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, 2004

                                       OR

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


                         Commission file number: 0-27824


                                SPAR Group, Inc.
             (Exact name of registrant as specified in its charter)

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

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

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


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


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


   On June 30, 2004, there were 18,858,972 shares of Common Stock outstanding.

<PAGE>


                                SPAR Group, Inc.

                                      Index

<TABLE>
<CAPTION>
<S>             <C>                                                                                  <C>
PART I:         FINANCIAL INFORMATION

Item 1:               Financial Statements

                      Consolidated Balance Sheets
                      as of June 30, 2004 and December 31, 2003....................................... 3

                      Consolidated Statements of Operations for the three
                      months and six months ended June 30, 2004 and 2003...............................4

                      Consolidated Statements of Cash Flows for the
                      six months ended June 30, 2004 and 2003......................................... 5

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

Item 2:               Management's Discussion and Analysis of Financial
                      Condition and Results of Operations.............................................16

Item 3:               Quantitative and Qualitative Disclosures About Market Risk......................28

Item 4:               Controls and Procedures.........................................................28

PART II:        OTHER INFORMATION

Item 1:               Legal Proceedings...............................................................29

Item 2:               Changes in Securities and Use of Proceeds.......................................29

Item 3:               Defaults upon Senior Securities.................................................29

Item 4:               Submission of Matters to a Vote of Security Holders.............................29

Item 5:               Other Information...............................................................29

Item 6:               Exhibits and Reports on Form 8-K................................................29

SIGNATURES............................................................................................31
</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)

<TABLE>
<CAPTION>
                                                     June 30,    December 31,
                                                       2004         2003
                                                     --------     --------
                                                    (Unaudited)    (Note)
<S>                                                  <C>          <C>
Assets
Current assets:
   Accounts receivable, net                          $  7,743     $ 13,942
   Prepaid expenses and other current assets              310          415
   Deferred income taxes                                    -        1,305
                                                     --------     --------
Total current assets                                    8,053       15,662

Property and equipment, net                             1,751        2,099
Goodwill                                                  798        8,749
Deferred income taxes                                       -          434
Other assets                                              448          926
                                                     --------     --------
Total assets                                         $ 11,050     $ 27,870
                                                     ========     ========

Liabilities and stockholders' equity
Current liabilities:
   Accounts payable                                  $  2,083     $  1,445
   Accrued expenses and other current liabilities       1,192        4,350
   Accrued expenses, due to affiliates                  1,296          996
   Restructuring charges, current                           -          685
   Customer deposits                                      932           17
   Line of credit, short-term                           1,856        4,084
                                                     --------     --------
Total current liabilities                               7,359       11,577

Other long-term liabilities                               513          270


Commitments and contingencies

Stockholders' equity:
   Preferred stock, $.01 par value:
     Authorized shares - 3,000,000
     Issued and outstanding shares - none                   -            -
   Common stock, $.01 par value:
     Authorized shares - 47,000,000
     Issued and outstanding shares -
       18,858,972 - June 30, 2004 and
                    December 31, 2003                     189          189
   Treasury stock                                        (213)        (384)
   Accumulated other comprehensive loss                    (3)          (7)
   Additional paid-in capital                          11,197       11,249
   Accumulated (deficit) retained earnings             (7,992)       4,976
                                                     --------     --------
Total stockholders' equity                              3,178       16,023
                                                     --------     --------
Total liabilities and stockholders' equity           $ 11,050     $ 27,870
                                                     ========     ========
</TABLE>

Note: The Balance Sheet at December 31, 2003,  has been derived from the audited
      financial  statements  at  that  date  but  does  not  include  any of the
      information  and  footnotes  required by accounting  principles  generally
      accepted in the United States for complete financial statements.

See accompanying notes.


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                      Three Months Ended          Six Months Ended
                                                     ---------------------     ---------------------
                                                     June 30,     June 30,     June 30,     June 30,
                                                       2004         2003         2004         2003
                                                     --------     --------     --------     --------
<S>                                                  <C>          <C>          <C>          <C>
Net revenues                                         $ 11,933     $ 17,351     $ 24,736     $ 36,090
Cost of revenues                                        8,716       11,146       17,411       22,397
                                                     --------     --------     --------     --------
Gross profit                                            3,217        6,205        7,325       13,693

Selling, general and administrative expenses            5,577        4,768       10,545        9,711
Impairment charges                                      8,141            -        8,141            -
Depreciation and amortization                             369          399          730          777
                                                     --------     --------     --------     --------
Operating (loss) income                               (10,870)       1,038      (12,091)       3,205

Interest expense                                           64           72           98          140
Other expense (income)                                      7          (10)           8           28
                                                     --------     --------     --------     --------
(Loss) income before provision for income taxes       (10,941)         976      (12,197)       3,037

Provision for income taxes                              1,236          368          771        1,151
                                                     --------     --------     --------     --------

Net (loss) income                                    $(12,177)    $    608     $(12,968)    $  1,886
                                                     ========     ========     ========     ========

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

  Net (loss) income - basic/diluted                  $  (0.65)    $   0.03     $  (0.69)    $   0.10
                                                     ========     ========     ========     ========

Weighted average common shares - basic                 18,859       18,858       18,859       18,850
                                                     ========     ========     ========     ========

Weighted average common shares - diluted               18,859       19,538       18,859       19,447
                                                     ========     ========     ========     ========
</TABLE>


See accompanying notes.

                                       4
<PAGE>

                                SPAR Group, Inc.

                      Consolidated Statements of Cash Flows
                           (unaudited) (In thousands)

<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                                    ---------------------
                                                                    June 30,     June 30,
                                                                      2004         2003
                                                                    --------     --------
<S>                                                                 <C>          <C>
Operating activities
Net (loss) income                                                   $(12,968)    $  1,886
Adjustments to reconcile net (loss) income to net cash provided
   by (used in) operating activities:
     Impairment charges                                                8,141            -
     Deferred tax asset adjustments                                      729            -
     Depreciation                                                        730          777

     Changes in operating assets and liabilities:
       Accounts receivable                                             6,199       (2,089)
       Prepaid expenses and other assets                                 515         (630)
       Accounts payable, accrued expenses, other current
         liabilities and customer deposits                              (561)        (332)
       Accrued expenses due to affiliates                                300          577
       Restructuring charges                                               -         (817)

                                                                    --------     --------
Net cash provided by (used in) operating activities                    3,085         (628)

Investing activities
Purchases of property and equipment                                     (824)        (966)
Acquisition of businesses                                               (399)        (436)
                                                                    --------     --------
Net cash used in investing activities                                 (1,223)      (1,402)

Financing activities
Net (payments) borrowings on line of credit                           (2,228)       6,500
Other long-term liabilities                                              243            -
Proceeds from employee stock purchase plan and exercised options         119           32
Payments to certain stockholders                                           -       (3,951)
Purchase of treasury stock                                                 -         (551)
Translation gain                                                           4            -
                                                                    --------     --------
Net cash (used in) provided by financing activities                   (1,862)       2,030

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

Supplemental disclosure of cash flow information
Interest paid                                                       $    103     $    111
</TABLE>

See accompanying notes.


