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 third  quarterly  period ended  September 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 September 30, 2004, there were 18,858,972 shares of Common Stock outstanding.


<PAGE>

                                SPAR Group, Inc.

                                      Index

<TABLE>
<CAPTION>
PART I:         FINANCIAL INFORMATION

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

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

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

                      Consolidated Statements of Cash Flows for the
                      nine months ended September 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.............................................17

Item 3:               Quantitative and Qualitative Disclosures About Market Risk......................29

Item 4:               Controls and Procedures.........................................................29

PART II:        OTHER INFORMATION

Item 1:               Legal Proceedings...............................................................30

Item 2:               Changes in Securities and Use of Proceeds.......................................30

Item 3:               Defaults upon Senior Securities.................................................30

Item 4:               Submission of Matters to a Vote of Security Holders.............................30

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

Item 6:               Exhibits........................................................................31

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


                                       2
<PAGE>
PART I:.FINANCIAL INFORMATION

Item 1:  Financial Statements

                                SPAR Group, Inc.
                           Consolidated Balance Sheets
                 (In thousands, except share and per share data)

                                                    September 30, December 31,
                                                        2004         2003
                                                      --------     --------
                                                    (Unaudited)     (Note)

Assets
 Current assets:
    Cash and cash equivalents                         $    236     $      -
    Accounts receivable, net                             7,966       13,942
    Prepaid expenses and other current assets            1,267          659
    Deferred income taxes                                    -        1,305
                                                      --------     --------
 Total current assets                                    9,469       15,906

 Property and equipment, net                             1,686        2,099
 Goodwill                                                  798        8,749
 Deferred income taxes                                       -          434
 Other assets                                              431          926
                                                      --------     --------
 Total assets                                         $ 12,384     $ 28,114
                                                      ========     ========

 Liabilities and stockholders' equity
 Current liabilities:
    Accounts payable                                  $  1,593     $  1,350
    Accrued expenses and other current liabilities       1,194        4,081
    Accrued expenses, due to affiliates                  1,889        1,091
    Restructuring charges, current                         162          685
    Customer deposits                                      915          530
    Line of credit, short-term                           2,809        4,084
                                                      --------     --------
 Total current liabilities                               8,562       11,821

 Other long-term liabilities                               476          270
 Restructuring charges, long-term                          117            -


 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 - September 30, 2004
        18,858,972 - December 31, 2003                     189          189
    Treasury stock                                        (176)        (384)
    Accumulated other comprehensive loss                   (56)          (7)
    Additional paid-in capital                          11,051       11,249
    Accumulated (deficit) retained earnings             (7,779)       4,976
                                                      --------     --------
 Total stockholders' equity                              3,229       16,023
                                                      --------     --------
 Total liabilities and stockholders' equity           $ 12,384     $ 28,114
                                                      ========     ========

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                 Nine Months Ended
                                                         -------------------------         -------------------------
                                                       September 30,    September 30,    September 30,   September 30,
                                                           2004             2003             2004             2003
                                                         --------         --------         --------         --------
<S>                                                      <C>              <C>              <C>              <C>
Net revenues                                             $ 10,683         $ 16,615         $ 35,418         $ 52,704
Cost of revenues                                            6,963           11,380           24,474           33,777
                                                         --------         --------         --------         --------
Gross profit                                                3,720            5,235           10,944           18,927

Selling, general and administrative expenses                4,028            5,334           14,471           15,044
Impairment charges                                              -                -            8,141                -
Depreciation and amortization                                 275              385            1,005            1,162
                                                         --------         --------         --------         --------
Operating (loss) income                                      (583)            (484)         (12,673)           2,721

Interest expense                                               29               69              127              209
Other income (expense)                                        773                -              764              (28)
                                                         --------         --------         --------         --------
Income (loss) before provision for income taxes               161             (553)         (12,036)           2,484

Provision (benefit) for income taxes                           15             (208)             783              943
                                                         --------         --------         --------         --------

Net income (loss) before minority interest                    146             (345)         (12,819)           1,541

Minority interest                                              64                -               64                -
                                                         --------         --------         --------         --------

Net income (loss)                                        $    210         $   (345)        $(12,755)        $  1,541
                                                         ========         ========         ========         ========

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

  Net income (loss) - basic/diluted                      $   0.01         $  (0.02)        $  (0.68)        $   0.08
                                                         ========         ========         ========         ========

Weighted average common shares - basic                     18,859           18,859           18,859           18,853
                                                         ========         ========         ========         ========

Weighted average common shares - diluted                   19,206           18,859           18,859           19,508
                                                         ========         ========         ========         ========
</TABLE>


See accompanying notes.

