--------------------------------------------------------------------------------
                                  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 second quarterly period ended JUNE 30, 2005

                                                               OR

_     TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
EXCHANGE ACT OF 1934 for the transition  period from  ____________________ to
_____________________


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                         Commission file number: 0-27824


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

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

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

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


Indicate by check whether the registrant  (1) has filed all reports  required to
be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days: [ 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 June 30, 2005, there were 18,881,397 shares of Common Stock outstanding.

--------------------------------------------------------------------------------

<PAGE>
<TABLE>
<CAPTION>

                                SPAR GROUP, INC.

                                      Index

PART I:         FINANCIAL INFORMATION

<S>             <C>                                                                                   <C>
Item 1:               Financial Statements

                      Consolidated Balance Sheets

                      as of June 30, 2005, and December 31, 2004...................................... 3

                      Consolidated Statements of Operations for the three
                      months and six months ended June 30, 2005, and 2004..............................4

                      Consolidated Statements of Cash Flows for the

                      six months ended June 30, 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......................30

Item 4:               Controls and Procedures.........................................................31

Item 5:               Other Information...............................................................31

PART II:        OTHER INFORMATION

Item 1:               Legal Proceedings...............................................................32

Item 2:               Changes in Securities and Use of Proceeds.......................................32

Item 3:               Defaults upon Senior Securities.................................................32

Item 4:               Submission of Matters to a Vote of Security Holders.............................32

Item 5:               Other Information...............................................................32

Item 6:               Exhibits  ......................................................................32

SIGNATURES............................................................................................33
</TABLE>


                                       2
<PAGE>
PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                                SPAR GROUP, INC.
                           Consolidated Balance Sheets
                 (In thousands, except share and per share data)

                                                      JUNE 30,   DECEMBER 31,
                                                       2005         2004
                                                     --------     --------
                                                    (Unaudited)    (Note)
 ASSETS
 Current assets:
   Cash and cash equivalents                         $  1,158     $    887
   Accounts receivable, net                            10,526       11,307
   Prepaid expenses and other current assets              423          657
                                                     --------     --------
Total current assets                                   12,107       12,851

Property and equipment, net                             1,242        1,536
Goodwill                                                  798          798
Other assets                                              198          636
                                                     --------     --------
Total assets                                         $ 14,345     $ 15,821
                                                     ========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                  $  1,533     $  2,158
   Accrued expenses and other current liabilities       3,039        2,391
   Accrued expenses due to affiliates                     714          987
   Restructuring charges                                   99          250
   Customer deposits                                    1,316        1,147
   Lines of credit                                      2,449        4,956
                                                     --------     --------
Total current liabilities                               9,150       11,889

Other long-term liabilities                                56           12
Minority interest                                         117          206
                                                     --------     --------
Total liabilities                                       9,323       12,107

Commitments and contingencies (Note - 11)

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 -
       18,881,397 - June 30, 2005
       18,858,972 - December 31, 2004                     189          189
   Treasury stock                                          (3)        (108)
   Accumulated other comprehensive loss                  (175)         (86)
   Additional paid-in capital                          11,018       11,011
   Accumulated deficit                                 (6,007)      (7,292)
                                                     --------     --------
Total stockholders' equity                              5,022        3,714
                                                     --------     --------
Total liabilities and stockholders' equity           $ 14,345     $ 15,821
                                                     ========     ========

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

See accompanying notes.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED        SIX MONTHS ENDED
                                                     JUNE 30,     JUNE 30      JUNE 30,     JUNE 30,
                                                       2005         2004         2005         2004
                                                     --------     --------     --------     --------
<S>                                                  <C>          <C>          <C>          <C>
Net revenues                                         $ 12,800     $ 11,933     $ 27,321     $ 24,736
Cost of revenues                                        8,169        8,816       16,820       17,511
                                                     --------     --------     --------     --------
Gross profit                                            4,631        3,117       10,501        7,225

Selling, general and administrative expenses            4,242        5,477        8,498       10,445
Impairment charges                                          -        8,141            -        8,141
Depreciation and amortization                             272          369          551          730
                                                     --------     --------     --------     --------
Operating income (loss)                                   117      (10,870)       1,452      (12,091)

Interest expense                                           33           64           73           98
Other (income) expense                                    (13)           7          (13)           8
                                                     --------     --------     --------     --------
Income (loss) before provision for income
taxes and minority interest                                97      (10,941)       1,392      (12,197)
Provision for income taxes                                 15        1,236           30          771
                                                     --------     --------     --------     --------
Income (loss) before minority interest                     82      (12,177)       1,362      (12,968)
Minority interest                                         (34)           -           77            -
                                                     --------     --------     --------     --------
Net income (loss)                                    $    116     $(12,177)    $  1,285     $(12,968)
                                                     ========     ========     ========     ========

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

  Net income (loss)- basic/diluted                   $   0.01     $  (0.65)    $   0.07     $  (0.69)
                                                     ========     ========     ========     ========

Weighted average common shares - basic                 18,870       18,859       18,865       18,859
                                                     ========     ========     ========     ========

Weighted average common shares - diluted               19,550       18,859       19,202       18,859
                                                     ========     ========     ========     ========
</TABLE>

See accompanying notes.


