

<TABLE>
<CAPTION>
                                                        2004               2003                2002
                                                   ---------------    ----------------    ----------------

<S>                                                <C>                <C>                 <C>
Beginning of the year                              $      8,749       $       7,858       $       8,357
Impairment charges                                       (8,350)                  -                   -
Changes in deferred tax assets  related to use
   of PIA net operating losses acquired                       -                   -                (499)
Adjustment to merger  related and  restructure
   liabilities                                                -                 (89)                  -
Acquisitions                                                399                 980                   -
                                                   ---------------    ----------------    ----------------
End of the year                                    $        798       $       8,749       $       7,858
                                                   ===============    ================    ================
</TABLE>

Translation of Foreign Currencies

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

Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS 123 (revised 2004),  Share-Based Payment,
(SFAS 123R).  SFAS 123R  addresses the accounting  for  share-based  payments to
employees,  including grants of employee stock options.  Under the new standard,
companies  will no  longer  be  able to  account  for  share-based  compensation
transactions  using the intrinsic  method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees.  Instead, the Company will be required
to account for such  transactions  using a fair-value  method and  recognize the
expense in the consolidated statement of income. SFAS 123R will be effective for
periods  beginning  after June 15, 2005 and allows,  but does not  require,  the
Company  to  restate  the full  fiscal  year of 2005 to  reflect  the  impact of
expensing  share-based  payments  under  SFAS  123R.  The  Company  has  not yet
determined  which fair-value  method and transitional  provision it will follow.
See Note 2 - Stock-Based Compensation for the pro forma impact on net income and
net income per share from calculating  stock-based  compensation costs under the
fair value alternative of SFAS


                                      F-14
<PAGE>


                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


2. Summary of Significant Accounting Policies (continued)

123.  However,  the  calculation of compensation  cost for  share-based  payment
transactions  after the  effective  date of SFAS 123R may be different  from the
calculation of compensation  cost under SFAS 123, but such  differences have not
yet been quantified.

Reclassifications

Certain   reclassifications  have  been  made  to  the  prior  years'  financial
statements to conform to the 2004 presentation.

3. Impairment Charges

Goodwill

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

In April  2004,  the  Company's  largest  customer  announced  that they  signed
definitive  agreements for the sale of its business to two purchasers.  The sale
was completed on August 2, 2004.  This customer  accounted for 26%, 30%, and 26%
of the  Company's  net revenues for the twelve  months ended  December 31, 2004,
2003,  and 2002,  respectively  and was the last remaining  profitable  business
related to the PIA  Acquisition  on July 8, 1999. At June 30, 2004,  the Company
had $7.6 million of goodwill  remaining that was related to the PIA Acquisition.
As a result of the loss of this  major  client,  the  Company  does not expect a
positive cash flow from this business unit. Therefore,  the Company has recorded
an impairment of the PIA related goodwill resulting in a non-cash charge of $7.6
million to the results of the operations for 2004.

In June 2003, the Company began its Canadian  operations through the acquisition
of substantially all of the business and assets of Impulse  Marketing  Services,
Inc. In  connection  with this  acquisition,  the Company  recorded  goodwill of
$712,000.  At the time of the  acquisition,  it was  expected  that the Canadian
subsidiary would be profitable. However, the Canadian subsidiary has operated at
a loss  since its  acquisition.  As a result  of the  continued  losses  and the
failure to attract new customers the Company does not expect to receive positive
cash flow from this unit.  Therefore,  the Company has recorded an impairment of
the related goodwill resulting in a non-cash charge of $712,000 for 2004.

Capitalized Internal Use Software Development Costs

Historically,  the Company has capitalized costs of computer software  developed
for internal use. Some of the costs  capitalized  were  associated  with certain
clients to whom the  Company no longer  provides  merchandising  services.  As a
result of the loss of these clients,  the Company recorded an impairment  charge
for the net book value of internally  developed  software costs of approximately
$442,000 for 2004.

Other Assets and Liabilities

Also,  in  connection  with the PIA  Acquisition,  certain tax  deferred  assets
related to the PIA net operating  loss carry forward  benefits were  recognized.
The  Company  also  recorded  as an  impairment  charge,  a  $750,000  valuation
allowance on these deferred tax assets.