                                       5
<PAGE>

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


1.    Basis of Presentation

      The  accompanying  unaudited,  consolidated  financial  statements of SPAR
Group, Inc., a Delaware  corporation  ("SGRP"),  and its subsidiaries  (together
with SGRP,  collectively,  the "Company" or the "SPAR Group") have been prepared
in accordance with accounting principles generally accepted in the United States
for interim  financial  information  and with the  instructions to Form 10-Q and
Article  10 of  Regulation  S-X.  Accordingly,  they do not  include  all of the
information and footnotes required by accounting  principles  generally accepted
in the United  States  for  complete  financial  statements.  In the  opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair  presentation have been included in these interim financial
statements.  However,  these  interim  financial  statements  should  be read in
conjunction with the annual consolidated  financial statements and notes thereto
for the Company as contained  in the  Company's  Annual  Report for 2003 on Form
10-K for the year ended  December 31,  2003,  as filed with the  Securities  and
Exchange  Commission on March 30, 2004 (the "Company's Annual Report for 2003 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.    Impairment Charges

Goodwill:

      In April 2004, the Company's  largest customer  announced that they signed
definitive  agreements for the sale of its business to two purchasers.  The sale
was completed on August 2, 2004. This customer  accounted for 35.9% and 32.7% of
the  Company's  net  revenues  for the six months  ended June 30, 2004 and 2003,
respectively and 29.9% of the Company's revenues for the year ended December 31,
2003.  This customer was the last  remaining  profitable  business that resulted
from the PIA acquisition on July 9, 1999.

      At March 31, 2004, the Company had $7.6 million of goodwill related to the
acquisition  of PIA. As a result of the loss of this major  client,  the Company
has recorded an impairment of the PIA related  goodwill  resulting in a non-cash
charge of $7.6 million to the results of operations  for the three months ending
June 30, 2004.  Also, in connection with the PIA  acquisition,  certain deferred
tax  assets  related  to PIA net  operating  loss carry  forward  benefits  were
recognized  as an  adjustment  to  goodwill.  The  Company  also  recorded as an
impairment charge, a $750,000 valuation allowance on these deferred tax assets.

      At March 31, 2004, the Company had approximately  $2.1 million accrued for
restructure  costs and PIA merger related costs. As a result of the PIA business
impairment,  the Company  evaluated these accruals and determined that only $0.4
million is required.  The Company  applied the $1.7 million ($1.4 million net of
the  tax  effect)  reduction  in PIA  related  acquisition  liabilities  against
impairment charges during the quarter ended June 30, 2004.

                                       6
<PAGE>
                                SPAR Group, Inc.
                   Notes to Consolidated Financial Statements
                             (unaudited) (continued)

       In June 2003, the Company acquired its Canadian operations. In connection
with the acquisition,  the Company recorded goodwill of $712,000. At the time of
acquisition,  it was expected that the Canadian  subsidiary would be profitable.
However,  the Canadian  subsidiary has operated at a loss since its acquisition.
It is also expected that the Canadian  subsidiary will incur a loss for the year
ending December 31, 2004. As a result of the continued losses and the failure to
attract new  customers  the Company has  recorded an  impairment  of the related
goodwill  resulting in a non-cash charge of $712,000 for the three months ending
June 30, 2004.

Capitalized Internal Use Software Development Costs:

       Historically,  the Company  has  capitalized  costs of computer  software
developed for internal use. Some of the costs  capitalized  were associated with
certain clients to whom the Company no longer provides  merchandising  services.
As a result of the loss of these  clients,  the Company  recorded an  impairment
charge  for the net  book  value  of  internally  developed  software  costs  of
approximately $442,000 for the three months ended June 30, 2004.

Other Assets:

       In addition to the above,  the Company has recorded  impairment  of other
assets totaling $68,000 for the three months ending June 30, 2004.

3.      Management's Plans Concerning Cash Flow

Management  believes  that  based upon the  Company's  cost  saving  initiatives
(outlined in Note 4 Restructuring  Charges) and the existing credit  facilities,
funding will be sufficient to support  ongoing  operations  over the next twelve
months.  The Company is and has been in  violation  of certain  covenants of its
Credit  Facility  (see  Note 6 Line of  Credit)  and  expects  to  violate  such
covenants  in  the  future.   The  Company's  bank,   Webster   Business  Credit
Corporation, has issued waivers for past covenant violations, however, there can
be no assurances that Webster will continue to issue such waivers in the future.

4.     Restructuring Charges

In 1999, in  connection  with the PIA merger,  the Company's  Board of Directors
approved  a  plan  to   restructure   the   operations  of  the  PIA  Companies.
Restructuring  costs were composed of committed  costs required to integrate the
SPAR Companies' and the PIA Companies' field organizations and the consolidation
of administrative  functions to achieve beneficial  synergies and costs savings.
(For the specific  definitions of those terms, see Item 1 - Business - GENERAL -
Continuing Operations - Merchandising  Services Division in the Company's Annual
Report for 2003 on Form 10-K.) At March 31,  2004,  the  Company had  previously
recorded  PIA related  restructuring  reserves  for  equipment  and office lease
settlements  totaling  $685,000.  At June 30, 2004,  the Company  evaluated  its
restructuring  reserves and determined that the  restructuring  reserves were no
longer necessary (See Note 2 Impairment Charges).

                                       7
<PAGE>
                                SPAR Group, Inc.
                   Notes to Consolidated Financial Statements
                             (unaudited) (continued)

       In July 2004,  as a result of the loss of several  significant  customers
and the pending sale of the Company's largest customer, the Company entered into
a plan to  restructure  and reduce  its field  force,  as well as, its  selling,
general and  administrative  cost  structure to reflect its lower  revenue base.
These reductions  consist of personnel  reductions and related expenses,  office
closings and  restructuring or abandoning of equipment leases. In July 2004, the
Company  implemented  several of the savings  initiatives  and will  continue to
implement  certain others over the next several months.  As a result of the July
restructuring,  the Company  estimates  it will incur  charges of  approximately
$200,000 for  severance  benefits and  approximately  $500,000 for equipment and
office leases that the Company will cease using in the quarter ending  September
30, 2004 or  thereafter.  The  Company  will  continue  to evaluate  cost saving
opportunities and expects to incur additional restructuring costs in the future.

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,
                                          2004           2003          2004           2003
                                        --------       --------      --------       --------
<S>                                     <C>            <C>           <C>            <C>
Numerator:

   Net (loss) income                    $(12,177)      $    608      $(12,968)      $  1,886

Denominator:
   Shares used in basic earnings
   (loss) per share calculation           18,859         18,858        18,859         18,850

Effect of diluted securities:
   Employee stock options                      -            680             -            597
                                        --------       --------      --------       --------

   Shares used in diluted earnings
   (loss) per share calculation           18,859         19,538        18,859         19,447
                                        ========       ========      ========       ========

Basic and diluted earnings (loss)
per common share:

   Net (loss) income - basic and        $  (0.65)      $   0.03      $  (0.69)      $   0.10
   diluted
                                        ========       ========      ========       ========
</TABLE>

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


                                       8
<PAGE>
                                SPAR Group, Inc.
                   Notes to Consolidated Financial Statements
                             (unaudited) (continued)


