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



                                    FORM 10-Q


(MARK ONE)
X QUARTERLY  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934 for the first quarterly period ended MARCH 31, 2005
                                                               OR

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT  OF  1934  for  the   transition   period   from   ______   to   ___________


                         Commission file number: 0-27824


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

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

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

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


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

Indicate by check whether the registrant is an accelerated  filer (as defined in
Rule 12b-2 of the Exchange Act): [ ] Yes [ X ] No



  On March 31, 2005, there were 18,858,972 shares of Common Stock outstanding.


<PAGE>


                                SPAR GROUP, INC.

                                      Index


PART I:      FINANCIAL INFORMATION

Item 1:        Financial Statements

               Consolidated Balance Sheets
               as of March 31, 2005, and December 31, 2004.................... 3

               Consolidated Statements of Operations for the three months
               ended March 31, 2005, and 2004..................................4

               Consolidated Statements of Cash Flows for the
               three months ended March 31, 2005, and 2004.................... 5

               Notes to Consolidated Financial Statements......................6

Item 2:        Management's Discussion and Analysis of Financial
               Condition and Results of Operations............................17

Item 3:        Quantitative and Qualitative Disclosures about Market Risk.....26

Item 4:        Controls and Procedures........................................27

Item 5:        Other Information..............................................27

PART II:     OTHER INFORMATION

Item 1:        Legal Proceedings..............................................28

Item 2:        Changes in Securities and Use of Proceeds......................28

Item 3:        Defaults upon Senior Securities................................28

Item 4:        Submission of Matters to a Vote of Security Holders............28

Item 5:        Other Information..............................................28

Item 6:        Exhibits and Reports on Form 8-K  .............................28

SIGNATURES....................................................................30





                                       2
<PAGE>
PART I:.FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS
                                SPAR GROUP, INC.
                           Consolidated Balance Sheets
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                     MARCH 31,            DECEMBER 31,
                                                                       2005                   2004
                                                               ----------------------  --------------------
                                                                    (Unaudited)              (Note)
<S>                                                            <C>                      <C>
 ASSETS
 Current assets:
    Cash and cash equivalents                                  $          277           $         887
    Accounts receivable, net                                            9,851                  11,307
    Prepaid expenses and other current assets                             400                     657
                                                               ----------------------  --------------------
 Total current assets                                                  10,528                  12,851

 Property and equipment, net                                            1,363                   1,536
 Goodwill                                                                 798                     798
 Other assets                                                             541                     636
                                                               ----------------------  --------------------
 Total assets                                                  $       13,230           $      15,821
                                                               ======================  ====================

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
    Accounts payable                                           $        1,346           $       2,158
    Accrued expenses and other current liabilities                      2,527                   2,391
    Accrued expenses due to affiliates                                  1,020                     987
    Restructuring charges                                                  99                     250
    Customer deposits                                                   1,029                   1,147
    Lines of credit                                                     2,124                   4,956
                                                               ----------------------  --------------------
 Total current liabilities                                              8,145                  11,889

 Other long-term liabilities                                               15                      12
 Minority interest                                                        217                     206
                                                               ----------------------  --------------------
 Total liabilities                                                      8,377                  12,107

 Commitments and contingencies (Note - 12)

 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 - March 31, 2005
        18,858,972 - December 31, 2004                                    189                     189
    Treasury stock                                                         (3)                   (108)
    Accumulated other comprehensive loss                                 (146)                    (86)
    Additional paid-in capital                                         10,936                  11,011
    Accumulated deficit                                                (6,123)                 (7,292)
                                                               ----------------------  --------------------
 Total stockholders' equity                                             4,853                   3,714
                                                               ----------------------  --------------------
 Total liabilities and stockholders' equity                    $       13,230           $      15,821
                                                               ======================  ====================
</TABLE>

Note:    The Balance  Sheet at December  31,  2004,  has been  derived  from the
         audited  financial  statements at that date but does not include any of
         the  information  and  footnotes  required  by  accounting   principles
         generally   accepted  in  the  United  States  for  complete  financial
         statements.

See accompanying notes.

                                       3
<PAGE>


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


<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                          MARCH 31,         MARCH 31
                                                             2005             2004
                                                      ------------------------------------

<S>                                                   <C>               <C>
Net revenues                                          $      14,521     $      12,803
Cost of revenues                                              8,651             8,694
                                                      ------------------------------------
Gross profit                                                  5,870             4,109

Selling, general and administrative expenses                  4,256             4,967
Depreciation and amortization                                   279               362
                                                      ------------------------------------
Operating income (loss)                                       1,335            (1,220)

Interest expense                                                 40                35
                                                      ------------------------------------
Income (loss) before provision for income taxes and           1,295            (1,255)
minority interest
Provision (benefit) for income taxes                             15              (465)
                                                      ------------------------------------
Net income (loss) before minority interest                    1,280              (790)
Minority interest                                               111                 -
                                                      ------------------------------------
Net income (loss)                                       $     1,169     $        (790)
                                                      ====================================

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

  Net income (loss)- basic/diluted                      $      0.06     $       (0.04)
                                                      ====================================

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

Weighted average common shares - diluted                     19,004            18,859
                                                      ====================================
</TABLE>

See accompanying notes.