                                      F-15
<PAGE>


                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

3. Impairment Charges (continued)

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

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

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

4. Supplemental Balance Sheet Information

Accounts receivable, net, consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                       ------------------------------------
                                                                             2004              2003
                                                                       ------------------------------------

<S>                                                                         <C>             <C>
 Trade                                                                      $   8,178       $   10,333
 Unbilled                                                                       3,600            4,551
 Non-trade                                                                        290               21
                                                                       ------------------------------------
                                                                               12,068           14,905
 Less:
 Allowance for doubtful accounts                                                 (761)            (515)
 Sales allowances                                                                   -             (448)
                                                                       ------------------------------------
                                                                           $   11,307       $   13,942
                                                                       ====================================


Property and equipment consists of the following (in thousands):

<CAPTION>
                                                                                  December 31,
                                                                       ------------------------------------
                                                                             2004              2003
                                                                       ------------------------------------

<S>                                                                        <C>              <C>
  Equipment                                                                $   5,397        $   4,784
  Furniture and fixtures                                                         547              550
  Leasehold improvements                                                         138              141
  Capitalized software development costs                                       1,629            2,128
                                                                       ------------------------------------
                                                                               7,711            7,603
  Less accumulated depreciation and amortization                               6,175            5,504
                                                                       ------------------------------------
                                                                           $   1,536        $   2,099
                                                                       ====================================

<CAPTION>
                                                                                    December 31,
                                                                        -------------------------------------
  Prepaid expenses and other current assets (in thousands):                    2004              2003
                                                                        -------------------------------------

<S>                                                                        <C>               <C>
  Prepaid insurance                                                        $     214        $     245
  Tax refund due                                                                  62              244
  Prepaid rents                                                                   49               70
  Other                                                                          332               99
                                                                        -----------------------------------
                                                                           $     657        $     658
                                                                        =====================================
</TABLE>



                                      F-16
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

4. Supplemental Balance Sheet Information (continued)

<TABLE>
                                                                                    December 31,
                                                                        -------------------------------------
  Accrued expenses and other current liabilities (in thousands):              2004              2003
                                                                        -------------------------------------

<S>                                                                          <C>              <C>
  Merger related payables                                                    $    450         $   1,495
  STIMULYS cash deposits                                                            -               794
  SPGI Revolver                                                                     -               740
  Accrued medical expenses                                                        225               100
  Taxes payable                                                                   345               139
  Accrued accounting and legal expenses                                           192               219
  Accrued salaries payable                                                        328               241
  Other                                                                           851               353
                                                                        -------------------------------------
                                                                             $  2,391         $   4,081
                                                                        =====================================
</TABLE>

5. Lines of Credit

In January 2003, the Company and Webster Business Credit Corporation, then known
as Whitehall  Business Credit  Corporation  ("Webster"),  entered into the Third
Amended and  Restated  Revolving  Credit and  Security  Agreement  (as  amended,
collectively,  the  "Credit  Facility").  The Credit  Facility  provided a $15.0
million  revolving  credit facility that matures on January 23, 2006. The Credit
Facility  allowed  the  Company  to  borrow  up to $15.0  million  based  upon a
borrowing  base  formula  as  defined  in  the  agreement  (principally  85%  of
"eligible"  accounts  receivable).  On May 17,  2004,  the Credit  Facility  was
amended to among other things,  reduce the revolving  credit facility from $15.0
million to $10.0 million, change the interest rate and increase reserves against
collateral. The amendment provides for interest to be charged at a rate based in
part upon the earnings before interest,  taxes,  depreciation and  amortization.
The average  interest rate for 2004 was 5.1%.  At December 31, 2004,  the Credit
Facility bears interest at Webster's "Alternative Base Rate" plus 0.75% (a total
of 6.0% per annum),  or LIBOR plus 3.25%.  The Credit Facility is secured by all
of the assets of the Company and its domestic  subsidiaries.  In connection with
the May 17,  2004,  amendment,  Mr.  Robert  Brown,  a Director,  the  Chairman,
President and Chief Executive Officer and a major stockholder of the Company and
Mr. William Bartels,  a Director,  the Vice Chairman and a major  stockholder of
the Company,  provided personal  guarantees totaling $1.0 million to Webster. On
August 20, 2004, the Credit  Facility was further amended in connection with the
waiver of certain covenant  violations (see below).  The amendment,  among other
things,  reduced  the  revolving  credit  facility  from  $10.0  million to $7.0
million,  changed the covenant  compliance  testing for certain  covenants  from
quarterly to monthly and reduced  certain  advance rates.  On November 15, 2004,
the Credit Facility was further amended to delete any required minimum Net Worth
and minimum Fixed Charge  Coverage Ratio  covenant  levels for the period ending
December 31, 2004. The amendments did not change the future covenant levels. The
Credit Facility also limits certain expenditures including,  but not limited to,
capital expenditures and other investments.