6.    Line of Credit

      In January 2003, the Company and Webster Business Credit Corporation, then
known as Whitehall  Business Credit  Corporation  ("Webster"),  entered into the
Third Amended and Restated  Revolving Credit and Security Agreement (as amended,
collectively,  the  "Credit  Facility").  The Credit  Facility  provided a $15.0
million  revolving  credit facility that matures on January 23, 2006. The Credit
Facility  allowed  the  Company  to  borrow  up to $15.0  million  based  upon a
borrowing  base  formula  as  defined  in  the  agreement  (principally  85%  of
"eligible"  accounts  receivable).  On May 17,  2004,  the Credit  Facility  was
amended to among other things,  reduce the revolving  credit facility from $15.0
million to $10.0 million, change the interest rate and increase certain reserves
against collateral.  The amendment provides for interest to be charged at a rate
based  in  part  upon  the  earnings  before  interest,  tax,  depreciation  and
amortization.  At June 30, 2004, the Credit Facility bears interest at Webster's
"Alternative  Base Rate" plus 0.75% (a total of 5.25% per annum),  or LIBOR plus
3.25%.  The Credit  Facility  is secured by all of the assets of the Company and
its  subsidiaries.  In connection  with the May 17, 2004  amendment,  Mr. Robert
Brown, a Director, the Chairman,  President, Chief Executive Officer and a major
stockholder  of the  Company  and Mr.  William  Bartels,  a  Director,  the Vice
Chairman and a major stockholder of the Company,  provided  personal  guarantees
totaling  $1.0  million to Webster.  On August 20, 2004 the Credit  Facility was
further  amended in connection  with the waiver of certain  covenant  violations
(see below).  The amendment,  among other things,  reduces the revolving  credit
facility  from $10.0 million to $7.0  million,  changes the covenant  compliance
testing for certain  covenants  from  quarterly  to monthly and reduces  certain
advance  rates.  The  amendment  does not  change the  future  covenant  levels.
Therefore,  the Company  expects to be in violation of certain  covenants in the
future. Webster has issued waivers for past covenant violations,  however, there
can be no assurances that Webster will issue such waivers in the future.

      The Credit Facility contains certain financial  covenants that must be met
by the Company on a consolidated basis, among which are a minimum "Net Worth", a
minimum "Fixed Charge Coverage  Ratio", a capital  expenditure  limitation and a
minimum EBITDA, as such terms are defined in the Credit Facility. Except for the
capital  expenditure  limitation,  the Company was not in  compliance  with such
financial  covenants  at June 30,  2004.  The  Company has secured a waiver from
Webster for those items of non-compliance (see above).

      Because of the requirement to maintain a lock box arrangement with Webster
and  Webster's  ability  to  invoke  a  subjective  acceleration  clause  at its
discretion,  borrowings  under the Credit  Facility are classified as current at
June 30, 2004, and December 31, 2003, in accordance with EITF 95-22.

      The revolving  loan balances  outstanding  under the Credit  Facility were
$1.9  million  and $4.1  million  at June  30,  2004,  and  December  31,  2003,
respectively. There were letters of credit outstanding under the Credit Facility
of $0.7 million at June 30, 2004 and December 31, 2003. As of June 30, 2004, the
SPAR Group had unused availability under the Credit Facility of $2.0 million out
of the  remaining  maximum  $4.2  million  unused  revolving  line of credit (as
adjusted by the August 20, 2004 amendment)  after reducing the borrowing base by
the outstanding loans and letters of credit.

                                       9
<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
(collectively,  the  "SMS  Principals"),  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 provided  approximately 99% of the Company's field  representatives in
the United States (through its  independent  contractor  field force),  and SMSI
provided  approximately  92% of the  Company's  field  management  in the United
States at June 30,  2004.  Pursuant to the Amended and  Restated  Field  Service
Agreement  dated as of  January 1, 2004 (the  "Field  Service  Agreement"),  SMS
provides  the  services  of  approximately  6,200 field  representatives  to the
Company at its  request  from time to time,  for which the Company has agreed to
reimburse SMS for all of its costs of providing  those services and to pay SMS a
premium  equal to 4% of such  costs.  Pursuant  to the terms of the  Amended and
Restated  Field  Management  Agreement  dated as of January 1, 2004 (the  "Field
Management  Agreement"),  SMSI  provides  approximately  62 full-time  national,
regional and district managers to the Company at its request, from time to time,
for which the  Company  has  agreed  to  reimburse  SMSI for all of its costs of
providing  those  services and to pay SMSI a premium  equal to 4% of such costs,
except that for 2004 SMSI agreed to concessions that reduced the Company's costs
by approximately  $89,000 and $234,000 for the three and six month periods ended
June 30, 2004,  respectively.  The SMS  Principals  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,  the SMS  Principals  benefit  from any  income of such  companies
allocated to them.

      SIT  provided  substantially  all of  the  Internet  computer  programming
services to the Company for the three and six month periods ended June 30, 2004.
Pursuant to the Amended and Restated  Programming and Support Agreement dated as
of January 1, 2004 (the "Programming and Support  Agreement"),  SIT continues to
provide programming  services to the Company at its request,  from time to time,
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.  No hourly  charges or business  expenses for
the SMS  Principals  were  charged  to the  Company  for the three and six month
periods ended June 30, 2004. However, since SIT is a "Subchapter S" corporation,
the SMS Principals benefit from any income of such company allocated to them.

      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.

                                       10
<PAGE>
                                SPAR Group, Inc.
                   Notes to Consolidated Financial Statements
                             (unaudited) (continued)

      The following  transactions  occurred  between the SPAR  Companies and the
above affiliates (in thousands):

<TABLE>
<CAPTION>
                                                Three Months Ended         Six Months Ended
                                               --------------------      --------------------
                                               June 30,     June 30,     June 30,    June 30,
                                                 2004         2003         2004        2003
                                               -------      -------      -------      -------
<S>                                            <C>          <C>          <C>          <C>
      Services provided by affiliates:
        SMS: Independent contractor field
           services                            $ 5,397      $ 7,257      $11,758      $14,954
                                               =======      =======      =======      =======

        SMSI: Field management services        $ 1,280      $ 1,859      $ 2,634      $ 3,775
                                               =======      =======      =======      =======

        SIT: Internet and computer
           programming services                $   334      $   476      $   715      $   882
                                               =======      =======      =======      =======

      Reimbursed costs from affiliates:        $    27      $    52      $    63      $   108
                                               =======      =======      =======      =======

              Accrued expenses due to affiliates (in thousands):

                                                  June 30,
                                            -------------------
                                              2004        2003
                                            -------      ------
                       SMS                  $ 1,296      $1,535
                                            =======      ======
</TABLE>


8.    Stock Options

      Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock  Based  Compensation,  requires  disclosure  of the fair  value  method of
accounting for stock options and other equity instruments.  Under the fair value
method,  compensation cost is measured at the grant date based on the fair value
of the award and is  recognized  over the service  period,  which is usually the
vesting period. The Company has chosen, under the provisions of SFAS No. 123, to
continue to account  for  employee  stock-based  transactions  under  Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.