                                       4
<PAGE>


                                SPAR GROUP, INC.
                      Consolidated Statements of Cash Flows
                           (unaudited) (in thousands)

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED
                                                                   MARCH 31         MARCH 31,
                                                                     2005             2004
                                                              ------------------------------------
<S>                                                           <C>                 <C>
 OPERATING ACTIVITIES
 Net income (loss)                                            $      1,169        $     (790)
 Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
      Minority interest earnings in subsidiaries                       111                 -

      Depreciation                                                     279               362

      Changes in operating assets and liabilities:
        Accounts receivable                                          1,456             2,541
        Prepaid expenses and other assets                              352              (821)
        Accounts payable, accrued expenses, other current
          liabilities and customer deposits                           (794)             (996)
        Accrued expenses due to affiliates                              33               580
        Restructuring charges                                         (151)                -
                                                              ------------------------------------
 Net cash provided by operating activities                           2,455               876

 INVESTING ACTIVITIES
 Purchases of property and equipment                                  (106)             (301)
 Acquisition of businesses                                               -              (453)
                                                              ------------------------------------
 Net cash used in investing activities                                (106)             (754)

 FINANCING ACTIVITIES
 Net payments on lines of credit                                    (2,832)             (195)
 Other long-term liabilities                                           (97)                5
 Proceeds from employee stock purchase plan and exercised
    options                                                             30                68
                                                              ------------------------------------
 Net cash used in financing activities                              (2,899)             (122)

 Translation loss                                                      (60)                -

 Net change in cash and cash equivalents                              (610)                -
 Cash and cash equivalents at beginning of period                      887                 -
                                                              ------------------------------------
 Cash and cash equivalents at end of period                   $        277      $          -
                                                              ====================================

 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
 Interest paid                                                $         48      $         35
                                                              ====================================
</TABLE>

See accompanying notes.




                                       5
<PAGE>


                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.      BASIS OF PRESENTATION

       The accompanying  unaudited,  consolidated  financial  statements of SPAR
Group, Inc., a Delaware  corporation  ("SGRP"),  and its subsidiaries  (together
with SGRP,  collectively,  the "Company" or the "SPAR Group") have been prepared
in accordance with accounting principles generally accepted in the United States
for interim  financial  information  and with the  instructions to Form 10-Q and
Article  10 of  Regulation  S-X.  Accordingly,  they do not  include  all of the
information and footnotes required by accounting  principles  generally accepted
in the United  States  for  complete  financial  statements.  In the  opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair  presentation have been included in these interim financial
statements.  However,  these  interim  financial  statements  should  be read in
conjunction with the annual consolidated  financial statements and notes thereto
for the Company as contained  in the  Company's  Annual  Report for 2004 on Form
10-K for the year ended  December 31,  2004,  as filed with the  Securities  and
Exchange  Commission on April 12, 2005 (the "Company's Annual Report for 2004 on
Form 10-K"). The Company's results of operations for the interim periods are not
necessarily indicative of its operating results for the entire year.

2.     BUSINESS AND ORGANIZATION

       The Company is a supplier of merchandising  and other marketing  services
throughout  the United  States and  internationally.  The Company also  provides
database marketing, technology services, teleservices and marketing research.

       The Company's  operations  are divided into two  divisions:  the Domestic
Merchandising  Services  Division and the International  Merchandising  Services
Division.  The Domestic  Merchandising  Services Division provides merchandising
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 through a 50% owned joint  venture in Japan.  The Company is scheduled
to start operations in Romania in the second quarter of 2005 through a 51% owned
joint  venture   subsidiary.   In  February  2005,  the  Company  announced  the
establishment of a 50% owned joint venture in China. The Company's Chinese joint
venture  is  currently  awaiting   government  approval  and  expects  to  begin
operations late in the third quarter of 2005.

3.      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
venture  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



                                       6
<PAGE>


                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

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 of  operations.  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.

4.     MANAGEMENT'S PLANS CONCERNING CASH FLOW

       Management  believes  that  based  upon the  Company's  current  level of
earnings and the existing  credit  facilities,  funding  will be  sufficient  to
support ongoing  operations over the next twelve months.  The Company is and has
been in violation  of certain  covenants  of its Credit  Facility  (see Note 7 -
Lines of Credit)  and  expects to violate  such  covenants  in the  future.  The
Company's bank, Webster Business Credit Corporation, has issued waivers for past
covenant  violations;  however,  there can be no  assurances  that  Webster will
continue to issue such waivers in the future.

5.     RESTRUCTURING 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 consisted 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 ended  September 30, 2004,  approximately
$230,000 for  severance  benefits and  approximately  $250,000 for office leases
that the Company ceased using. At March 31, 2005, the Company had  approximately
$99,000 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.




                                       7
<PAGE>

                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

6.     EARNINGS PER SHARE

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

                                               THREE MONTHS ENDED
                                      -------------------------------------
                                          MARCH 31,          MARCH 31,
                                            2005               2004
                                      ------------------ ------------------
Numerator:

   Net income (loss)                  $      1,169       $       (790)

Denominator:
   Shares used in basic earnings
   (loss) per share calculation             18,859             18,859

Effect of diluted securities:
   Employee stock options                      145                  -
                                      ------------------ ------------------

   Shares used in diluted earnings
   (loss) per share calculation             19,004             18,859
                                      ================== ==================

Basic and diluted earnings (loss)
per common share:

   Net income (loss) - basic and
   diluted                            $       0.06       $      (0.04)
                                      ================== ==================

        The computation of dilutive loss per share excluded  anti-dilutive stock
options to purchase  approximately  501,000  shares for the three  months  ended
March 31, 2004.