                                       4
<PAGE>

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



                                                              SIX MONTHS ENDED
                                                            JUNE 30,    JUNE 30,
                                                             2005         2004
                                                            -------      ------
OPERATING ACTIVITIES
Net cash provided by operating activities                     3,045       3,089

INVESTING ACTIVITIES
Purchases of property and equipment                            (257)       (824)
Acquisition of businesses                                         -        (399)
                                                            -------      ------
Net cash used in investing activities                          (257)     (1,223)

FINANCING ACTIVITIES
Net payments on lines of credit                              (2,507)     (2,228)
Other long-term liabilities                                    (122)        243
Proceeds from employee stock purchase plan and exercised
   options                                                      112         119
                                                            -------      ------
Net cash used in financing activities                        (2,517)     (1,866)

Net change in cash and cash equivalents                         271           -
Cash and cash equivalents at beginning of period                887           -
                                                            -------      ------
Cash and cash equivalents at end of period                  $ 1,158      $    -
                                                            =======      ======

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest paid                                               $    75     $   103

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  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
in-store  event  staffing,  product  sampling,  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  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 and electronics 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, Romania and through a 50% owned joint venture in Japan. In
February  2005,  the Company  announced the  establishment  of a 50% owned joint
venture  in China.  The  Company's  Chinese  joint  venture  is  expected  to be
operational before the end of 2005.

3.     PRINCIPLES OF CONSOLIDATION

       The Company  consolidates its 100% owned subsidiaries.  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  venture,  and
accordingly,   consolidates   those   entities  into  the  Company's   financial
statements.  All significant  intercompany  accounts and transactions  have been
eliminated.

                                       6
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

4.     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 June 30, 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.

5.     EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED        SIX MONTHS ENDED
                                      --------    --------     --------    --------
                                      JUNE 30,     JUNE 30,    JUNE 30,     JUNE 30,
                                        2005        2004         2005        2004
                                      --------    --------     --------    --------
<S>                                   <C>         <C>          <C>         <C>
Numerator:

   Net income (loss)                  $    116    $(12,177)    $  1,285    $(12,968)

Denominator:
   Shares used in basic earnings
   (loss) per share calculation         18,870      18,859       18,865      18,859

Effect of diluted securities:
   Employee stock options                  680           -          337           -
                                      --------    --------     --------    --------

   Shares used in diluted earnings
   (loss) per share calculation         19,550      18,859       19,202      18,859
                                      ========    ========     ========    ========

Basic and diluted earnings (loss)
per common share:

   Net income (loss) - basic and
   diluted                            $   0.01    $  (0.65)    $   0.07    $  (0.69)
                                      ========    ========     ========    ========
</TABLE>

       The computation of dilutive loss per share excluded  anti-dilutive  stock
options to  purchase  approximately  370,000  and  795,000  shares for the three
months and six months ended June 30, 2004, respectively.

                                       7
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)


6.     LINES OF CREDIT

       In January  2003,  the Company and Webster  Business  Credit  Corporation
("Webster"),  then known as Whitehall Business Credit Corporation,  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 June 30, 2005,  there were no
LIBOR based loans and the interest rate calculated at Webster's Alternative Base
Rate plus 0.75% totaled 6.75% per annum.  The average  interest rate for the six
months ended June 30, 2005, was 6.4% 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", 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 June 30, 2005,  and
Webster  has  issued a waiver for those  violations.  The  Company is  currently
negotiating  with  Webster to amend the  existing  covenants.  If  amended,  the
Company  expects  that it will  comply  with the  amended  covenants  in  future
periods.  However,  there can be no assurances  that the Company will be able to
comply with the amended  covenants and that if the Company  violates the amended
covenants, Webster will continue to issue such waivers in the future.

       The revolving loan balances  outstanding  under the Credit  Facility were
$1.5  million  and $4.1  million  at June  30,  2005,  and  December  31,  2004,
respectively. There were letters of credit outstanding under the Credit Facility
of  approximately  $700,000 at June 30, 2005,  and December 31, 2004. As of June
30, 2005, the SPAR Group had unused  availability  under the Credit  Facility of
$3.5 million out of the remaining  maximum $4.8 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 June 30, 2005).  At June 30, 2005,
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  guarantied by the
joint venture partner, Paltac Corporation ("Paltac").  The Company has agreed to
reimburse  Paltac  for 50% of any  payment  made by  Paltac  as a result of this
Guaranty. The average interest rate on the borrowings under the Japanese line of
credit for the six months ended June 30, 2005, was 1.375% per annum.

                                       8
<PAGE>

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


7.      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  89% of the  Company's  field  management  at a total  cost to the
Company of  approximately  $11.0  million  and $14.4  million for the six months
ended  June 30,  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  5,200  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  40 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  $234,000
for the six months ended June 30,  2004.  Total net premiums (4% of SMS and SMSI
costs less 2004  concessions)  paid to SMS and SMSI for services  rendered  were
approximately  $420,000 and $550,000 for the six months ended June 30, 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  $424,000 and $715,000
for the six months ended June 30,  2005,  and 2004,  respectively.  SIT provided
approximately  14,000 and 20,000 hours of Internet computer programming services
to the Company for the six months ended June 30, 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 $30.62
and $35.39 for the six months ended June 30, 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 six months  ended
June 30, 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.