                                       11
<PAGE>
                                SPAR Group, Inc.
                   Notes to Consolidated Financial Statements
                             (unaudited) (continued)

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

<TABLE>
<CAPTION>
                                                                   Six Months Ended
                                                                -----------------------
                                                                June 30,       June 30,
                                                                  2004           2003
                                                                --------       --------
<S>                                                             <C>            <C>
Net (loss) income, as reported                                  $(12,968)      $  1,886
                                                                --------       --------
Stock based employee compensation expense
  under the fair market value method                            $    342       $    907
                                                                --------       --------
Adjusted pro forma net (loss) income                            $(13,310)      $    979


Basic and diluted net (loss) income per share, as reported      $  (0.69)      $   0.10

Basic and diluted adjusted pro forma net (loss) income          $  (0.71)      $   0.05
  per share, after adjustment for stock based
  employee compensation expense under the fair market
  value method
</TABLE>


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

      For the six months  ended June 30,  2004,  there was a recovery of amounts
previously expensed of approximately $60,000 under the provision of SFAS No. 123
dealing with stock  options to  non-employees  for stock option grants that were
awarded to the employees of the Company's affiliates resulting from the decrease
in the market price of the stock from  December  31, 2003 to June 30, 2004.  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.


                                       12
<PAGE>
                                SPAR Group, Inc.
                   Notes to Consolidated Financial Statements
                             (unaudited) (continued)

9.    Treasury Stock

      The Company  utilized 33,148 of repurchased  shares to issue stock for the
exercise of stock options  during the six months ended June 30, 2004. As of June
30, 2004, the Company has 42,908 shares of treasury stock,  which it acquired at
a cost of approximately $213,000. Currently, the Company has no stock repurchase
program in place.

10.   Line of Credit and Advances due from SPAR  Performance  Group,  Inc. (now
      called STIMULYS, Inc.); Inability to Consolidate under FIN 46

      In connection with the sale of SPAR Performance Group, Inc.  ("SPGI"),  on
June 30, 2002,  the Company sold all of the stock of its  subsidiary,  SPGI.  In
connection  with the sale,  SPGI  entered  into a term loan  agreement  with the
Company under which SPGI borrowed $6.0 million in term loans, which due to their
speculative nature have been fully reserved.

      Also in  connection  with the  sale,  the  Company  agreed  to  provide  a
discretionary  revolving  line of credit to SPGI not to exceed $2.0 million (the
"SPGI Revolver")  through  September 30, 2005. The SPGI Revolver is secured by a
pledge of all the assets of SPGI and is guarantied by SPGI's parent, Performance
Holdings,  Inc.  The SPGI  Revolver  provided  for  advances  in  excess  of the
borrowing  base  through  September  30, 2003.  As of October 1, 2003,  the SPGI
Revolver  was  adjusted,  as per the  agreement,  to  include a  borrowing  base
calculation  (principally 85% of "eligible" accounts  receivable).  In September
2003,  SPGI requested and the Company  agreed to provide  advances of up to $1.0
million in excess of the borrowing base through  September 30, 2004. In December
of 2003, SPGI changed its name to STIMULYS,  Inc. On April 30, 2004, as a result
of various defaults by STIMULYS,  the Company amended the discretionary  line of
credit  by  eliminating  advances  in  excess of  STIMULYS'  borrowing  base and
reducing the maximum amount of the revolving line to the greater of $1.0 million
or the borrowing base.  Under the SPGI Revolver  terms,  STIMULYS is required to
deposit all of its cash receipts to the Company's lock box.

      At June 30, 2004, there was approximately  $0.9 million advanced under the
SPGI Revolver and $70,000 in outstanding letters of credit,  while the borrowing
base was approximately  $0.9 million.  Due to the speculative nature of the SPGI
Revolver,  the Company has a reserve of approximately  $750,000 against the SPGI
Revolver at June 30, 2004.

      In accordance with FASB  Interpretation No. 46 - Consolidation of Variable
Interest  Entities  (FIN  46),  as a result  of the  term  loans  and  revolving
advances,  the  Company has  concluded  that it is the  primary  beneficiary  of
STIMULYS and is,  therefore,  required to consolidate  STIMULYS in its financial
statements.   However,  the  Company  has  been  unable  to  perform  accounting
procedures   necessary  to  include  STIMULYS  in  the  consolidated   financial
statements,  as required by FIN 46, and has been unable to obtain the  necessary
permission  from  STIMULYS  to  include  that   organization  in  the  Company's
consolidated financial statements.  At June 30, 2004, the Company's maximum loss
exposure  is  $220,000,  which  represents  the  amounts  outstanding  under the
revolving  line of credit  and the  letter  of credit in excess of the  $750,000
reserve.  The  Company's  maximum  potential  loss exposure  resulting

                                       13
<PAGE>
                                SPAR Group, Inc.
                   Notes to Consolidated Financial Statements
                             (unaudited) (continued)


from the  revolving  line of  credit  agreement  with  STIMULYS  is  limited  to
$250,000,  which is the $1.0 million  revolving line of credit less the $750,000
reserve.

11.   Income Taxes

As a result of the loss of several significant clients,  current year losses and
the lack of certainty of a return to  profitability  in the next twelve  months,
the Company has reversed the $465,000 tax benefit  recorded in the quarter ended
March 31, 2004. In addition, the Company has recorded a full valuation allowance
against its net deferred tax assets resulting in a charge totaling approximately
$729,000 for the three months ending June 30, 2004.

12.   Customer Deposits

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

13.   Contingencies/Joint Venture Guarantee

In May  2001,  the  Company  and  Paltac,  Inc.  ("Paltac"),  a  large  Japanese
distributor, entered into a joint venture to create a Japanese company, SPAR FM.
SPAR FM  entered  into a 300  million  Yen  Revolving  Credit  Agreement  with a
Japanese bank. The bank required Paltac guarantee the outstanding balance on the
revolving credit facility. As part of the joint venture agreement, should Paltac
be required to make a payment on its guarantee to the bank, then the Company has
agreed to remit to Paltac 50% of any such payment up to a maximum of 150 million
Yen or approximately $1.4 million. As of June 30, 2004, SPAR FM has borrowed 100
million Yen under its  Revolving  Credit  Agreement.  Therefore,  the  Company's
current exposure to Paltac  respecting  outstanding loans to SPAR FM at June 30,
2004 would be 50 million  Yen or  approximately  $0.5  million.  The Company has
recorded  approximately  $0.3 million in long-term  liabilities for its share of
the cumulative losses associated with this joint venture.

Legal Matters

On October 24, 2001,  Safeway Inc., a former  customer of the PIA  Merchandising
Co.,  Inc. and Pivotal  Sales  Company,  filed a complaint  alleging  damages of
approximately  $3.6 million plus interest and costs and alleged punitive damages
in an unspecified  amount against the Company in Alameda County  Superior Court,
California,  Case No.  2001028498  with respect to (among other things)  alleged
breach of contract. On or about December 30, 2002, the Court approved the filing
of Safeway Inc.'s Second Amended  Complaint,  which alleges causes of action for
(among other things) breach of contract against the Company,  PIA  Merchandising
Co., Inc. and Pivotal Sales Company. The Second Amended Complaint was filed with
the Court on January  13,  2003,  and does not  specify  the amount of  monetary
damages  sought.  No punitive or exemplary  damages are sought in Safeway Inc.'s
Second  Amended  Complaint.  This  case is  being  vigorously  contested  by the
Company.