The Company was in violation of certain monthly  covenants at December 31, 2004,
and expects to be in violation at future  measurement  dates.  Webster  issued a
waiver for the December 31, 2004 covenant violations.  However,  there can be no
assurances that Webster will issue such waivers in the future.

Because of the  requirement  to maintain a lock box  arrangement  with  Webster,
Webster's ability to invoke a subjective  acceleration clause at its discretion,
and the  expected  future  covenant  violations,  borrowings  under  the  Credit
Facility are  classified as current at December 31, 2004 and 2003, 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.


                                      F-17
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

5.  Lines of Credit (continued)

The revolving  loan  balances  outstanding  under the Credit  Facility were $4.1
million at December  31, 2004,  and  December  31,  2003.  There were letters of
credit  outstanding  under the Credit  Facility of $0.7  million at December 31,
2004,  and December 31, 2003. As of December 31, 2004, the SPAR Group had unused
availability  under the Credit  Facility of $1.4  million  out of the  remaining
maximum  $2.2  million  unused  revolving  line of  credit  after  reducing  the
borrowing base by outstanding loans and letters of credit.

In 2001, the Japanese joint venture SPAR FM Japan, Inc. entered into a revolving
line of credit  arrangement  with  Japanese  banks for 300  million  yen or $2.7
million  (based upon the exchange rate at September 30, 2004).  At September 30.
2004,  SPAR FM Japan,  Inc. had 100 million yen or  approximately  $900,000 loan
balance  outstanding under the line of credit. The line of credit is effectively
guarantied by the Company and the joint venture partner, Paltac Corporation. The
average  interest rates on the borrowings  under the Japanese line of credit for
its short-term  bank loans at September 30, 2004 and 2003 were 1.375% and 1.375%
per annum, respectively.

6. Income Taxes

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

<TABLE>
<CAPTION>
                                                        December 31,
                                  ----------------------------------------------------------
                                        2004               2003                 2002
                                  -----------------  ------------------  -------------------

<S>                                 <C>                 <C>                  <C>
    Current                         $        103        $       189          $      476
    Deferred                                 750               (131)              2,522
                                  -----------------  ------------------  -------------------
                                    $        853        $        58          $    2,998
                                  =================  ==================  ===================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                        December 31,
                                                   --------------------------------------------------------
                                                        2004                2003                2002
                                                   ---------------     ----------------    ----------------

<S>                                                        <C>                  <C>                <C>
   (Benefit) provision for income taxes at
     federal statutory rate                        $    (3,911)         $      (77)        $     2,821
   State income taxes, net of federal benefit              117                  95                 175
   Permanent differences                                 1,613                  41                 (48)
   Change in valuation allowance                         3,013                   -                   -
   Other                                                    21                  (1)                 50
                                                   ---------------     ----------------    ----------------
   Provision for income taxes                      $       853          $       58         $     2,998
                                                   ===============     ================    ================
</TABLE>



                                      F-18
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

6. Income Taxes (continue)

Deferred taxes consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                       ------------------------------------
                                                                             2004              2003
                                                                       ------------------------------------
    Deferred tax assets:
<S>                                                                      <C>                 <C>
      Net operating loss carryforwards                                   $      5,230        $   3,876
      Restructuring                                                               266              309
      Deferred revenue                                                            384                -
      SIM reserve against loan commitment                                         135              304
      Allowance for doubtful accounts and other receivable                        288              323
      Other                                                                       455              559
      Valuation allowance                                                      (6,139)          (3,126)
                                                                       ------------------------------------
    Total deferred tax assets                                                     619            2,245

    Deferred tax liabilities:
      Capitalized software development costs                                      619              506
                                                                       ------------------------------------
    Total deferred tax liabilities                                                619              506
                                                                       ------------------------------------
    Net deferred tax assets                                              $          -        $   1,739
                                                                       ====================================
</TABLE>

At December 31, 2004, the Company has net operating loss carryforwards (NOLs) of
$10.2 million, related to the PIA Acquisition available to reduce future federal
taxable income.  The $10.2 million PIA related net operating loss  carryforwards
begin to expire in the year  2012.  Section  382 of the  Internal  Revenue  Code
restricts  the  annual  utilization  of the NOLs  incurred  prior to a change in
ownership.  Such a change in ownership had occurred in 1999, thereby restricting
the NOL's prior to such date available to the Company to approximately  $657,500
per year.  In  addition,  the  Company has NOLs  related to its  current  losses
totaling $4.1 million. The $4.1 million net operating loss carryfowards begin to
expire in the year 2023.