                                       9
<PAGE>

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

("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.

       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 JUNE 30, SIX MONTHS ENDED JUNE 30,
                                             ---------------------      --------------------
                                              2005          2004          2005         2004
                                             -------      --------      -------      -------
<S>                                          <C>          <C>           <C>          <C>
     Services provided by affiliates:
       Independent contractor services
          (SMS)                              $ 4,369      $  5,397      $ 9,154      $11,758
                                             =======      ========      =======      =======
       Field management services (SMSI)      $   912      $  1,250      $ 1,879      $ 2,634
                                             =======      ========      =======      =======
       Handheld computer leases (SMS)        $    70       $     -      $   127      $     -
                                             =======      ========      =======      =======
       Internet and software program
       consulting services (SIT)             $   214      $    334      $   424      $   715
                                             =======      ========      =======      =======
</TABLE>

       Accrued expenses due to affiliates (in thousands): JUNE 30,  DECEMBER 31,
                                                           2005         2004
                                                           ----        ----
       SPAR Marketing Services, Inc.                       $714        $987
                                                           ====        ====

                                       10
<PAGE>

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

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

8.     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.

       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>
                                                            SIX MONTHS ENDED JUNE 30,
                                                            ----------------------
                                                              2005           2004
                                                            --------      --------

<S>                                                         <C>           <C>
     Net income (loss), as reported                         $  1,285      $(12,968)
     Stock based employee compensation expense
       under the fair market value method                        211           342
                                                            --------      --------
     Pro forma net income (loss)                            $  1,074      $(13,310)

     Basic and diluted net income (loss) per share, as
       reported                                             $   0.07      $  (0.69)
     Basic and diluted net income (loss) per share,
       pro forma                                            $   0.06      $  (0.71)
</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 six
months ended June 30,  2005,  the Company  recorded an expense of  approximately
$72,000.  For the six months ended June 30, 2004, as a result of the decrease in
the market price of the Company's stock from December 31, 2003 to June 30, 2004,
there was a recovery of amounts  previously  expensed of  approximately  $60,000
under the  provision of SFAS
                                       11
<PAGE>
                                SPAR GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (UNAUDITED) (CONTINUED)

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.

9.     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.

       The following table summarizes the Company's treasury stock activity from
January 1, 2005, to June 30, 2005.

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

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

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

       TREASURY STOCK, JUNE 30, 2005                254       $   3,483
                                                =======       =========

10.    CUSTOMER DEPOSITS

       Customer  deposits at June 30,  2005,  were $1.3  million.  Approximately
$870,000 is associated with a non-refundable  deposit received by the Company in
June 2004 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.  At June 30, 2005,  the  outstanding  balance for this customer was
approximately $870,000.

11.    COMMITMENTS AND CONTINGENCIES

       INTERNATIONAL COMMITMENTS

       The Company's  international model is to partner with local merchandising
companies  and combine the Company's  proprietary  software and expertise in the
merchandising  business with their partner's  knowledge of the local market.  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 expected to be operational before the end of 2005.

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


       Certain  of these  joint  ventures  and joint  venture  subsidiaries  are
becoming profitable,  while others are either marginally profitable or 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 and breach
of implied  contract.  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. and Pivotal  filed  cross-claims  against
Safeway on or about March 11,  2002,  and amended  them on or about  October 15,
2002,  alleging causes of action by 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  against  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.
and Pivotal 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.

12.    GEOGRAPHIC DATA

       A summary of the Company's net revenue,  operating income (loss) and long
lived assets by  geographic  area for the three months and six months ended June
30, 2005, and 2004,  respectively,  and at June 30, 2005, and December 31, 2004,
are as follows (in thousands):

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                          -----------------------          -----------------------
                                           2005             2004             2005            2004
                                          --------        --------         --------        --------
<S>                                       <C>             <C>              <C>             <C>
     Net revenue:
     United States                        $ 9,180         $10,568          $19,979         $23,232
     International                          3,620           1,365            7,342           1,504
                                          --------        --------         --------        --------
     Total net revenue                    $12,800         $11,933          $27,321         $24,736
                                          ========        ========         ========        ========

                                       13
<PAGE>

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

                                        THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                          -----------------------          -----------------------
                                           2005             2004             2005            2004
                                          --------        --------         --------        --------
     Operating income (loss):
     United States                        $      -        $ (9,670)        $    895        $(10,562)
     International                             117          (1,200)             557          (1,529)
                                          --------        --------         --------        --------
     Total operating income (loss)        $    117        $(10,870)        $  1,452        $(12,091)
                                          ========        ========         ========        ========
</TABLE>

                              JUNE 30,    DECEMBER 31,
                               ------        ------
    Long lived assets:          2005          2004
                               ------        ------

United States                  $1,942        $2,484
International                     296           486
                               ------        ------
Total long lived assets        $2,238        $2,970
                               ======        ======


       International  revenues  disclosed above are the revenues reported by the
Company's  100% owned  foreign  subsidiary,  its 51% owned foreign joint venture
subsidiaries  and its 50% owned foreign joint venture.  For the six months ended
June 30,  2005,  the wholly  owned  Canadian  subsidiary  contributed  8% of the
consolidated  net revenue of the Company.  The joint  venture in Japan and joint
venture subsidiary in South Africa  contributed 11% and 8%,  respectively to the
consolidated  net revenue of the Company.  Each of the  remaining  foreign joint
venture  subsidiaries  contributed  less than 5% to the consolidated net revenue
for the six month period ending June 30, 2005.