7.      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 provides a
$7.0 million  revolving  credit  facility that matures on January 23, 2006.  The
Company may borrow up to $7.0  million  based upon a borrowing  base  formula as
defined in the agreement  (principally 85% of "eligible"  accounts  receivable).
The Credit  Facility  bears  interest at a rate based in part upon the  earnings
before  interest,  taxes,  depreciation  and amortization and depending upon the
type of borrowing, is calculated based upon Webster's "Alternative Base Rate" or
the London Inter Bank Offering Rate  ("LIBOR").  At March 31, 2005 there were no
LIBOR based loans and the interest rate calculated at Webster's Alternative Base
Rate plus 0.75% totaled 6.5% per annum.  The average interest rate for the three
months ended March 31, 2005 was 6.1% per annum.  The Credit  Facility is secured
by all of the



                                       8
<PAGE>

                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

assets of the Company and its domestic  subsidiaries.  In addition,  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,  provide  personal  guarantees
totaling  $1.0  million to Webster.  The Credit  Facility  requires  the Company
satisfy certain financial covenants,  including a minimum "Net Worth", a minimum
"Fixed Charge Coverage  Ratio", a capital  expenditure  limitation and a minimum
"EBITDA", as such terms are defined in the Credit Facility.  The Credit Facility
also limits certain expenditures by the Company,  including capital expenditures
and other investments.

       The Company was in violation of certain  covenants at March 31, 2005, and
expects to be in violation at future measurement dates.  Webster issued a waiver
for the March 31, 2005 covenant violations.  However, there can be no assurances
that Webster will issue such waivers in the future.

       The revolving loan balances  outstanding  under the Credit  Facility were
$1.2  million  and $4.1  million  at March 31,  2005,  and  December  31,  2004,
respectively. There were letters of credit outstanding under the Credit Facility
of approximately  $700,000 at March 31, 2005, and December 31, 2004. As of March
31, 2005, the SPAR Group had unused  availability  under the Credit  Facility of
$2.3 million out of the remaining  maximum $5.1 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 December 31,  2004).  At December
31, 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 rate on the  borrowings  under the Japanese line of credit for
its short-term bank loans at December 31, 2004 was 1.375% per annum.

8.      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 $5.8 million and $7.7 million for the three months ended March 31,
2005, and 2004, 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,



                                       9
<PAGE>

                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

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  $145,000 for the three months ended March 31, 2004. Total
net  premiums (4% of SMS and SMSI costs less 2004  concessions)  paid to SMS and
SMSI for  services  rendered  were  approximately  $233,000 and $162,000 for the
three months ended March 31, 2005, and 2004, 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
owned by  Messrs.  Brown  and  Bartels,  they  benefit  from any  income of such
companies allocated to them.

        SIT  provided  substantially  all of the Internet  computer  programming
services to the Company at a total cost of  approximately  $210,000 and $380,000
for the three months ended March 31, 2005, and 2004, respectively.  SIT provided
approximately 6,700 and 10,000 hours of Internet computer  programming  services
to  the  Company  for  the  three  months  ended  March  31,  2005,   and  2004,
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 $31.27  and $36.62 for the three  months  ended  March 31,  2005,  and 2004,
respectively.  The Company has been advised  that no hourly  charges or business
expenses  for Messrs.  Brown and Bartels  were charged to the Company by SIT for
the three months ended March 31, 2005, and 2004,  respectively.  However,  since
SIT is a "Subchapter S"  corporation  owned by Messrs.  Brown and Bartels,  they
benefit from any income of such company allocated to them.

        In November  2004 and January  2005,  the Company  entered into separate
operating  lease   agreements   between  SMS  and  the  Company's  wholly  owned
subsidiaries,  SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ("SPAR
Canada").  Each lease has a 36 month  term and  representations,  covenants  and
defaults  customary  for the  leasing  industry.  The SMF lease is for  handheld
computers  to be used by  field  merchandisers  in the  performance  of  various
merchandising  services  in the  United  States  and had a  monthly  payment  of
$20,318.  These handheld  computers had an original  purchase price of $632,200.
The  SPAR  Canada  lease  is also  for  handheld  computers  to be used by field
merchandisers in the performance of various merchandising services in Canada and
had a monthly  payment of  $3,326.  These  handheld  computers  had an  original
purchase  price of $105,000.  In May 2005, the Company and SMS amended the lease
agreements  reducing the total  monthly  payment from $20,318 to $17,891 for SMF
and from $3,326 to $2,972 for SPAR  Canada.  The amended  monthly  payments  are
based upon a lease factor of 2.83%.