As a result of the loss of several significant clients,  current year losses and
the lack of certainty of a return to profitably in the next twelve  months,  the
Company  has  established  a valuation  allowance  equal to the total of its net
deferred tax assets of $6.1 million.

The Company does not provide for U.S. income taxes on the undistributed earnings
of its foreign  subsidiaries  since, at the present time,  management  considers
them to be permanently invested in the subsidiary.





                                      F-19
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

7. Commitments and Contingencies

Lease Commitments

The Company leases  equipment and certain office space in several cities,  under
non-cancelable operating lease agreements. Certain leases require the Company to
pay its share of any increases in operating expenses and real estate taxes. Rent
expense was approximately $1.0 million, $0.9 million, and $1.0 million for 2004,
2003, and 2002,  respectively.  At December 31, 2004, future minimum commitments
under  all  non-cancelable  operating  lease  arrangements  are as  follows  (in
thousands):

                          2005          $      776
                          2006                 569
                          2007                  82
                          2008                  40
                          2009                   1
                                    ------------------
                         Total          $    1,468
                                    ===================

International Commitments

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

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

Legal Matters

        Safeway   Inc.   ("Safeway"),   filed  a   Complaint   against  the  PIA
Merchandising  Co., Inc. ("PIA Co."), a wholly owned  subsidiary of the Company,
and Pivotal Sales Company ("Pivotal"), a wholly owned subsidiary of PIA Co., and
SGRP in Alameda Superior Court, case no. 2001028498 on October 24, 2001, and has
subsequently  amended  it.  Safeway  alleges  causes  of  action  for  breach of
contract,  breach of implied  contract,  breach of fiduciary  duty,  conversion,
constructive fraud,  breach of trust,  unjust enrichment,  and accounting fraud.
Safeway has most  recently  alleged  monetary  damages in the  principal  sum of
$3,000,000 and probable interest of $1,000,000 and has also demanded unspecified
costs. PIA Co., Pivotal and SGRP 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 them  against  Safeway for breach of  contract,  interference  with
economic relationship,  unfair trade practices and unjust enrichment and seeking
damages and injunctive  relief.  Mediation between the parties occurred in 2004,
but did not result in a  settlement.  PIA Co., Pivotal  and SGRP are  vigorously
defending  Safeway's  allegations.  It is not possible at this time to determine
the  likelihood of the outcome of this  lawsuit.  However,  if Safeway  prevails
respecting  its  allegations,  and PIA  Co.,  Pivotal  and  SGRP  lose on  their
cross-claims and counterclaims, that result could have a material adverse effect
on the  Company.  The Company  anticipates  that this matter will be resolved in
2005.

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



                                      F-20
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

7. Commitments and Contingencies (continued)

of these other matters are not anticipated to have a material  adverse effect on
the financial position, results of operations or cash flows of the Company.

8. Treasury Stock

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

The following  table  summarizes  the Company's  treasury stock activity for the
years 2004 and 2003.

                                               Quantity           Amount
                                           ------------------------------------
    Treasury Stock, January 1, 2003                 9,783       $   30,073
      Purchases                                   211,315          923,714
      Used to fulfill:
          Employee Stock Purchases                 (9,848)         (30,297)
          Options Exercised                      (135,194)        (539,383)
                                           ------------------------------------

    Treasury Stock, December 31, 2003              76,056          384,107
      Used to fulfill:
          Options Exercised                       (54,148)        (276,007)
                                           ------------------------------------

    Treasury Stock, December 31, 2004              21,908       $  108,100
                                           ====================================

9. Employee Benefits

Stock Purchase Plans

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

Shares  purchased by employees and  consultants  under the SP Plans were 43,023,
22,561, and 10,104 for 2004, 2003, and 2002, respectively.

The Company's expense as a result of the 15% discount  offered to employees  and
consultants were approximately $10,000,  $11,000, and $4,000 for 2004, 2003, and
2002, respectively.

Retirement/Pension Plans

The Company has a 401(k) Profit Sharing Plan covering substantially all eligible
employees.  Employer  contributions were  approximately  $97,000,  $87,000,  and
$117,000 for 2004, 2003, and 2002, respectively.


                                      F-21
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

9. Employee Benefits (continued)

In  2003  and  2002,  certain  of  the  Company's   employees  were  covered  by
union-sponsored,  collectively bargained,  multi-employer pension plans. Pension
expense  related to these  plans was  approximately  $32,000 and $60,000 for the
years ended  December 31, 2003 and 2002,  respectively.  There were no employees
under union contract in 2004.