                                       14
<PAGE>
                                SPAR Group, Inc.
                   Notes to Consolidated Financial Statements
                             (unaudited) (continued)

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

14.   Geographic Data

A summary of the Company's net revenue,  operating  income and long lived assets
by geographic  area for the three and six month periods  ending June 30, 2004 is
as follows (in thousands):

                 Three Months Ending       Six Months Ending
                       --------                 --------
                       June 30,                 June 30,
                         2004                     2004
                       --------                 --------
Net revenue:
United States          $ 10,568                 $ 23,231
International          $  1,365                 $  1,505

Operating income:
United States          $(10,395)                $(11,258)
International          $   (475)                $   (833)

Long lived assets as of June 30, 2004:
United States          $  1,555
International          $    196

No one  international  geographic market is greater than 10% of consolidated net
revenue.


                                       15
<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,  2004 (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, 2003,  as filed with
the Securities and Exchange  Commission on March 30, 2004 (the "Company's Annual
Report for 2003 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 2003 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

         The  Company's   operations  are  divided  into  two   divisions:   the
Merchandising   Services   Division   and  the   International   Division.   The
Merchandising  Services  Division  provides  merchandising   services,   product
demonstrations, product sampling, database marketing, teleservices and marketing
research to manufacturers and retailers with product  distribution  primarily in
mass  merchandisers,  drug chains,  convenience stores and grocery stores in the
United States. The International  Division,  established in July 2000, currently
provides merchandising services in Japan, Canada, Turkey and South Africa.


                                       16
<PAGE>

                                SPAR Group, Inc.


Merchandising Services Division

     The Company provides nationwide  merchandising and other marketing services
to  general   merchandise,   health  and  beauty  care,   consumer  goods,  home
entertainment,  PC software and food  products  companies  in drug chains,  mass
merchandisers,  convenience  stores  and  retail  grocery  stores 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 multiple manufacturers primarily under single or multi-year
contracts  or  agreements.   Services  also  include  stand-alone,   large-scale
implementations  such as new  store  openings,  new  product  launches,  special
seasonal  or  promotional  merchandising,  focused  product  support and product
recalls.  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,  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. In 2003, the Company added in-store
product   demonstration   and  in-store   product   sampling   services  to  its
merchandising   service  offerings.   Marketing  services  consist  of  database
marketing, teleservices and marketing research.


International Division

         In July 2000,  the  Company  established  its  International  Division,
through a wholly owned subsidiary,  SPAR Group  International,  Inc. ("SGI"), to
focus on expanding its merchandising  services business worldwide.  In May 2001,
the  Company  entered  into a 50%  owned  joint  venture  with a large  Japanese
distributor  to provide  merchandising  services  in Japan.  In June  2003,  the
Company expanded its  merchandising  services into Canada through a wholly owned
subsidiary.  In July 2003,  the Company  established  a 51% owned joint  venture
based in Istanbul to provide merchandising  services throughout Turkey. In April
2004, the Company established a joint venture in South Africa. The joint venture
is headquartered  in Durban and is owned 51% by the Company.  In April 2004, the
Company  announced the  establishment  of a joint venture in India with plans to
start operations during the third quarter. The joint venture is headquartered in
New Delhi and is owned 51% by the Company.


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.  Three critical accounting policies are revenue  recognition,
allowance for doubtful  accounts and sales allowance,  and capitalized  internal
use software development costs:

                                       17
<PAGE>

                                SPAR Group, Inc.


         Revenue Recognition

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

         Allowance for Doubtful Accounts and Sales Allowance

         The Company  continually  monitors the  collectability  of its accounts
receivable based upon current customer credit  information and other information
available.  Utilizing this information, the Company has established an allowance
for doubtful accounts of $589,000 and $515,000 at June 30, 2004 and December 31,
2003,  respectively.  The Company also recorded a sales allowance of $37,000 and
$448,000  at June 30,  2004 and  December  31,  2003,  respectively,  to reflect
potential customer credits.

         Internal Use Software Development Costs

         Under  the  rules of SOP 98-1,  Accounting  for the  Costs of  Computer
Software Developed or Obtained for Internal Use, the Company capitalizes certain
costs incurred in connection with developing or obtaining internal use software.
Capitalized software development costs are amortized over three years.

         The Company  capitalized  $362,808  and  $541,042  of costs  related to
software  developed  for  internal use in the six months ended June 30, 2004 and
2003, respectively.

         The  Company  also  recorded  a net  impairment  charge of  capitalized
software  related  to  lost  clients  totaling  approximately  $442,000  in  the
three-month period ending June 30, 2004.


                                       18
<PAGE>

                                SPAR Group, Inc.

Results of Operations


Three months ended June 30, 2004, compared to three months ended June 30, 2003

       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, 2004              June 30, 2003
                                                    -----------------------     -----------------------
                                                                                                              (Decrease)
                                                     Amount           %          Amount           %            Increase %
                                                    ---------     ---------     ---------     ---------        ---------
<S>                                                  <C>              <C>        <C>              <C>            <C>
Net revenues                                         $ 11,933         100.0%     $ 17,351         100.0%         (31.2)%

Cost of revenues                                        8,716          73.0        11,146          64.2          (21.8)

Selling, general and administrative expense             5,577          46.7         4,768          27.4           17.0

Impairment charges                                      8,141          68.2             -             -              -

Depreciation and amortization                             369           3.1           399           2.3           (7.5)

Interest expense                                           64           0.6            72           0.4          (11.1)

Other expense (income)                                      7           0.1           (10)         (0.1)        (170.0)
                                                    ---------     ---------     ---------     ---------

(Loss) income before provision for income taxes       (10,941)        (91.7)          976           5.6       (1,221.0)

Provision for income tax                                1,236          10.4           368           2.1          235.9
                                                    ---------     ---------     ---------     ---------

Net (loss) income                                    $(12,177)       (102.0)%    $    608           3.5%      (2,102.8)%
                                                    =========     =========     =========     =========
</TABLE>

         Net  revenues  for the three  months  ended June 30,  2004,  were $11.9
million,  compared to $17.4  million for the three months ended June 30, 2003, a
decrease of 31.2%. The decrease in net revenues resulted  primarily from reduced
business from the Company's largest customer,  which was in the process of being
sold during the quarter, as well as the loss of two other large clients.

         One customer,  a division of a major retailer,  accounted for 27.5% and
36.9% of the Company's net revenues for the three months ended June 30, 2004 and
2003,  respectively.  This customer also accounted for  approximately  18.0% and
41.2% of accounts receivable at June 30, 2004 and 2003,  respectively.  In April
2004,  the  customer's  parent  company  announced  that they signed  definitive
agreements  for the  sale

                                       19
<PAGE>

                                SPAR Group, Inc.


of this  business to two  purchasers.  The sale was completed on August 2, 2004.
The loss of this business will have a material  adverse  effect on the Company's
business, results of operations and financial condition.

         For the three months ended June 30, 2004, a second  customer  accounted
for 10.3% of net revenue.  This customer also accounted for approximately  18.9%
of accounts receivable at June 30, 2004.

         For the three months  ended June 30, 2003, a third and fourth  customer
accounted for 8.0% and 4.8%  respectively of net revenue.  The Company no longer
provides services to these customers.