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


                                       10
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (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>
                                                        THREE MONTHS ENDED MARCH 31,
                                               -------------------------------------------
                                                       2005                 2004
                                               -------------------------------------------
<S>                                                <C>                   <C>
    Services provided by affiliates:
      Independent contractor services (SMS)       $  4,844               $   6,361
                                               ===========================================

      Field management services (SMSI)            $    939               $   1,354
                                               ===========================================

      Handheld computer leases (SMSI)             $     63               $       -
                                               ===========================================

      Internet and software program
      consulting services (SIT)                   $    210               $     381
                                               ===========================================


     Accrued expenses due to affiliates (in thousands):      MARCH 31,      DECEMBER 31,
                                                                2005            2004
                                                          ---------------------------------

       SPAR Marketing Services, Inc.                      $      1,020         $     987
                                                          =================================

</TABLE>

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

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



                                       11
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

        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. If compensation  cost had been recognized,  the Company's net income (loss)
and pro forma net income (loss) per share from continuing  operations would have
been reduced to the adjusted amounts  indicated below (in thousands,  except per
share data):

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED MARCH 31,
                                                      ---------------------------------------
                                                             2005               2004
                                                      ---------------------------------------

<S>                                                     <C>                <C>
   Net income (loss), as reported                       $    1,169         $     (790)
   Stock based employee compensation expense
     under the fair market value method                         25                156
                                                      ---------------------------------------
   Pro forma net income (loss)                          $    1,144         $     (946)

   Basic and diluted net income (loss) per share, as
     reported                                           $     0.06         $    (0.04)
   Basic and diluted net income (loss) per share,
     pro forma                                          $     0.06         $    (0.05)
</TABLE>

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

       Under the  provision  of SFAS No. 123  dealing  with  non-employee  stock
option  grants  awarded to the employees of the  Company's  affiliates,  for the
three  months  ended  March  31,  2005,  the  Company  recorded  an  expense  of
approximately $14,000. For the three months ended March 31, 2004, as a result of
the decrease in the market price of the  Company's  stock from December 31, 2003
to March 31, 2004, there was no expense under the provision of SFAS No. 123. The
Company determines the fair value of the options granted to non-employees  using
the Black-Scholes  valuation model and recovers amounts  previously  expensed or
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.

10.    TREASURY STOCK

        The Company initiated a share repurchase  program in 2002, which allowed
for the  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.




                                       12
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

        The following  table  summarizes  the Company's  treasury stock activity
from January 1, 2005 to March 31, 2005.

                                                 Quantity           Amount
                                             -----------------------------------

    Treasury Stock, January 1, 2005                  21,908       $  108,100

    Used to fulfill options exercised               (21,654)        (104,617)
                                             -----------------------------------

    TREASURY STOCK, MARCH 31, 2005                      254       $    3,483
                                             ===================================


11.    CUSTOMER DEPOSITS

       In  June  2004,  the  Company  received  a   non-refundable   deposit  of
approximately  $900,000 from a customer.  The deposit is to be applied to future
invoices  for  services  that will be  provided  by the  Company  under a master
service agreement through December 31, 2006. Each invoice will be reduced by 20%
until the deposit is depleted. As of March 31, 2005, the outstanding balance was
approximately $870,000.

12.     COMMITMENTS AND CONTINGENCIES

        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, India and Romania. The Company also announced the establishment of
a joint  venture in China.  The  Company's  Chinese  joint  venture is currently
awaiting  government  approval and expects to begin operations late in the third
quarter of 2005.

        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 SGRP,  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



                                       13
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

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 alleged interest
of $1,500,000 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.

13.  GEOGRAPHIC DATA

        A summary of the Company's net revenue, operating income (loss) and long
lived  assets by  geographic  area for the three months ended March 31, 2005 and
2004,  respectively,  and as of March 31, 2005,  and  December  31, 2004,  is as
follows (in thousands):

                                              THREE MONTHS ENDED MARCH 31,
                                        ----------------------------------------
                                              2005                    2004
                                        ----------------------------------------
    Net revenue:
    ------------
    United States                          $     10,800          $   12,664
    International                                 3,721                 139
                                        ----------------------------------------
    Total net revenue                      $     14,521          $   12,803
                                        ========================================

                                              THREE MONTHS ENDED MARCH 31,
                                        ----------------------------------------
                                              2005                    2004
                                        ----------------------------------------
    Operating income (loss):
    ------------------------
    United States                          $        895          $     (890)
    International                                   440                (330)
                                        ----------------------------------------
    Total operating income (loss)          $      1,335          $   (1,220)
                                        ========================================

                                            MARCH 31,              DECEMBER 31,
                                        ----------------------------------------
    Long lived assets:                         2005                    2004
                                        ----------------------------------------

    United States                          $      2,281          $    2,484
    International                                   421                 486
                                        ----------------------------------------
    Total long lived assets                $      2,702          $    2,970
                                        ========================================


                                       14
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

        International revenues disclosed above were based upon revenues reported
by the Company's foreign  subsidiaries and joint ventures.  For the three months
ended March 31, 2005,  both the joint  venture  subsidiaries  in Japan and South
Africa each contributed 9% to the  consolidated net revenue of the Company.  The
wholly-owned Canadian subsidiary  contributed 7% of the consolidated net revenue
of the Company.

14.  SUPPLEMENTAL BALANCE SHEET INFORMATION

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

<TABLE>
<CAPTION>
                                                                   MARCH 31,       DECEMBER 31,
                                                               ------------------------------------
                                                                     2005              2004
                                                               ------------------------------------

<S>                                                                 <C>              <C>
 Trade                                                              $   5,990        $   8,178
 Unbilled                                                               4,365            3,600
 Non-trade                                                                172              290
                                                               ------------------------------------
                                                                       10,527           12,068
 Less:
 Allowance for doubtful accounts                                         (676)            (761)
                                                               ------------------------------------
                                                                    $   9,851       $   11,307
                                                               ====================================

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

                                                                   MARCH 31,       DECEMBER 31,
                                                               ------------------------------------
                                                                     2005              2004
                                                               ------------------------------------