13.    SUPPLEMENTAL BALANCE SHEET INFORMATION

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

                                        JUNE 30,        DECEMBER 31,
                                       --------         --------
                                         2005              2004
                                       --------         --------

Trade                                  $  7,716         $  8,178
Unbilled                                  3,259            3,600
Non-trade                                   227              290
                                       --------         --------
                                         11,202           12,068
Less:
Allowance for doubtful accounts            (676)            (761)
                                       --------         --------
                                       $ 10,526         $ 11,307
                                       ========         ========


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

Prepaid expenses and other current assets consist     JUNE 30,  DECEMBER 31,
of the following (in thousands):                       ----        ----
                                                       2005        2004
                                                       ----        ----

Prepaid insurance                                      $122        $214
Tax refund due                                           62          62
Prepaid rents                                            49          49
Other                                                   190         332
                                                       ----        ----
                                                       $423        $657
                                                       ====        ====

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


                                                       JUNE 30,     DECEMBER 31,
                                                        ------        ------
                                                         2005          2004
                                                        ------        ------

  Equipment                                             $5,469        $5,397
  Furniture and fixtures                                   545           547
  Leasehold improvements                                   138           138
  Capitalized software development costs                 1,818         1,629
                                                        ------        ------
                                                         7,970         7,711
  Less accumulated depreciation and amortization         6,728         6,175
                                                        ------        ------
                                                        $1,242        $1,536
                                                        ======        ======

 Accrued expenses and other current liabilities
 consist of the following (in thousands):

                                              JUNE 30,     DECEMBER 31,
                                                2005          2004
                                              ------        ------
  Merger Related Payables                     $  450        $  450
  Accrued medical expenses                       225           225
  Taxes Payable                                  391           345
  Accrued accounting and legal expense           512           192
  Accrued salaries payable                       462           328
  Other                                          999           851
                                              ------        ------
                                              $3,039        $2,391
                                              ======        ======

14.    ISSUANCE OF OPTIONS

       On April 12,  2005 and May 12,  2005,  the Company  issued  non-qualified
stock options to various  employees of the Company and its affiliates to acquire
500,030  and  100,750  shares of stock of SGRP at $1.26  and  $1.75  per  share,
respectively, with the normal four year vesting provisions.

15.    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 six months ended June 30, 2005,  these
exposures were primarily concentrated in the Canadian dollar, South African


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

rand  and  Japanese  yen.  At  June  30,  2005,   international  assets  totaled
approximately $4.0 million and international  liabilities totaled  approximately
$6.4 million. For six months ended June 30, 2005, international revenues totaled
$7.3  million  and the  Company's  share  of the net  income  was  approximately
$456,000.

16.    INTEREST RATE FLUCTUATIONS

       The Company is exposed to market risk  related to the  variable  interest
rates on its lines of credit.  At June 30, 2005, the Company's outstanding  debt
totaled  approximately $2.4 million,  which consisted of domestic  variable-rate
(6.8%)  debt of $1.5  million  and  international  variable  rate (1.4%) debt of
$900,000.  Based on the six months  ending June 30,  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 six months
ended June 30, 2005, by approximately $30,000.

17.    RECLASSIFICATION

       Certain amounts in the 2004 financial  statements have been  reclassified
to conform to the 2005 presentation.














                                       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 SIX
MONTHS  ENDED JUNE 30,  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, electronics,
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,  India and Romania and a 50% owned joint
venture in Japan.  In February 2005,  the Company  established a 50% owned joint
venture  in  China.  For the  six  months  ended

                                       17
<PAGE>
                                SPAR GROUP, INC.

June 30, 2005, the Company  consolidated Canada,  Turkey,  South Africa,  India,
Romania and Japan into the Company's  financial  statements.  China did not have
operations for the six months ended June 30, 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
and electronics  chains and grocery  stores.  Included in its customers are home
entertainment,  general  merchandise,   electronics,  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:

                         Percent Ownership in
                         Subsidiary or Joint
         Date                  Venture                   Location
----------------------- ----------------------- ---------------------------
       May 2001                  50%                    Osaka, Japan
      June 2003                  100%                 Toronto, Canada
      July 2003                  51%                  Istanbul, Turkey
      April 2004                 51%                Durban, South Africa
      April 2004                 51%                  New Delhi, India
    December 2004                51%                 Bucharest, Romania
    February 2005                50%                  Hong Kong, China

The China joint venture is expected to be operational before the end of 2005.