         In addition,  approximately  15% of the  Company's net revenues for the
three months ended June 30, 2004 and 2003 resulted from  merchandising  services
performed  for  manufacturers  and others at Kmart.  Kmart filed for  protection
under the U.S.  Bankruptcy  Code in January 2002 and emerged from  bankruptcy in
May 2003. During its time in bankruptcy,  Kmart closed a number of stores in the
United  States.  While the Company's  customers  and the  resultant  contractual
relationships  or agreements  are with various  manufacturers  and not Kmart,  a
significant  reduction of this retailer's stores or cessation of this retailer's
business would negatively impact the Company.

         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 from  operations  consists of in-store labor and field
management  wages,  related  benefits,  travel  and other  direct  labor-related
expenses.  Cost of revenues as a  percentage  of net  revenues was 73.0% for the
three months  ended June 30, 2004,  compared to 64.2% for the three months ended
June 30, 2003. The increase is primarily a result of additional costs associated
with its per unit fee revenue  programs and reduced pricing to a large customer.
The  Company is  currently  in the process of reducing  its field  structure  to
reflect its reduction of business.

      Approximately  76.3% and 81.8% of the  Company's  cost of  revenue  in the
three months ended June 30, 2004 and 2003, 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 to the Financial Statements in
this Quarterly Report).

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


                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                              ---------------------------------------------------------------------------
                                                                                                             Increase
                                                    June 30, 2004                  June 30, 2003            (Decrease)
                                              ---------------------------    --------------------------    --------------
                                                Amount            %            Amount            %               %
                                                ------            -            ------            -               -
<S>                                           <C>                 <C>         <C>                <C>           <C>
Selling, general and administrative           $       5.6         46.7%       $   4.8            27.4%         17.0%
Impairment charges                                    8.1         68.2%             -               -             -
Depreciation and amortization                         0.4          3.1%           0.4             2.3%        (7.5)%
</TABLE>

         Selling,  general and administrative expenses were $5.6 million for the
three months ended June 30, 2004,  compared to $4.8 million for the three months
ended June 30, 2003, an increase of $0.8 million or 17.0%.  The increase of $0.8
million  consists  of a  one-time  charge  of $0.5  million  resulting  from the
settlement  of a client claim and  approximately  $0.6 million of  international
selling,  general and administrative  costs acquired in 2004, offset by domestic
reductions of $0.3 million.  The Company is currently in the process of reducing
its selling,  general and administrative cost structure to reflect its reduction
of business.

         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  adjustments to other  liabilities  of $1.0 million and  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  costs of $0.4  million  for the  three
months ended June 30, 2004, were consistent with the prior year.

Other Expense (Income)

         Other  expense  represents  the Company's  share in the Japanese  joint
venture loss totaling  approximately  $7,000 for the three months ended June 30,
2004.

Income Taxes

         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  taxes due. For the three  months  ended June 30,  2003,  the
income tax provision  represents a combined federal and state income tax rate of
38%.

Net Income

         The Company had a net loss of $12.2  million for the three months ended
June 30,  2004,  or $(0.65)  per diluted  share,  compared to net income of $0.6
million, or $0.03 per diluted share, for the corresponding period last year.


                                       21
<PAGE>

                                SPAR Group, Inc.


Results of Operations

Six months ended June 30, 2004, compared to six months ended June 30, 2003

        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>
                                                                                   Six Months Ended
                                                   --------------------------------------------------------------------------------
                                                            June 30, 2004                     June 30, 2003
                                                                                                                         % Incr.
                                                       Amount             %              Amount              %           (Decr.)
                                                   ---------------- --------------- ----------------- -----------------
<S>                                                 <C>                 <C>         <C>                     <C>             <C>
Net revenues                                        $     24,736        100.0%      $     36,090            100.0%          (31.5)%

Cost of revenues                                          17,411         70.4             22,397             62.1           (22.3)

Selling, general, and administrative expense              10,545         42.6              9,711             26.9             8.6

Impairment charges                                         8,141         32.9                  -                -               -

Depreciation and amortization                                730          3.0                777              2.1            (6.1)

Interest expense                                              98          0.4                140              0.4           (30.0)

Other expense (income)                                         8          0.0                 28              0.1           (71.4)
                                                   ---------------- --------------- ----------------- -----------------

(Loss) income before provision for income taxes          (12,197)       (49.3)             3,037              8.4          (501.6)

Provision for income taxes                                   771          3.1              1,151              3.2            33.0
                                                   ---------------- --------------- ----------------- -----------------

Net (loss) income                                  $      (12,968)      (52.4)%     $      1,886              5.2%         (787.6)%
                                                   ================ =============== ================= =================
</TABLE>

         Net revenues  from  operations  for the six months ended June 30, 2004,
were $24.7 million,  compared to $36.1 million for the six months ended June 30,
2003, a decrease of 31.5%. The decrease in net revenues resulted  primarily from
reduced business from the Company's largest  customer,  which was in the process
of being sold, decreased project revenue from another client and the loss of two
other large clients.

         One  customer  accounted  for  35.9%  and  32.7% of the  Company's  net
revenues  for the six months  ended June 30, 2004 and 2003,  respectively.  This
customer also accounted for approximately 18.0% and 41.2% of accounts receivable
at June 30, 2004, and 2003,  respectively.  In April 2004, the customer's parent
company  announced that they signed  definitive  agreements for the sale of this
business to two

                                       22
<PAGE>

                                SPAR Group, Inc.


purchasers.  The sale was completed on August 2, 2004. The loss of this business
will have a  material  adverse  effect on the  Company's  business,  results  of
operations and financial condition.

         For the six months ended June 30, 2004, a second customer accounted for
8.4% of net revenue.  This customer also  accounted for  approximately  18.9% of
accounts  receivable at June 30, 2004. For the six months ended June 30, 2003, a
third  and  fourth  customer  accounted  for 9.8% and 5.0%  respectively  of net
revenue. The Company no longer provides services to these customers.

         Approximately  15% and 16% of the  Company's  net  revenues for the six
months ended June 30, 2004, and 2003, respectively,  resulted from merchandising
services  performed at Kmart for various  customers.  Kmart filed for protection
under the U.S.  Bankruptcy  Code in January 2002 and emerged from  bankruptcy in
May 2003. During its time in bankruptcy,  Kmart closed a number of stores in the
United  States.  While the Company's  customers  and the  resultant  contractual
relationships  or  agreements  are  with  various  manufacturers  and  not  this
retailer, a significant reduction of this retailer's stores or cessation of this
retailer's business would negatively impact the Company.

         Cost of revenues  consists of field 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 70.4% for the six months ended June
30, 2004, compared to 62.1% for the six months ended June 30, 2003. The increase
is  primarily  a result of  additional  costs  associated  with its per unit fee
revenue  programs  and  reduced  pricing  to a large  customer.  The  Company is
currently  in the  process  of  reducing  its field  structure  to  reflect  its
reduction in business.

      Approximately 82.7% and 83.6% of the Company's costs of revenue in the six
months ended June 30, 2004, and 2003, respectively, resulted from field in-store
independent   contractor  and  field  management  services  purchased  from  the
Company's affiliates,  SMS, and SMSI,  respectively (see Note 7 to the Financial
Statements in this Quarterly Report).