 Equipment                                                         $   5,406        $   5,397
 Furniture and fixtures                                                  547              547
 Leasehold improvements                                                  138              138
 Capitalized software development costs                                1,726            1,629
                                                               ------------------------------------
                                                                       7,817            7,711
 Less accumulated depreciation and amortization                        6,454            6,175
                                                               ------------------------------------
                                                                   $   1,363        $   1,536
                                                               ====================================

                                                                   MARCH 31,        DECEMBER 31,
                                                               -------------------------------------
 Prepaid expenses and other current assets (in thousands):            2005              2004
                                                               -------------------------------------

 Prepaid insurance                                                 $     197        $     214
 Tax refund due                                                           62               62
 Prepaid rents                                                            49               49
 Other                                                                    92              332
                                                               ------------------------------------
                                                                   $     400        $     657
                                                               ====================================
</TABLE>




                                       15
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)


15.      ISSUANCE OF OPTIONS

         On April 12, 2005,  the Company issued  non-qualified  stock options to
various  employees and affiliates to acquire  500,030 shares of stock of SGRP at
$1.26 per share, with the normal four year vesting provisions.

16.      FOREIGN CURRENCY RATE FLUCTUATIONS

         The  Company  has  foreign  currency   exposure   associated  with  its
international  100% owned subsidiary,  its 51% owned joint venture  subsidiaries
and its 50% owned joint venture.  In the first quarter of 2005,  these exposures
are  primarily  concentrated  in the  Canadian  dollar,  Japanese  yen and South
African rand.  For the three months ended March 31, 2005,  international  assets
totaled $3.2 million and  international  liabilities  totaled $5.8 million.  For
three months ended March 31, 2005,  international  revenues totaled $3.7 million
and the Company's share of the net income was approximately $300,000.

17.      INTEREST RATE FLUCTUATIONS

         The Company is exposed to market risk related to the variable  interest
rate on its lines of credit.  At March 31, 2005, the Company's  outstanding debt
totaled $2.1 million,  which consisted of domestic  variable-rate (6.5%) debt of
$1.2 million and international  variable rate (1.4%) debt of $0.9 million. Based
on the three months ending March 31, 2005, average outstanding  borrowings under
variable-rate  debt, a  one-percentage  point  increase in interest  rates would
negatively  impact  pre-tax  earnings  and cash flows for the three months ended
March 31, 2005 by approximately $6,000.





                                       16
<PAGE>


                                SPAR GROUP, INC.


ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
               RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS
--------------------------

       STATEMENTS  CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q FOR THE THREE
MONTHS  ENDED  MARCH 31, 2005 (THIS  "QUARTERLY  REPORT"),  OF SPAR GROUP,  INC.
("SGRP", AND TOGETHER WITH ITS SUBSIDIARIES, THE "SPAR GROUP" OR THE "COMPANY"),
INCLUDE  "FORWARD-LOOKING  STATEMENTS"  WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING, IN PARTICULAR AND
WITHOUT  LIMITATION,  THE  STATEMENTS  CONTAINED  IN THE  DISCUSSIONS  UNDER THE
HEADING "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 AND ANY
OTHER  CAUTIONARY  STATEMENTS  CONTAINED IN THE COMPANY'S  ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED  DECEMBER 31, 2004, AS FILED WITH THE  SECURITIES
AND EXCHANGE COMMISSION ON APRIL 12, 2005 (THE "COMPANY'S ANNUAL REPORT FOR 2004
ON FORM  10-K"),  AND THE  CAUTIONARY  STATEMENTS  CONTAINED  IN THIS  QUARTERLY
REPORT. ALL  FORWARD-LOOKING  STATEMENTS  ATTRIBUTABLE TO THE COMPANY OR PERSONS
ACTING ON ITS BEHALF ARE  EXPRESSLY  QUALIFIED BY THE RISK FACTORS (SEE ITEM 1 -
CERTAIN RISK FACTORS) AND OTHER  CAUTIONARY  STATEMENTS IN THE COMPANY'S  ANNUAL
REPORT  FOR  2004 ON  FORM  10-K  AND IN  THIS  QUARTERLY  REPORT.  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.

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



                                       17
<PAGE>
                                SPAR GROUP, INC.


established a 50% owned joint venture in China. For the three months ended March
31, 2005, the Company consolidated Canada, Turkey, South Africa, India and Japan
into  the  Company's  financial  statements.  Romania  and  China  did not  have
operations for the three months ended March 31, 2005.


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  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.



                                       18
<PAGE>
                                SPAR GROUP, INC.


        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. Operations are expected to start
in the second quarter of 2005.

        In February 2005, the Company announced the establishment of a 50% owned
joint venture headquartered in Hong Kong. The Company's Chinese joint venture is
currently awaiting government approval,  and operations are expected to start in
the third quarter of 2005.


CRITICAL ACCOUNTING POLICIES
----------------------------

       The Company's critical accounting 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.  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.



                                       19
<PAGE>
                                SPAR GROUP, INC.

       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 $676,000 and $761,000
       at March 31, 2005, and December 31, 2004, 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 $97,000 and $184,000 of costs related to software
       developed  for  internal use in the three months ended March 31, 2005 and
       2004, respectively.




                                       20
<PAGE>
                                SPAR GROUP, INC.