10. Related-Party Transactions

Mr. Robert G. Brown,  a Director,  the Chairman,  President and Chief  Executive
Officer and a major  stockholder of the Company,  and Mr. William H. Bartels,  a
Director,  the  Vice  Chairman  and a  major  stockholder  of the  Company,  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 field  representatives
(through its independent  contractor field force) and  approximately  92% of the
Company's field management at a total cost of approximately $24.0 million, $36.0
million, and $30.5 million for 2004, 2003, and 2002,  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 field force of approximately
6,300  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  approximately  50  full-time  national,  regional  and  district
managers to the Company. For those services, the Company has agreed to reimburse
SMS and SMSI for all of their costs of providing  those  services and to pay SMS
and SMSI each a premium equal to 4% of their respective  costs,  except that for
2004 SMSI agreed to concessions  that reduced the premium paid by  approximately
$640,000  for  2004.  Total net  premiums  (4% of SMS and SMSI  costs  less 2004
concessions)  paid to SMS and  SMSI for  services  rendered  were  approximately
$320,000, $1,350,000, and $1,100,000 for 2004, 2003, and 2002, respectively. The
Company  has been  advised  that  Messrs.  Brown  and  Bartels  are not paid any
salaries as officers of SMS or SMSI so there were no salary  reimbursements  for
them  included  in such  costs  or  premium.  However,  since  SMS and  SMSI are
"Subchapter S" corporations,  Messrs.  Brown and Bartels benefit from any income
of such companies allocated to them.

SIT provided  substantially all of the Internet computer programming services to
the  Company  at a  total  cost of  approximately  $1,170,000,  $1,610,000,  and
$1,630,000 for 2004, 2003, and 2002,  respectively.  SIT provided  approximately
34,000,  47,000, and 46,000 hours of Internet computer  programming  services to
the Company for 2004, 2003, and 2002, respectively.  Pursuant to the Amended and
Restated  Programming  and Support  Agreement  dated as of January 1, 2004,  SIT
continues to provide  programming  services to the Company for which the Company
has agreed to pay SIT  competitive  hourly  wage rates for time spent on Company
matters  and to  reimburse  the  related  out-of-pocket  expenses of SIT and its
personnel.  The average hourly billing rate was $34.71,  $34.24,  and $35.10 for
2004, 2003, and 2002, 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 2004.  However,  since SIT is a "Subchapter  S"  corporation,
Messrs.  Brown and Bartels benefit from any income of such company  allocated to
them.


                                      F-22
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


10. Related-Party Transactions (continued)

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):

<TABLE>
<CAPTION>
                                                                  Twelve Months Ended December 31,
                                                          -------------------------------------------------
                                                               2004           2003             2002
                                                          -------------------------------------------------
<S>                                                          <C>               <C>             <C>
    Services provided by affiliates:
      Independent contractor services (SMS)                  $ 19,944         $ 28,411        $ 23,262
                                                          =================================================

      Field management services (SMSI)                      $   4,502         $  7,600        $  7,280
                                                          =================================================

      Internet and software program
      consulting services (SIT)                             $   1,172         $  1,607        $  1,626
                                                          =================================================


    Accrued expenses due to affiliates (in
      thousands):                                                   December 31,
                                                               2004            2003
                                                          ---------------------------------

    SPAR Marketing Services, Inc.                           $     987         $  1,091
                                                          =================================
</TABLE>

In addition to the above, through the services of Affinity Insurance,  Ltd., the
Company  purchased  insurance  coverage for its casualty and property  insurance
risk for  approximately  $1.1 million for each of the three years ended December
31, 2004, 2003, and 2002. The Company's CEO and Vice Chairman own, through SMSI,
a minority (less than 5%) equity interest in Affinity.

11. Stock Options

The Company has four stock option  plans:  the Amended and  Restated  1995 Stock
Option Plan ("1995 Plan"),  the 1995 Director's Plan  ("Director's  Plan"),  the
Special Purpose Stock Option Plan ("Special  Purpose Plan"),  and the 2000 Stock
Option Plan ("2000 Plan").

The 1995 Plan  provided  for the granting of either  incentive  or  nonqualified
stock options to specific employees,  consultants,  and directors of the Company
for the purchase of up to 3,500,000  shares of the Company's  common stock.  The
options had a term of ten years from the date of issuance, except in the case of
incentive stock options granted to greater than 10%  stockholders  for which the
term was five years. The exercise price of nonqualified  stock options must have
been  equal to at least 85% of the fair  market  value of the  Company's  common
stock at the date of grant.  Since  2000,  the  Company  has not granted any new
options under this plan.  During 2004,  1,500 options to purchase  shares of the
Company's  common stock were exercised and options to purchase  26,625 shares of
the  Company's  stock were  cancelled  under this plan.  At December  31,  2004,
options  to  purchase  15,125  shares  of  the  Company's  common  stock  remain
outstanding  under this plan. The 1995 Plan was superseded by the 2000 Plan with
respect to all new options issued.