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

<TABLE>
<CAPTION>
                                                                         Six Months Ended
                                              ------------------------------------------------------------------------
                                                                                                             Incr.
                                                    June 30, 2004                  June 30, 2003            (Decr.)
                                              ---------------------------    --------------------------    -----------
                                                Amount            %            Amount            %             %
                                                ------           ---           ------           ---           ---
<S>                                           <C>                <C>          <C>               <C>            <C>
Selling, general and administrative           $      10.5        42.6%        $   9.7           26.9%          8.6%
Impairment charge                                     8.1        32.9%              -              -             -
Depreciation and amortization                         0.7         3.0%            0.8            2.1%         (6.1)%
</TABLE>

         Selling, general and administrative expenses were $10.5 million for the
six months  ended June 30,  2004,  compared  to $9.7  million for the six months
ended June 30, 2003, an increase of $0.8 million or 8.6%. The increase  consists
of a one time charge of $0.5 million  resulting  from the settlement of a

                                       23
<PAGE>

                                SPAR Group, Inc.


client claim and approximately $0.7 million of international and $0.2 million of
in-store  demonstration  selling,  general and administrative  costs acquired in
2004, offset by domestic  reductions of approximately $0.6 million.  The Company
is currently in the process of reducing its selling,  general and administrative
cost structure to reflect its reduction of business.

         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  costs of $0.7 million for the first six
months ended June 30, 2004,  were comparable to  depreciation  and  amortization
costs of $0.8 million for the six months ended June 30, 2003.

Other Expense (Income)

         Other  expense  represents  the Company's  share in the Japanese  joint
venture  loss  totaling  approximately  $8,000 for the six months ended June 30,
2004.

Income Taxes

         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  taxes due.  For the six months
ended June 30, 2003 the income tax provision  represents a combined  federal and
state income tax rate of 38%.

Net Income

         The  Company had a net loss of $13.0  million for the six months  ended
June 30,  2004,  or $(0.69)  per  diluted  share  compared to net income of $1.9
million or $0.10 per diluted share for the corresponding period last year.

Liquidity and Capital Resources

         In the six months  ended June 30,  2004,  the Company had a net loss of
$13.0  million.  Included in the net loss were non-cash  charges of $8.1 million
for impairment,  $0.7 million for deferred tax asset  valuation  adjustments and
$0.7 million for depreciation and amortization.

         Net cash provided by operating activities for the six months ended June
30, 2004,  was $3.1  million,  compared with net cash used in operations of $0.6
million for the six months ended June 30, 2003. The increase in cash provided by
operating activities was primarily a result of decreases in accounts receivable,
prepaid expenses and other assets and increases in customer deposits and accrued
expenses due to affiliates

                                       24
<PAGE>

                                SPAR Group, Inc.


significantly offset, by net operating losses, decreases in accounts
payable, accrued expenses and other current liabilities.

         Net cash  used in  investing  activities  of $1.2  million  for the six
months  ended  June 30,  2004,  was  comparable  to net cash  used in  investing
activities of $1.4 million for the six months ended June 30, 2003.

         Net cash used in financing activities for the six months ended June 30,
2004, was $1.9 million,  compared with net cash provided by financing activities
of $2.0 million for the six months ended June 30, 2003. The increase of net cash
used in financing  activities was primarily a result of net payments on the line
of credit.

         The above activity  resulted in no change in cash and cash  equivalents
for the six months ended June 30, 2004, as the Company  utilizes  excess cash to
pay down its line of credit.

         At June 30,  2004,  the Company had  positive  working  capital of $0.7
million,  as compared to a positive  working capital of $4.1 million at December
31, 2003. The decrease in working capital is due primarily to operating  losses,
decreases in accounts  receivable,  accounts payable and accrued  expenses.  The
Company's  current  ratio was 1.09 at June 30,  2004,  and 1.35 at December  31,
2003.

         In January 2003, the Company and Webster  Business Credit  Corporation,
then known as Whitehall  Business Credit Corporation  ("Webster"),  entered into
the Third  Amended and  Restated  Revolving  Credit and Security  Agreement  (as
amended,  collectively,  the "Credit Facility").  The Credit Facility provided a
$15.0 million  revolving  credit  facility that matures on January 23, 2006. The
Credit  Facility  allowed the Company to borrow up to $15.0 million based upon a
borrowing  base  formula  as  defined  in  the  agreement  (principally  85%  of
"eligible"  accounts  receivable).  On May 17,  2004,  the Credit  Facility  was
amended to among other things,  reduce the revolving  credit facility from $15.0
million to $10.0  million,  change the  interest  rate and increase the reserves
against collateral.  The amendment provides for interest to be charged at a rate
based  in  part  upon  the  earnings  before  interest,  tax,  depreciation  and
amortization.  At June 30, 2004, the Credit Facility bears interest at Webster's
"Alternative  Base Rate" plus 0.75% (a total of 5.25% per annum),  or LIBOR plus
3.25%.  The Credit  Facility  is secured by all of the assets of the Company and
its  subsidiaries.  In connection  with the May 17, 2004  amendment,  Mr. Robert
Brown, a Director,  the Chairman,  President and Chief  Executive  Officer and a
major stockholder of the Company and Mr. William Bartels,  a Director,  the Vice
Chairman and a major stockholder of the Company,  provided  personal  guarantees
totaling  $1.0  million to Webster.  On August 20, 2004 the Credit  Facility was
further  amended in connection  with the waiver of certain  covenant  violations
(see below).  The amendment,  among other things,  reduces the revolving  credit
facility  from $10.0 million to $7.0  million,  changes the covenant  compliance
testing for certain  covenants  from  quarterly  to monthly and reduces  certain
advance  rates.  The  amendment  does not  change the  future  covenant  levels.
Therefore,  the Company  expects to be in violation of certain  covenants in the
future. Webster has issued waivers for past covenant violations,  however, there
can be no assurances that Webster will issue such waivers in the future.

         The Credit Facility contains certain  financial  covenants that must be
met by the  Company on a  consolidated  basis,  among  which are a minimum  "Net
Worth",  a  minimum  "Fixed  Charge  Coverage  Ratio",  a  capital   expenditure
limitation  and a minimum  EBITDA,  as such  terms  are  defined  in the  Credit

                                       25
<PAGE>

                                SPAR Group, Inc.


Facility. Except for the capital expenditure limitation,  the Company was not in
compliance  with such  financial  covenants  at June 30,  2004.  The Company has
secured a waiver from Webster for those items of non-compliance (see above).

         Because of the  requirement  to  maintain a lock box  arrangement  with
Webster and Webster's ability to invoke a subjective  acceleration clause at its
discretion,  borrowings  under the Credit  Facility are classified as current at
June 30, 2004, and December 31, 2003, in accordance with EITF 95-22.

         The revolving loan balances  outstanding under the Credit Facility were
$1.9  million  and  $4.1  million  at June  30,  2004  and  December  31,  2003,
respectively. There were letters of credit outstanding under the Credit Facility
of $0.7  million at June 30, 2004,  and December 31, 2003.  As of June 30, 2004,
the SPAR Group had unused availability under the Credit Facility of $2.0 million
out of the remaining  maximum $4.2 million  unused  revolving line of credit (as
adjusted by the August 20, 2004 amendment)  after reducing the borrowing base by
outstanding loans and letters of credit.