RESULTS OF OPERATIONS


THREE MONTHS ENDED MARCH 31, 2005, COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
--------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                   --------------------------------------------------------------------------------
                                                              March 31, 2005                     March 31, 2004
                                                                                                                         Increase
                                                            Amount            %              Amount              %      (decrease)%
                                                            ------            -              ------              -      ----------

<S>                                                     <C>                  <C>            <C>                 <C>         <C>
Net revenues                                            $   14,521           100.0%         $ 12,803           100.0%      13.4%

Cost of revenues                                             8,651            59.6             8,694            67.9       (0.5)

Selling, general and administrative expense                  4,256            29.3             4,967            38.8      (14.3)

Depreciation and amortization                                  279             1.9               362             2.8      (23.0)

Interest expense                                                40             0.3                35             0.3       17.7
                                                   ---------------- --------------- ----------------- ----------------

Income (loss) before provision for income taxes
   and minority interest                                     1,295             8.9           (1,255)            (9.8)         -

Provision (benefit) for income tax                              15             0.1             (465)            (3.6)         -
                                                   ---------------- --------------- ----------------- ----------------

Net income (loss) before minority interest                   1,280             8.8             (790)            (6.2)         -

Minority interest                                              111             0.8                -                -          -
                                                   ---------------- --------------- ----------------- ----------------

Net income (loss)                                        $   1,169             8.0%         $  (790)            (6.2)%        -
                                                   ================ =============== ================= ================
</TABLE>

NET REVENUES

       Net  revenues  for the three  months  ended  March 31,  2005,  were $14.5
million, compared to $12.8 million for the three months ended March 31, 2004, an
increase of 13.4%. For the first quarter domestic revenue decreased $1.9 million
or 14.7% to $10.8 million, compared to $12.7 million a year ago. The decrease in
domestic  revenue  is a result  of the  loss of  several  significant  customers
partially offset by revenue from new customers. Internationally, revenue for the
first quarter increased to $3.7 million from $139,000 last year,  primarily as a
result of the Japan consolidation,  the South African acquisition and a stronger
performance from our Canadian operations.



                                       21
<PAGE>
                                SPAR GROUP, INC.

       One customer  accounted  for 17% and 7% of the  Company's net revenue for
the three months ended March 31, 2005,  and 2004,  respectively.  This  customer
also accounted for approximately 25% and 29% of accounts receivable at March 31,
2005, and December 31, 2004, respectively.

       A second customer accounted for 16% and 44% of the Company's net revenues
for the three months ended March 31, 2005 and 2004, respectively.  This customer
also accounted for approximately 12% and 4% of accounts  receivable at March 31,
2005 and December 31, 2004, respectively.  In 2004, this customer was a division
of a major retailer.  This customer was sold by its parent on August 2, 2004. In
the first quarter of 2005 the Company  performed a project that resulted in $1.9
million  of revenue  for this  customer.  Even with this  project  revenue,  the
Company saw a significant  decline in net revenue from this customer and expects
the decline to continue in 2005.

       Approximately  10% and 15% of the  Company's  net  revenues for the three
months ended March 31, 2005, and 2004, respectively, resulted from merchandising
services  performed for customers at Kmart.  These  customers also accounted for
approximately 11% and 22% of accounts  receivable at March 31, 2005 and December
31, 2004,  respectively.  While the contractual  relationships or agreements are
with various customers and not Kmart, a significant reduction of this retailer's
stores or cessation of this  retailer's  business  would  negatively  impact the
Company.

       In addition, approximately 10% of the Company's net revenue for the three
months ended March 31, 2005 resulted from  merchandising  services performed for
customers at Circuit City. These customers also accounted for  approximately 12%
and 16% of  accounts  receivable  at March  31,  2005  and  December  31,  2004,
respectively. While the contractual relationships or agreements are with various
customers  and not Circuit  City, a  significant  reduction  of this  retailer's
stores or cessation of this  retailer's  business  would  negatively  impact the
Company.

       Failure to attract new large  customers  could  significantly  impede the
growth of the Company's revenues,  which could have a material adverse effect on
the Company's future business, results of operations and financial condition.

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 as a  percentage  of net  revenues was 59.6% for the
three months ended March 31, 2005,  compared to 67.9% for the three months ended
March 31, 2004. The decrease is primarily a result of the Company  restructuring
its domestic field force to reflect its reduction of business.

       Approximately  88% and 89% of the  Company's  domestic cost of revenue in
the three months ended March 31, 2005,  and 2004,  respectively,  resulted  from
in-store independent contractor and field management services purchased from the
Company's affiliates, SPAR Marketing Services, Inc. ("SMS"), and SPAR Management
Services, Inc. ("SMSI"), respectively (see Note 8 - Related-Party Transactions).




                                       22
<PAGE>

                                SPAR GROUP, INC.


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

        Selling,  general and administrative expenses decreased by $0.7 million,
or 14.3%, for the three months ended March 31, 2005, to $4.3 million compared to
$5.0  million for the three  months  ended  March 31,  2004.  Domestic  selling,
general  and  administrative  expenses  totaled  $3.2  million for 2005 and were
reduced  $1.4  million  from $4.6  million in 2004.  The  reduction of 30.2% was
primarily due to cost  reduction  programs  initiated in 2004 as a result of the
loss of certain large  customers.  The domestic cost  reductions  were partially
offset by  increases  of $0.7  million in  international  selling,  general  and
administrative  expenses  resulting  from the  consolidation  of Japan,  and the
operations of South Africa, Turkey and India joint venture subsidiaries that did
not have operations last year.