                                      F-23
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


11. Stock Options (continued)

The  Director's  Plan was a stock  option plan for  non-employee  directors  and
provided for the purchase of up to 120,000 shares of the Company's common stock.
Since 2000, the Company has not granted any new options under this plan.  During
2004, no options to purchase shares of the Company's common stock were exercised
under this plan. At December 31, 2004,  20,000 options to purchase shares of the
Company's common stock remained outstanding under this plan. The Director's Plan
has been replaced by the 2000 Plan with respect to all new options issued.

On July 8, 1999,  in connection  with the merger,  the Company  established  the
Special  Purpose  Plan of PIA  Merchandising  Services,  Inc. to provide for the
issuance of substitute options to the holders of outstanding  options granted by
SPAR  Acquisition,  Inc. There were 134,114  options granted at $0.01 per share.
Since July 8, 1999, the Company has not granted any new options under this plan.
During 2004,  21,000  options to purchase  shares of the Company's  common stock
were exercised under this plan. At December 31, 2004,  options to purchase 4,750
shares of the Company's common stock remain outstanding under this plan.

On December 4, 2000, the Company  adopted the 2000 Plan, as the successor to the
1995 Plan and the Director's  Plan with respect to all new options  issued.  The
2000 Plan provides for the granting of either  incentive or  nonqualified  stock
options to specified  employees,  consultants,  and directors of the Company for
the purchase of up to 3,600,000 (less those options still  outstanding under the
1995 Plan or exercised after December 4, 2000 under the 1995 Plan).  The options
have a term of ten years,  except in the case of incentive stock options granted
to greater than 10%  stockholders  for whom the term is five years. The exercise
price of  nonqualified  stock  options must be equal to at least 85% of the fair
market  value of the  Company's  common  stock  at the  date of grant  (although
typically  the  options are issued at 100% of the fair  market  value),  and the
exercise  price of  incentive  stock  options must be equal to at least the fair
market value of the  Company's  common stock at the date of grant.  During 2004,
options to purchase  476,417 shares of the Company's  common stock were granted,
options to purchase  53,302 shares of the Company's  common stock were exercised
and options to purchase 1,345,542 shares of the Company's stock were voluntarily
surrendered  and  cancelled  under this plan.  At December 31, 2004,  options to
purchase 1,251,383 shares of the Company's common stock remain outstanding under
this plan and options to purchase 1,618,719 shares of the Company's common stock
were available for grant under this plan.




                                      F-24
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


11. Stock Options (continued)

The following table summarizes stock option activity under the Company's plans:

<TABLE>
<CAPTION>
                                                                                        Weighted Average
                                                                          Shares         Exercise Price
                                                                   ----------------------------------------

<S>                                                                      <C>                  <C>
    Options outstanding, December 31, 2001                               2,483,727            $  1.42

    Granted                                                                332,792            $  2.01
    Exercised                                                             (230,463)              1.23
    Canceled or expired                                                   (487,875)              5.05
                                                                   ---------------------
    Options outstanding, December 31, 2002                               2,098,181            $  1.52


    Granted                                                                401,020            $  3.51
    Exercised                                                             (143,641)              1.17
    Canceled or expired                                                    (92,750)              2.38
                                                                   ---------------------
    Options outstanding, December 31, 2003                               2,262,810            $  1.85

    Granted                                                                476,417            $  1.47
    Exercised                                                              (75,802)              0.49
    Canceled or expired                                                 (1,372,167)              6.18
                                                                   ---------------------
    Options outstanding, December 31, 2004                               1,291,258            $  1.66

    Option price range at end of year                                          $0.01 to $14.00


                                                               2004            2003             2002
                                                         --------------------------------------------------
    Grant Date weighted average fair value of
      options granted during the year                       $   1.43        $   2.33         $   1.60
</TABLE>





                                      F-25
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

11.  Stock Options (continued)

The following table summarizes  information  about stock options  outstanding at
December 31, 2004:

<TABLE>
<CAPTION>
                                         Options Outstanding                        Options Exercisable
                        ---------------------------------------------------- --------------------------------
                                                Weighted
                             Number             Average         Weighted           Number
                         Outstanding at        Remaining        Average        Exercisable at    Weighted
        Range of        December 31, 2004   Contractual Life    Exercise        December 31,      Average
     Exercise Prices                                            Price              2004      Exercise Price
   -------------------- ---------------------------------------------------- --------------------------------