         Management   believes  that  based  upon  the  Company's   cost  saving
initiatives  and the existing credit  facilities,  funding 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 reduction in business from such clients, or the inability to acquire
new  clients,  or the  Company's  inability to return to  profitability,  or the
inability to obtain bank  waivers for future  covenant  violations  could have a
material  adverse effect on the Company's cash resources and its ongoing ability
to fund operations.

         In  connection  with  the sale of SPGI on June 30,  2002,  the  Company
agreed to provide a discretionary revolving line of credit to SPGI not to exceed
$2.0 million (the "SPGI Revolver") through September 30, 2005. The SPGI Revolver
is  secured by a pledge of all the  assets of SPGI and is  guarantied  by SPGI's
parent,  Performance  Holdings,  Inc. The SPGI Revolver provided for advances in
excess of the borrowing base through  September 30, 2003. As of October 1, 2003,
the SPGI Revolver was  adjusted,  as per the  agreement,  to include a borrowing
base  calculation  (principally  85%  of  "eligible"  accounts  receivable).  In
September 2003, SPGI requested and the Company agreed to provide  advances of up
to $1.0 million in excess of the borrowing  base through  September 30, 2004. In
December 2003,  SPGI changed its name to STIMULYS,  Inc. On April 30, 2004, as a
result of various  defaults by STIMULYS,  the Company amended the  discretionary
line of credit by eliminating advances in excess of STIMULYS' borrowing base and
reducing the maximum amount of the revolving line to the greater of $1.0 million
or the borrowing base. At June 30, 2004,  there was  approximately  $0.9 million
borrowed under the SPGI Revolver and $70,000 in  outstanding  letters of credit.
Under the SPGI Revolver  terms,  STIMULYS is required to deposit all of its cash
receipts to the Company's lock box.

                                       26
<PAGE>

                                SPAR Group, Inc.


Certain Contractual Obligations

         The  following  table  contains a summary  of certain of the  Company's
contractual obligations by category as of June 30, 2004 (in thousands).

<TABLE>
<CAPTION>
          Contractual Obligations                                   Payments due by Period

                                               Total       Less than 1    1-3 years     3-5 years     More than 5
                                                              year                                       years
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>        <C>              <C>             <C>
Credit Facility                                 $1,856        $1,856          $  -         $   -          $    -
--------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations                      1,751           828           884            39               -
--------------------------------------------------------------------------------------------------------------------
Total                                           $3,607        $2,684          $884         $  39          $    -
--------------------------------------------------------------------------------------------------------------------
</TABLE>


         In  addition  to the above  table,  the Company had agreed to provide a
discretionary  line of credit to  STIMULYS  not to exceed  the  greater  of $1.0
million or the borrowing base through  September 30, 2005.  Outstanding loans to
SPGI under the discretionary  line of credit totaled  approximately $0.9 million
at June 30, 2004.

         The Company also had $0.7 in outstanding  Letters of Credit at June 30,
2004.

         In May 2001, the Company and Paltac, Inc. ("Paltac"),  a large Japanese
distributor, entered into a joint venture to create a Japanese company, SPAR FM.
SPAR FM  entered  into a 300  million  Yen  Revolving  Credit  Agreement  with a
Japanese bank. The bank required Paltac guarantee the outstanding balance on the
revolving credit facility. As part of the joint venture agreement, should Paltac
be  required  to make a payment on its  guarantee  to the bank,  the Company has
agreed to remit to Paltac 50% of any such payment up to a maximum of 150 million
Yen or approximately $1.4 million. As of June 30, 2004, SPAR FM has borrowed 100
million Yen under its  Revolving  Credit  Agreement.  Therefore,  the  Company's
current exposure to Paltac  respecting  outstanding loans to SPAR FM at June 30,
2004, would be 50 million Yen or approximately $0.5 million.



                                       27
<PAGE>

                                SPAR Group, Inc.


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

         The Company is exposed to market risk related to the variable  interest
rate  on the  line of  credit  and the  variable  yield  on its  cash  and  cash
equivalents.  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 long term debt.
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.

         Currently,  the Company  does not  believe the risk  related to foreign
currency exchange rates is material.

         The Company  has no  derivative  financial  instruments  or  derivative
commodity  instruments in its cash and cash equivalents and investments.  Excess
cash is normally used to pay down its revolving line of credit.


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 material  changes in the Company's  internal  control over
financial reporting during the second quarter of 2004.


                                       28
<PAGE>

                                SPAR Group, Inc.


PART II:  OTHER INFORMATION

Item 1.        Legal Proceedings

               No change.

Item 2:        Changes in Securities and Use of Proceeds

               Item 2(a): Not applicable

               Item 2(b): Not applicable

               Item 2(c): Not applicable

               Item 2(d): Not applicable

Item 3:        Defaults upon Senior Securities

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

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

               Not applicable.

Item 5:        Other Information

               Not applicable.


Item 6:        Exhibits And Reports On Form 8-K

       Exhibits.

         10.1     Waiver  and  Amendment  No. 5 to Third  Amended  and  Restated
                  Revolving Credit and Security Agreement among Webster Business
                  Credit  Corporation,  SPAR  Group,  Inc.,  and  certain of its
                  subsidiaries dated as of August 20, 2004, as filed herewith.

         10.2     Change in Control Severance  Agreement between Kori Belzer and
                  SPAR  Group,  Inc.,  dated as of  August  12,  2004,  as filed
                  herewith.

         10.3     Change in Control Severance  Agreement between Patricia Franco
                  and SPAR Group,  Inc.,  dated as of August 12, 2004,  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.

                                       29
<PAGE>

                                SPAR Group, Inc.


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

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

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

       Reports On Form 8-K

         1.       Periodic Report on Form 8-K, dated March 26, 2004,  filed with
                  the U.S.  Securities and Exchange  Commission on May 26, 2004,
                  respecting the Waiver And Amendment No. 3 To Third Amended And
                  Restated  Revolving Credit And Security Agreement entered into
                  as of March 26, 2004,  and the Joinder,  Waiver And  Amendment
                  No. 4 to Third  Amended  and  Restated  Revolving  Credit  And
                  Security Agreement entered into as of May 17, 2004.

         2.       Periodic  Report on Form 8-K,  dated May 18, 2004,  filed with
                  the U.S.  Securities and Exchange  Commission on May 27, 2004,
                  respecting  the  adoption  of  each  of (i)  the  Amended  and
                  Restated By-Laws of the Company; (ii) the Amended and Restated
                  Charter of the Audit  Committee  of the Board of  Directors of
                  the Company;  (iii) the Charter of the Compensation  Committee
                  of the Board of Directors of the Company;  (iv) the Charter of
                  the  Governance  Committee  of the Board of  Directors  of the
                  Company;   (v)  the  SPAR  Group,  Inc.  Statement  of  Policy
                  Respecting Stockholder Communications with Directors; and (vi)
                  the SPAR Group,  Inc.  Statement of Policy Regarding  Director
                  Qualifications and Nominations.

         3.       Periodic Report on Form 8-K, dated August 23, 2004, filed with
                  the U.S.  Securities  and  Exchange  Commission  on August 23,
                  2004,  respecting  the earnings  press  release for the second
                  quarter ended June 30, 2004.


                                       30
<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 23, 2004      SPAR Group, Inc., Registrant


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



                                       31