DEPRECIATION AND AMORTIZATION

        Depreciation  and  amortization  charges of $0.3  million  for the three
months ended March 31, 2005 was consistent  with $0.4 million in the same period
for 2004.

INCOME TAXES

       The  Company  recorded an income tax  provision  of $15,000 for the three
months ended March 31, 2005.  The  provision  was  primarily  for minimum  state
taxes.  There was no provision  for federal tax for the three months ended March
31, 2005 since the Company  expects to utilize net operating loss  carryforwards
previously  reserved to offset any federal taxes due. For the three months ended
March 31, 2004, the income tax benefit  represents a combined  federal and state
income tax rate of 37%.

MINORITY INTEREST

        Minority interest of approximately $111,000 resulted from the operations
of the 51% owned joint venture  subsidiaries and the 50% owned joint venture for
the three months ended March 31, 2005.

NET INCOME

       The Company had a net income of $1.2  million for the three  months ended
March 31,  2005,  or $0.06 per  diluted  share,  compared  to a net loss of $0.8
million, or $0.04 per share, for the corresponding period last year.



                                       23
<PAGE>
                                SPAR GROUP, INC.

LIQUIDITY AND CAPITAL RESOURCES

       In the three months ended March 31, 2005, the Company had a net income of
$1.2 million.

       Net cash  provided by  operating  activities  for the three  months ended
March 31, 2005,  was $2.5  million,  compared to net cash  provided by operating
activities  of $0.9  million  for the three  months  ended March 31,  2004.  The
increase of $1.6 million in cash  provided by operating  activities is primarily
due to net operating  income,  reductions  in prepaid  expenses and other assets
partially  offset  by lower  reductions  in  accounts  receivables,  as well as,
restructuring payments.

       Net cash used in  investing  activities  for the three months ended March
31, 2005, was $0.1 million compared to net cash used in investing  activities of
$0.8 million for the three months ended March 31, 2004. The decrease in net cash
used in investing activities was a result of no acquisitions and lower purchases
of property and equipment in 2005.

       Net cash used in  financing  activities  for the three months ended March
31, 2005, was $2.9 million, compared to net cash used in financing activities of
$0.1 million for the three months ended March 31, 2004. The increase of net cash
used in financing  activities  was  primarily a result of higher net payments on
the lines of credit.

        The above activity  resulted in a reduction in cash and cash equivalents
for the three months ended March 31, 2005 of $0.6 million.

       At March 31,  2005,  the Company  had  positive  working  capital of $2.4
million,  as compared to a positive  working capital of $1.0 million at December
31, 2004.  The increase in working  capital is due  primarily to  reductions  in
accounts  payable  and lines of credit,  partially  offset by  reduced  accounts
receivable.  The Company's  current ratio was 1.29 at March 31, 2005 and 1.08 at
December 31, 2004.

       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 provides a
$7.0 million  revolving  credit  facility that matures on January 23, 2006.  The
Company may borrow up to $7.0  million  based upon a borrowing  base  formula as
defined in the agreement  (principally 85% of "eligible"  accounts  receivable).
The Credit  Facility  bears  interest at a rate based in part upon the  earnings
before  interest,  taxes,  depreciation  and amortization and depending upon the
type of borrowing, is calculated based upon Webster's "Alternative Base Rate" or
the London Inter Bank Offering Rate  ("LIBOR").  At March 31, 2005 there were no
LIBOR based loans and the interest rate calculated at Webster's Alternative Base
Rate plus 0.75% totaled 6.5% per annum.  The average interest rate for the three
months ended March 31, 2005 was 6.1% per annum.  The Credit  Facility is secured
by all of the assets of the Company and its domestic subsidiaries.  In addition,
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,  provide
personal  guarantees  totaling  $1.0  million to  Webster.  The Credit  Facility
requires the Company satisfy certain  financial  covenants,  including a minimum
"Net Worth",  a minimum "Fixed Charge  Coverage  Ratio",  a capital  expenditure
limitation and a minimum "EBITDA", as such terms are defined in the



                                       24
<PAGE>
                                SPAR GROUP, INC.

Credit  Facility.  The Credit  Facility also limits certain  expenditures by the
Company, including capital expenditures and other investments.

       The Company was in violation of certain  covenants at March 31, 2005, and
expects to be in violation at future measurement dates.  Webster issued a waiver
for the March 31, 2005 covenant violations.  However, there can be no assurances
that Webster will issue such waivers in the future.

       The revolving loan balances  outstanding  under the Credit  Facility were
$1.2  million  and $4.1  million  at March 31,  2005,  and  December  31,  2004,
respectively. There were letters of credit outstanding under the Credit Facility
of approximately  $700,000 at March 31, 2005, and December 31, 2004. As of March
31, 2005, the SPAR Group had unused  availability  under the Credit  Facility of
$2.3 million out of the remaining  maximum $5.1 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 December 31,  2004).  At December
31, 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 rate on the  borrowings  under the Japanese line of credit for
its short-term bank loans at December 31, 2004 was 1.375% per annum.

       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 in Japan and has  continued  this
strategy.  As of this  filing,  the  Company is  currently  operating  in Japan,
Canada,  Turkey,  South Africa, India and Romania. In February 2005, the Company
announced the  establishment of a joint venture in China. The Company's  Chinese
joint venture is currently  awaiting  government  approval,  and  operations are
expected to start in the third quarter of 2005.

       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>
                                SPAR GROUP, INC.