<S>                            <C>          <C>              <C>                  <C>           <C>
     Less than $1.00           273,536      8.1 years        $  0.71              230,336       $  0.70
      $1.01 - $2.00            783,347      7.0 years           1.31              697,972          1.30
      $2.01 - $4.00            192,875      8.4 years           2.75               61,196          2.88
   Greater than $4.00           41,500      5.1 years           9.37               41,126          9.42
                        ------------------                                 -----------------
   Total                     1,291,258                                          1,030,630
                        ==================                                 =================
</TABLE>

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

12. Notes Payable to Certain Stockholders

In April 2003, all previously outstanding amounts due certain stockholders under
certain notes bearing interest at 8.0% were paid in full.

13. Geographic Data

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

                                       Twelve Months Ended December 31,
                                 ----------------------------------------------
                                      2004           2003           2002
                                 ----------------------------------------------
    Net revenue:
    United States                $     43,163    $    64,305      $  69,612
    International                       8,207            554              -
                                 ----------------------------------------------
    Total net revenue            $     51,370       $ 64,859      $  69,612
                                 ==============================================












                                      F-26
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004


13. Geographic Data (continued)


<TABLE>
<CAPTION>
                                                Twelve Months Ended December 31,
                                         ----------------------------------------------
                                              2004           2003           2002
                                         ----------------------------------------------
    Operating (loss) income:
<S>                                      <C>                <C>            <C>
    United States                        $     (10,559)     $    893       $  9,100
    International                               (1,477)         (868)          (467)
                                         ----------------------------------------------
    Total operating (loss) income        $     (12,036)     $     25       $  8,633
                                         ==============================================


<CAPTION>


                                                                December 31,
                                                    -------------------------------------
     Long lived assets:                                    2004              2003
                                                    -------------------------------------

<S>                                                      <C>               <C>
     United States                                       $   2,484         $  11,632
     International                                             486               576
                                                    -------------------------------------
     Total long lived assets                             $   2,970         $  12,208
                                                    =====================================
</TABLE>



International  revenues disclosed above were based upon revenues reported by the
Company's  foreign  subsidiaries  and  joint  ventures.   No  one  international
geographic market is greater than 10% of consolidated net revenue for the twelve
months ended December 31, 2004.

14. Restructuring Charges

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

In July 2004, as a result of the loss of several  significant  customers and the
pending sale of the Company's largest customer,  the Company entered into a plan
to restructure and reduce its field force, as well as, its selling,  general and
administrative   cost  structure  to  reflect  its  lower  revenue  base.  These
reductions  consist of  personnel  reductions,  personnel  related  expenses and
office  closings.  As a result of the July  restructuring,  the Company expensed
approximately  $480,000 in the quarter ending September 30, 2004,  approximately
$230,000 for  severance  benefits and  approximately  $250,000 for office leases
that  the  Company  ceased  using.   At  December  31,  2004,  the  Company  had
approximately  $250,000  reserved  for  future  restructure  payments  that  are
expected to be paid in 2005.  The Company  records  restructure  expenses in the
selling,  general  and  administrative  section  of its  consolidated  operating
statements.







                                      F-27
<PAGE>

                        SPAR Group, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                                December 31, 2004

14. Restructuring Charges (continued)

The following table displays a roll forward of the liabilities for restructuring
charges from January 1, 2001 to December 31, 2004 (in thousands):

<TABLE>
<CAPTION>
                                                                 Equipment         Office
                                                 Employee         Lease            Lease
                                                Separation      Settlements      Settlements        Total
                                              --------------- ---------------- ---------------- --------------

<S>                                           <C>             <C>              <C>               <C>
January 1, 2001 balance                       $       487     $      2,770     $        544     $   3,801

Adjustments in restructuring charges                 (132)               -                -          (132)
2001 payments                                        (355)          (1,008)            (124)       (1,487)
                                              --------------- ---------------- ---------------- --------------
December 31, 2001 balance                     $         -     $      1,762     $        420     $   2,182

2002 payments                                           -             (593)               -          (593)
                                              --------------- ---------------- ---------------- --------------
December 31, 2002 balance                     $         -     $      1,169     $        420     $   1,589

Adjustments in restructuring charges                    -               98             (185)          (87)
2003 payments                                                         (817)                          (817)
                                              --------------- ---------------- ---------------- --------------
December 31, 2003, balance                    $         -     $        450     $        235     $     685