                                       18
<PAGE>

                                SPAR GROUP, INC.

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.  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  venture,  and  accordingly  consolidates  these  entities into the
       Company's financial  statements.  In addition,  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.

       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  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

                                       19
<PAGE>

                                SPAR GROUP, INC.

       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 June 30, 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  $188,667  and  $362,808  of costs  related  to
       software  developed  for  internal  use in the six months  ended June 30,
       2005,  and 2004,  respectively  and  amortized  capitalized  software  of
       $277,481 and  $365,323 in the six months  ended June 30, 2005,  and 2004,
       respectively.


                                       20
<PAGE>

                                SPAR GROUP, INC.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2005, COMPARED TO THREE MONTHS ENDED JUNE 30, 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
                                                   ---------------------------------------------------------------------------------
                                                       June 30, 2005                        June 30, 2004
                                                       -------------                        -------------
                                                                                                                        Increase
                                                       Dollars                %             Dollars              %     (decrease) %
                                                       -------                -             -------              -     ------------

<S>                                                     <C>                 <C>             <C>              <C>             <C>
Net revenues                                            $   12,800          100.0%          $ 11,933         100.0%          7.3%

Cost of revenues                                             8,169            63.8             8,816          73.9          (7.3)

Selling, general and administrative expense                  4,242            33.1             5,477          45.9         (22.6)

Impairment charges                                               -               -             8,141          68.2           -

Depreciation and amortization                                  272             2.1               369           3.1         (26.4)

Interest expense                                                33             0.3                64           0.5         (48.3)

Other (income) expense                                        (13)           (0.1)                 7           0.1        (286.7)
                                                   ---------------- --------------- ----------------- ----------------

Income (loss) before provision for income taxes
   and minority interest                                        97             0.8          (10,941)         (91.7)          -

Provision for income tax                                        15             0.1             1,236          10.4           -
                                                   ---------------- --------------- ----------------- ----------------

Net income (loss) before minority interest                      82             0.7          (12,177)        (102.1)          -

Minority interest                                             (34)           (0.3)                 -           -             -
                                                   ---------------- --------------- ----------------- ----------------

Net income (loss)                                          $   116            1.0%       $  (12,177)        (102.1)%         -
                                                   ================ =============== ================= ================
</TABLE>


       NET REVENUES

       Net  revenues  for the three  months  ended  June 30,  2005,  were  $12.8
million,  compared to $11.9 million for the three months ended June 30, 2004, an
increase of 7%. For the second quarter domestic  revenue  decreased $1.4 million
or 13% to $9.2 million, compared to $10.6 million a year ago. The

                                       21
<PAGE>

                                SPAR GROUP, INC.


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 second quarter  increased to $3.6 million from $1.4 million last
year,  primarily as a result of the Japan  consolidation  and increased  revenue
from the Company's Canadian operations.

       One customer  accounted  for 21% and 10% of the Company's net revenue for
the three months ended June 30, 2005, and 2004, respectively. This customer also
accounted for approximately 26% and 8% of accounts  receivable at June 30, 2005,
and December 31, 2004, respectively.

       Approximately  8% and 12% of the  Company's  net  revenues  for the three
months ended June 30, 2005, and 2004, respectively,  resulted from merchandising
services  performed for customers at Kmart.  These  customers also accounted for
approximately  5% and 22% of accounts  receivable at June 30, 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 9% of the Company's net revenue for the three
months ended June 30, 2005 resulted from  merchandising  services  performed for
customers at Circuit City.  These customers also accounted for  approximately 7%
and 16% of  accounts  receivable  at June  30,  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.

       A second customer  accounted for 4% and 28% of the Company's net revenues
for the three months ended June 30, 2005, and 2004, respectively.  This customer
also accounted for  approximately  8% and 7% of accounts  receivable at June 30,
2005, and December 31, 2004, respectively. In 2004, this customer was a division
of a major  retailer and was sold by its parent on August 2, 2004. In 2005,  the
Company saw a significant  decline in net revenue from this customer and expects
the decline to continue in 2005.

       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  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 64% for the three months ended June
30, 2005,  compared to 74% for the three  months  ended June 30,  2004.  For the
second quarter domestic cost of revenues as a percentage of net revenues was 65%
and 73% for the three  months  ended June 30,  2005 and 2004  respectively.  The
decrease is primarily a result of the Company  restructuring  its domestic field
force to reflect its reduction of business. Internationally, cost of revenues as
a percentage of net revenues was 60% and 80% for the three months ended June 30,
2005 and 2004  respectively.  The international  cost of revenue  percentage was
favorably  impacted by the increase in  international  revenue which enabled the
Company to leverage its infrastructure.

                                       22
<PAGE>

                                SPAR GROUP, INC.

       Approximately  88% and 86% of the  Company's  domestic cost of revenue in
the three months  ended June 30, 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 7 - Related-Party Transactions).