CERTAIN CONTRACTUAL OBLIGATIONS

       The  following  table  contains a summary  of  certain  of the  Company's
contractual obligations by category as of March 31, 2005 (in thousands).

<TABLE>
          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 Facility                                 $2,124        $2,124       $     -        $    -          $    -
Operating Lease Obligations                      1,990         1,027           944            19               -
Total                                           $4,114        $3,151       $   944        $   19          $    -
</TABLE>


       The Company also had  approximately  $700,000 in  outstanding  Letters of
Credit at March 31, 2005.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

       The Company is exposed to market risk  related to the  variable  interest
rate on its lines of credit.  At March 31, 2005, the Company's  outstanding debt
totaled $2.1 million,  which consisted of domestic  variable-rate (6.5%) debt of
$1.2 million and international  variable rate (1.4%) debt of $0.9 million. Based
on the three months ending March 31, 2005, average outstanding  borrowings under
variable-rate  debt, a  one-percentage  point  increase in interest  rates would
negatively  impact  pre-tax  earnings  and cash flows for the three months ended
March 31, 2005 by approximately $6,000.

       The  Company  has  foreign   currency   exposure   associated   with  its
international  100% owned subsidiary,  its 51% owned joint venture  subsidiaries
and its 50% owned joint venture.  In the first quarter of 2005,  these exposures
are  primarily  concentrated  in the  Canadian  dollar,  Japanese  yen and South
African rand.  For the three months ended March 31, 2005,  international  assets
totaled $3.2 million and  international  liabilities  totaled $5.8 million.  For
three months ended March 31, 2005,  international  revenues totaled $3.7 million
and the Company's share of the net income was approximately $300,000.



                                       26
<PAGE>
                                SPAR GROUP, INC.


ITEM 4.    CONTROLS AND PROCEDURES

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

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

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

ITEM 5.  OTHER INFORMATION.


         None





                                       27
<PAGE>

                                SPAR GROUP, INC.


PART II:  OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

            No change.

ITEM 2:     CHANGES IN SECURITIES AND USE OF PROCEEDS

            Item 2(a): Not applicable

            Item 2(b): Not applicable

            Item 2(c): Not applicable

            Item 2(d): Not applicable

ITEM 3:     DEFAULTS UPON SENIOR SECURITIES

            Item 3(a):  Defaults under Indebtedness:  None.
            Item 3(b):  Defaults under Preferred Stock:  Not applicable.

ITEM 4:     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

            Not applicable.

ITEM 5:     OTHER INFORMATION

            Not applicable.


ITEM 6:     EXHIBITS AND REPORTS ON FORM 8-K

       EXHIBITS.

         10.1     Amended and Restated  Equipment Leasing Schedule 001 to Master
                  Lease Agreement by and between SPAR Marketing Services,  Inc.,
                  and SPAR Marketing Force,  Inc., dated as of November 1, 2004,
                  relating to lease of  handheld  computer  equipment,  as filed
                  herewith.

         10.2     Amended and Restated  Equipment Leasing Schedule 002 to Master
                  Lease Agreement by and between SPAR Marketing Services,  Inc.,
                  and SPAR Marketing  Force,  Inc., dated as of January 4, 2005,
                  relating to lease of  handheld  computer  equipment,  as filed
                  herewith.



                                       28
<PAGE>
                                SPAR GROUP, INC.

         10.3     Amended and Restated  Equipment Leasing Schedule 003 to Master
                  Lease Agreement by and between SPAR Marketing Services,  Inc.,
                  and SPAR Marketing Force,  Inc., dated as of January 31, 2005,
                  relating to lease of  handheld  computer  equipment,  as filed
                  herewith.

         10.4     Amended and Restated  Equipment Leasing Schedule 001 to Master
                  Lease Agreement by and between SPAR Marketing Services,  Inc.,
                  and SPAR Canada Company dated as of January 4, 2005,  relating
                  to lease of handheld computer equipment, as filed herewith.

         10.5     Equipment  Leasing  Schedule 004 to Master Lease  Agreement by
                  and between SPAR Marketing Services,  Inc., and SPAR Marketing
                  Force, Inc., dated as of March 24, 2005,  relating to lease of
                  handheld computer equipment, as filed herewith.

         10.6     Waiver to the Third Amended and Restated  Revolving Credit and
                  Security Agreement among Webster Business Credit  Corporation,
                  SPAR Group,  Inc., and certain of its subsidiaries dated as of
                  March 31, 2005, as filed herewith.

         10.7     Waiver to the Third Amended and Restated  Revolving Credit and
                  Security Agreement among Webster Business Credit  Corporation,
                  SPAR Group,  Inc., and certain of its subsidiaries dated as of
                  May 11, 2005, as filed herewith.

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

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

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

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

       REPORTS ON FORM 8-K.

         1.       Periodic  Report on Form 8-K, dated May 5, 2005 filed with the
                  U.S.  Securities  and  Exchange  Commission  on May 10,  2005,
                  respecting  the earnings  press  release for the first quarter
                  ended March 31, 2005.




                                       29
<PAGE>

                                SPAR GROUP, INC.


                                   SIGNATURES



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





       Date:  May 18, 2005           SPAR Group, Inc., Registrant


                                     By: /s/ Charles Cimitile
                                         ---------------------------------------
                                         Charles Cimitile
                                         Chief Financial Officer, Treasurer,
                                         Secretary and duly authorized signatory







                                       30