Impairment charge (see Note 3 - Impairment
Charges)                                                -             (450)            (235)         (685)
2004 restructure plan                                 230                -              250           480
2004 payments                                        (230)               -                -          (230)
                                              --------------- ---------------- ---------------- --------------
December 31, 2004, balance                    $         -     $          -     $        250     $     250
                                              =============== ================ ================ ==============
</TABLE>

15. Net (Loss) Income Per Share

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

<TABLE>
<CAPTION>
                                                                 Twelve Months Ended December 31,
                                                         --------------------------------------------------
                                                               2004            2003             2002
                                                         --------------------------------------------------

<S>                                                      <C>                <C>              <C>
    Numerator:
      Net (loss) income                                  $    (12,268)      $    (539)       $   5,298

    Denominator:
      Shares used in basic net (loss) income per share
        calculation                                            18,859          18,855           18,761
      Effect of diluted securities:
        Employee stock options                                      -               -              387
                                                         --------------------------------------------------
      Shares used in diluted net (loss) income per
         share calculations                                    18,859          18,855           19,148
                                                         ==================================================

    Basic and diluted net (loss) income per common
      share:                                                $   (0.65)      $   (0.03)      $     0.28
</TABLE>

The computation of dilutive loss per share excluded  anti-dilutive stock options
to purchase approximately 430,000 and 657,000 shares as of December 31, 2004 and
2003, respectively.


                                      F-28
<PAGE>


16. Quarterly Financial Data (Unaudited)

Quarterly data for 2004 and 2003 was as follows (in thousands,  except  earnings
per share data):

<TABLE>
<CAPTION>
                                                                        Quarter
                                              -------------------------------------------------------------
                                                   First         Second          Third         Fourth
                                              -------------------------------------------------------------

<S>                                               <C>          <C>              <C>            <C>
    Year Ended December 31, 2004:
    Net revenues                                 $  12,803      $  11,932      $  10,683      $  15,952
    Gross profit                                     4,109          3,115          3,720          6,782
                                              -------------------------------------------------------------
    Net (loss) income                            $    (790)     $ (12,177)     $     210      $     489
                                              =============================================================

    Basic/diluted net (loss) income per
      common share                               $   (0.04)     $   (0.65)     $    0.01      $    0.03
                                              =============================================================

    Year Ended December 31, 2003:
    Net revenues                                 $  18,738        $17,351      $  16,615      $  12,155
    Gross profit                                     7,487          6,205          5,235          3,594
                                              -------------------------------------------------------------
    Net income (loss)                            $   1,278      $     608      $    (345)     $  (2,080)
                                              =============================================================

    Basic/diluted net income (loss) per
      common share                               $    0.07      $    0.03      $   (0.02)     $   (0.11)
                                              =============================================================
</TABLE>


2004

The lost business and subsequent impairment charges were the primary factors for
the losses incurred in the first two quarters of 2004.  However,  primarily as a
result of the restructure  plan initiated in the third quarter,  the Company was
profitable in the second half of 2004.

2003

In the fourth quarter 2003, the Company  experienced  certain charges to revenue
and cost of sales  that did not  occur in  2004.  These  charges  accounted  for
approximately  50%  of the  loss  in  2003  fourth  quarter.  The  Company  also
experienced  lower  revenues from per unit fee  contracts in the fourth  quarter
resulting from decreased  retail sales of some of the Company's  larger clients'
products, as well as the loss of a particular client earlier in the year.








                                      F-29
<PAGE>



                        SPAR Group, Inc. and Subsidiaries

                 Schedule II - Valuation and Qualifying Accounts

                                 (In thousands)

<TABLE>
<CAPTION>
                                              Balance at       Charged to
                                             Beginning of       Costs and                   Balance at End
                                                Period           Expenses       Deductions      of Period
                                           -----------------------------------------------------------------
        Year ended December 31, 2004:
          Deducted from asset accounts:
<S>                                              <C>            <C>              <C>     <C>    <C>
             Allowance for doubtful
               accounts                          $   515        $     366        $   120 (1)    $   761
             Sales allowances                    $   448        $       -        $   448        $     -

        Year ended December 31, 2003:
          Deducted from asset accounts:
             Allowance for doubtful
               accounts                          $   301        $     377        $   163 (1)    $   515
             Sales allowances                    $     -        $     448        $       -      $   448

        Year ended December 31, 2002:
          Deducted from asset accounts:
             Allowance for doubtful
               accounts                          $   325        $     262        $   286 (1)    $   301
</TABLE>


(1) Uncollectible accounts written off, net of recoveries







                                      F-30