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

       Selling,  general and administrative  expenses decreased by $1.2 million,
or 23%, for the three months  ended June 30, 2005,  to $4.3 million  compared to
$5.5 million for the three months ended June 30, 2004. Domestic selling, general
and  administrative  expenses decreased by $1.8 million to $3.0 million for 2005
from $4.8  million  in 2004.  The  reduction  of 38% was  primarily  due to cost
reduction  programs  initiated in 2004 as a result of the loss of certain  large
customers.   Internationally,   selling,  general  and  administrative  expenses
increased by approximately  $560,000 to $1.3 million for 2005 from approximately
$700,000 in 2004. The increase of 77% was primarily due to the  consolidation of
the Japan joint venture.

IMPAIRMENT CHARGES

       Impairment  charges were $8.1 million for the three months ended June 30,
2004.  Impairment  charges  consisted  of $9.0  million of goodwill  impairment,
offset by reductions to the other  liabilities  for PIA merger  related costs of
$1.0  million  and PIA  restructuring  charges  of $0.7  million,  net of a $0.3
million tax effect, $0.4 million of net impairment of software development costs
previously capitalized and $0.1 million for impairment of other assets.

DEPRECIATION AND AMORTIZATION

       Depreciation  and  amortization  charges  of $0.3  million  for the three
months ended June 30, 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 June 30, 2005. The provision was primarily for minimum state taxes.
There was no provision for federal tax for the three months ended June 30, 2005,
since the Company expects to utilize net operating loss carryforwards previously
reserved to offset any federal taxes due.

       The Company  recorded  an income tax  provision  of $1.2  million for the
three months ended June 30, 2004.  The  provision  was primarily a result of the
establishment  of a valuation  reserve for the  deferred  tax assets  previously
recorded by the Company  totaling $0.7  million,  a reversal of the $0.5 million
tax  benefit  previously  recorded  in the  quarter  ending  March 31,  2004 and
estimated minimum state taxes due.

                                       23
<PAGE>

                                SPAR GROUP, INC.


MINORITY INTEREST

       Minority  interest of approximately  $34,000 resulted from the operations
of the 51% owned joint venture  subsidiaries  and the 50% owned  Japanese  joint
venture for the three months ended June 30, 2005.

NET INCOME

       The Company had a net income of $116,000  for the three months ended June
30, 2005, or $0.01 per diluted  share,  compared to a net loss of $12.2 million,
or $0.65 per diluted share, for the corresponding period last year.















                                       24
<PAGE>

                                SPAR GROUP, INC.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2005, COMPARED TO SIX MONTHS ENDED JUNE 30, 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>
<S>                                                      <C>                <C>          <C>                <C>             <C>

                                                                                    Six Months Ended

                                                   ---------------------------------------------------------------------------------


                                                                June 30, 2005                  June 30, 2004
                                                                -------------                  -------------
                                                                                                                        Increase
                                                          Dollars             %            Dollars            %         (decrease) %
                                                          -------             -            -------            -        ------------

  Net revenues                                           $ 27,321           100.0%       $ 24,736           100.0%          10.5%

  Cost of revenues                                         16,820            61.6          17,511            70.8           (4.0)

  Selling, general and administrative expense               8,498            31.1          10,445            42.2          (18.6)

  Impairment charges                                            -               -           8,141            32.9              -

  Depreciation and amortization                               551             2.0             730             3.0          (24.6)

  Interest expense                                             73             0.3              98             0.4          (25.6)

  Other (income) expense                                      (13)           (0.0)              8             0.0         (260.8)
                                                         --------         -------        --------         -------        -------

  Income (loss) before provision for income taxes
     and minority interest                                  1,392             5.0         (12,197)          (49.3)           -

  Provision for income tax                                     30             0.1             771             3.1            -
                                                         --------         -------        --------         -------

  Net income (loss) before minority interest                1,362             4.9         (12,968)          (52.4)           -

  Minority interest                                            77             0.3               -               -            -
                                                         --------         -------        --------         -------

  Net income (loss)                                      $  1,285             4.6%       $(12,968)          (52.4)%          -
                                                         ========         =======        ========         =======
</TABLE>

NET REVENUES

       Net revenues for the six months ended June 30, 2005,  were $27.3 million,
compared to $24.7 million for the six months ended June 30, 2004, an increase of
$2.6 million or 11%. For the six month period,  domestic revenue  decreased $3.3
million or 14% to $19.9  million,  compared to $23.2  million in


                                       25
<PAGE>

                                SPAR GROUP, INC.

the prior year.  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 six months increased to $7.3 million from $1.5
million last year, primarily as a result of the Japan  consolidation,  the South
African   acquisition  and  increased   revenue  from  the  Company's   Canadian
operations.

       One customer  accounted  for 19% and 8% of the  Company's net revenue for
the six months ended June 30, 2005, and 2004,  respectively.  This customer also
accounted for approximately 26% and 8% of accounts  receivable at June 30, 2005,
and December 31, 2004, respectively.

       A second customer accounted for 10% and 36% of the Company's net revenues
for the six months ended June 30, 2005,  and 2004,  respectively.  This customer
also accounted for  approximately  8% and 7% of accounts  receivable at June 30,
2005, and December 31, 2004, respectively. In 2004, this customer was a division
of a major  retailer and was sold by its parent on August 2, 2004. In 2005,  the
Company  performed a project  that  resulted in $2.8 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.

       In addition,  approximately  10% of the Company's net revenue for the six
months ended June 30, 2005,  resulted from merchandising  services performed for
customers at Circuit City.  These customers also accounted for  approximately 7%
and 16% of  accounts  receivable  at June  30,  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.

       Approximately 9% and 13% of the Company's net revenues for the six months
ended  June 30,  2005,  and  2004,  respectively,  resulted  from  merchandising
services  performed for customers at Kmart.  These  customers also accounted for
approximately  5% and 22% of accounts  receivable at June 30, 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.

       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  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 62% for the six months ended June
30, 2005,  compared to 71% for the six months  ended June 30, 2004.  For the six
months ended June 30, 2005 and 2004,  domestic  cost of revenues as a percentage
of net revenues was 62% and 70% respectively. The decrease is primarily a result
of the Company  restructuring  its domestic field force to reflect its reduction
of business.  Internationally,  cost of revenues as a percentage of net revenues
was 60% and 79% for the six months  ended June 30,  2005 and 2004  respectively.
The


                                       26
<PAGE>

                                SPAR GROUP, INC.

international  cost of revenue percentage was favorably impacted by the increase
in   international   revenue   which   enabled  the  Company  to  leverage   its
infrastructure.

       Approximately  89% and 88% of the  Company's  domestic cost of revenue in
the six months  ended  June 30,  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 7 - Related-Party Transactions).

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

        Selling,  general and administrative expenses decreased by $1.9 million,
or 19%,  for the six months ended June 30,  2005,  to $8.5  million  compared to
$10.4 million for the six months ended June 30, 2004. Domestic selling,  general
and  administrative  expenses decreased by $3.1 million to $6.2 million for 2005
from $9.3  million  in 2004.  The  reduction  of 34% was  primarily  due to cost
reduction  programs  initiated in 2004 as a result of the loss of certain  large
customers.   Internationally,   selling,  general  and  administrative  expenses
increased  by  approximately  $1.2  million to $2.3  million  for 2005 from $1.1
million in 2004. The increase of 112% was primarily due to the  consolidation of
Japan and increased operations in South Africa and Canada.

IMPAIRMENT CHARGES

       Impairment  charges  were $8.1  million for the six months ended June 30,
2004.  Impairment  charges  consisted  of $9.0  million of goodwill  impairment,
offset by reductions to the other  liabilities  for PIA merger  related costs of
$1.0  million  and PIA  restructuring  charges  of $0.7  million,  net of a $0.3
million tax effect, $0.4 million of net impairment of software development costs
previously capitalized and $0.1 million for impairment of other assets.

DEPRECIATION AND AMORTIZATION

       Depreciation and amortization  charges of $0.6 million for the six months
ended June 30,  2005,  was  consistent  with $0.7 million in the same period for
2004.

INCOME TAXES

       The  Company  recorded  an income tax  provision  of $30,000  for the six
months ended June 30, 2005. The provision was primarily for minimum state taxes.
There was no  provision  for federal tax for the six months ended June 30, 2005,
since the Company expects to utilize net operating loss carryforwards previously
reserved to offset any federal taxes due.

       The Company  recorded an income tax provision of $0.8 million for the six
months  ended  June 30,  2004.  The  provision  was  primarily  a result  of the
establishment  of a valuation  reserve for net  deferred  tax assets  previously
recorded by the Company and estimated minimum state taxes due.



                                       27
<PAGE>

                                SPAR GROUP, INC.

MINORITY INTEREST

       Minority  interest  expense of  approximately  $77,000  resulted from the
operations of the 51% owned joint venture  subsidiaries  and the 50% owned joint
venture for the six months ended June 30, 2005.

NET INCOME

       The  Company had a net income of $1.3  million  for the six months  ended
June 30,  2005,  or $0.07 per  diluted  share,  compared  to a net loss of $13.0
million, or $0.69 per diluted share, for the corresponding period last year.

LIQUIDITY AND CAPITAL RESOURCES

       In the six months  ended June 30,  2005,  the Company had a net income of
$1.3 million.

       Net cash provided by operating  activities  for the six months ended June
30, 2005, and 2004, was $3.1 million.

       Net cash used in investing  activities  for the six months ended June 30,
2005,  was  approximately  $260,000  compared  to net  cash  used  in  investing
activities of $1.2 million for the six months ended June 30, 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 six months ended June 30,
2005,  was $2.5  million,  compared to net cash used in financing  activities of
$1.9 million for the six months  ended June 30,  2004.  The increase of net cash
used in financing  activities  was  primarily a result of higher net payments on
the lines of credit and other long term liabilities.

       The above activity  resulted in an increase in cash and cash  equivalents
for the six months ended June 30, 2005, of approximately $271,000.

       At June 30,  2005,  the  Company  had  positive  working  capital of $3.0
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
lines of  credit,  and  accounts  payable,  as well  as,  an  increase  in cash,
partially  offset by  reduced  accounts  receivable  and  increases  in  accrued
expenses and other current liabilities.  The Company's current ratio was 1.32 at
June 30, 2005, and 1.08 at December 31, 2004.

       In January  2003,  the Company and Webster  Business  Credit  Corporation
("Webster"),  then known as Whitehall Business Credit Corporation,  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


                                       28
<PAGE>

                                SPAR GROUP, INC.

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 June 30,  2005,  there were no LIBOR based loans and the interest
rate calculated at Webster's  Alternative Base Rate plus 0.75% totaled 6.75% per
annum.  The average  interest  rate for the six months ended June 30, 2005,  was
6.4% 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", 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 June 30, 2005,  and
Webster  has issued a waiver for the June 30,  2005,  covenant  violations.  The
Company is currently  negotiating with Webster to amend the existing  covenants.
If amended,  the Company expects that it will be able to comply with the amended
covenants  in  future  periods.  However,  there can be no  assurances  that the
Company will comply with the amended  covenants and that if the Company violates
the  amended  covenants,  Webster  will  continue  to issue such  waivers in the
future.

       The revolving loan balances  outstanding  under the Credit  Facility were
$1.5  million  and $4.1  million  at June  30,  2005,  and  December  31,  2004,
respectively. There were letters of credit outstanding under the Credit Facility
of  approximately  $700,000 at June 30, 2005,  and December 31, 2004. As of June
30, 2005, the SPAR Group had unused  availability  under the Credit  Facility of
$3.5 million out of the remaining  maximum $4.8 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 June 30, 2005).  At June 30, 2005,
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  guarantied by the
joint venture partner, Paltac Corporation ("Paltac").  The Company has agreed to
reimburse  Paltac  for 50% of any  payment  made by  Paltac  as a result of this
Guaranty. The average interest rate on the borrowings under the Japanese line of
credit for its short-term bank loans at June 30, 2005, was 1.375% per annum.

       The Company's  international model is to partner with local merchandising
companies  and combine the Company's  proprietary  software and expertise in the
merchandising  business  with the  partner's  knowledge of the local market . In
2001, the Company established its first joint venture in Japan and has continued
this strategy.  As of this filing, the Company is currently  operating in Japan,
Canada,  Turkey,  South Africa, India and Romania. In February 2005, the Company
announced the  establishment of a joint venture in China. The Company's  Chinese
joint venture is expected to be operational before the end of 2005.



                                       29
<PAGE>

                                SPAR GROUP, INC.

       Certain of these joint ventures and joint venture subsidiaries are or are
becoming profitable,  while others are either marginally profitable or 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 its lender's waivers for future covenant
violations  could have a material adverse effect on the Company's cash resources
and its ongoing ability to fund operations.

CERTAIN CONTRACTUAL OBLIGATIONS

       The  following  table  contains a summary  of  certain  of the  Company's
contractual obligations by category as of June 30, 2005 (in thousands).

<TABLE>
<CAPTION>
<S>                                  <C>           <C>        <C>              <C>             <C>
---------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS                         PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------------------------------
                                    Total       Less than 1    1-3 years     3-5 years     More than 5
                                                   year                                       years
---------------------------------------------------------------------------------------------------------
Credit Facility                      $2,449        $2,449       $     -        $    -          $    -
---------------------------------------------------------------------------------------------------------
Operating Lease Obligations           1,010           527           483             -               -
---------------------------------------------------------------------------------------------------------
Total                                $3,459        $2,976       $   483        $    -          $    -
---------------------------------------------------------------------------------------------------------
</TABLE>

       The Company also had  approximately  $700,000 in  outstanding  Letters of
Credit at June 30, 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
rates on its lines of credit.  At June 30, 2005, the Company's outstanding  debt
totaled  approximately $2.4 million,  which consisted of domestic  variable-rate
(6.8%)  debt of $1.5  million  and  international  variable  rate (1.4%) debt of
$900,000.  Based on the six months  ending June 30,  2005,  average  outstanding
borrowings under

                                       30
<PAGE>

                                SPAR GROUP, INC.

variable-rate  debt, a  one-percentage  point  increase in interest  rates would
negatively  impact pre-tax earnings and cash flows for the six months ended June
30, 2005, by approximately $30,000.

       The  Company  has  foreign   currency   exposure   associated   with  its
international  100% owned subsidiary,  its 51% owned joint venture  subsidiaries
and its 50% owned Japanese joint venture. In the six months ended June 30, 2005,
these  exposures  were  primarily  concentrated  in the Canadian  dollar,  South
African rand and Japanese yen. At June 30, 2005,  international  assets  totaled
approximately $4.0 million and international  liabilities totaled  approximately
$6.4 million. For six months ended June 30, 2005, international revenues totaled
$7.3  million  and the  Company's  share  of the net  income  was  approximately
$456,000.

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

ITEM 5. OTHER INFORMATION.

        None



                                       31
<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 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

        EXHIBITS.

        10.1    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
                August 10, 2005,  with respect to the fiscal  quarter ended June
                30, 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.






                                       32
<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:  August 15, 2005             SPAR Group, Inc., Registrant


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









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