                                       4
<PAGE>

                                SPAR Group, Inc.
                      Consolidated Statements of Cash Flows
                           (unaudited) (In thousands)

<TABLE>
<CAPTION>
                                                                             Nine Months Ended
                                                                        -------------------------
                                                                     September 30,    September 30,
                                                                          2004             2003
                                                                        --------         --------
<S>                                                                     <C>              <C>
Operating activities
Net (loss) income before minority interest                              $(12,819)        $  1,541
Adjustments to reconcile net (loss) income to net cash provided
   by (used in) operating activities:
     Impairment charges                                                    8,141                -
     Minority interest earnings in subsidiaries                               64                -
     Deferred tax asset adjustments                                          709              254
     Depreciation                                                          1,005            1,162

     Changes in operating assets and liabilities:
       Accounts receivable                                                 5,976            1,456
       Prepaid expenses and other assets                                    (181)            (816)
       Accounts payable, accrued expenses, other current
         liabilities and customer deposits                                (1,216)          (1,642)
       Accrued expenses due to affiliates                                    798              670
       Restructuring charges                                                 280             (817)

                                                                        --------         --------
Net cash provided by operating activities                                  2,757            1,808

Investing activities
Purchases of property and equipment                                       (1,014)          (1,356)
Acquisition of businesses                                                   (399)            (299)
                                                                        --------         --------
Net cash used in investing activities                                     (1,413)          (1,655)

Financing activities
Net (payments) borrowings on line of credit                               (1,275)           4,524
Other long-term liabilities                                                  206                -
Proceeds from employee stock purchase plan and exercised options              10              198
Payments to certain stockholders                                               -           (3,951)
Purchase of treasury stock                                                     -             (924)
                                                                        --------         --------
Net cash used in financing activities                                     (1,059)            (153)

Translation loss                                                             (49)               -

Net change in cash                                                           236                -
Cash at beginning of period                                                    -                -
                                                                        --------         --------
Cash at end of period                                                   $    236   $            -
                                                                        ========         ========

Supplemental disclosure of cash flow information
Interest paid                                                           $    124         $    174
</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 30.2% and 31.1% of
the  Company's net revenues for the nine months ended  September  30, 2004,  and
2003,  respectively.  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 nine months ending
September  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 $709,000 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 the
related goodwill thereby reducing the impairment  charges  recognized during the
nine months ended September 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 nine months ending
September 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 nine months ended September 30, 2004.

Other Assets:

      In addition to the above,  the Company has  recorded  impairment  of other
assets totaling $68,000 for the nine months ending September 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 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  and office
closings.  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  expensed
approximately  $480,000 in the quarter ending September 30, 2004,  approximately
$230,000 for  severance  benefits and  approximately  $250,000 for office leases
that  the  Company  ceased  using.  At  September  30,  2004,  the  Company  had
approximately  $280,000 reserved for future  restructure  payments.  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                       Nine Months Ended
                                      -------------------------------------     ----------------------------------
                                        September 30,      September 30,         September 30,    September 30,
                                            2004               2003                  2004              2003
                                      ------------------ ------------------     ---------------- -----------------
<S>                                   <C>                <C>                    <C>              <C>
Numerator:

   Net income (loss)                  $        210       $       (345)          $    (12,755)    $      1,541

Denominator:
   Shares used in basic earnings
   (loss) per share calculation             18,859             18,859                 18,859           18,853

Effect of diluted securities:
   Employee stock options                      167                  -                      -              655
                                      ------------------ ------------------     ---------------- -----------------

   Shares used in diluted earnings
   (loss) per share calculation             19,026             18,859                 18,859           19,508
                                      ================== ==================     ================ =================

Basic and diluted earnings (loss) per common share:

   Net income (loss) - basic and      $      0.01        $     (0.02)           $     (0.68)     $      0.08
   diluted
                                      ================== ==================     ================ =================
</TABLE>

      The  computation of dilutive loss per share excluded  anti-dilutive  stock
options to purchase  approximately 726,000 shares for three months September 30,
2003 and  approximately  591,000 shares for the nine months ending September 30,
2004.


                                       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,  taxes,  depreciation  and
amortization.  At September  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, reduced the revolving
credit  facility  from  $10.0  million to $7.0  million,  changed  the  covenant
compliance  testing for certain  covenants from quarterly to monthly and reduced
certain advance rates. The amendment did not change the future covenant levels.

         The Credit Facility contains certain  financial  covenants that must be
met by the Company on a consolidated  basis,  including,  a minimum  monthly and
cumulative  "EBITDA",  minimum "Net Worth",  a minimum  "Fixed  Charge  Coverage
Ratio",  as such terms are defined in the Credit  Facility.  The Credit Facility
also  limits  certain   expenditures   including  but  not  limited  to  capital
expenditures  and other  investments.  The Company was in  violation  of certain
quarterly  covenants  at September  30, 2004,  and expects to be in violation at
future  measurement  dates.  Webster  issued a waiver for the September 30, 2004
covenant violations, however, there can be no assurances that Webster will issue
such waivers in the future.

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

      The revolving  loan balances  outstanding  under the Credit  Facility were
$2.8  million and $4.1 million at  September  30,  2004,  and December 31, 2003,
respectively. There were letters of credit outstanding under the Credit Facility
of $0.7 million at each of  September  30,  2004,  and December 31, 2003.  As of
September  30,  2004,  the SPAR Group had unused  availability  under the Credit
Facility of $0.2  million  out of the  remaining  maximum  $3.5  million  unused
revolving line of credit after reducing the borrowing base by 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 September 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  6,300 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  50 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  $230,000 and  $470,000  for the three and nine month  periods
ended  September 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 nine month periods ended September 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
nine month periods ended September 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             Nine Months Ended
                                        ----------------------        ----------------------
                                      September 30,  September 30,   September 30,  September 30,
                                          2004           2003           2004           2003
                                        -------        -------        -------        -------
<S>                                     <C>            <C>            <C>            <C>
Services provided by affiliates:
  SMS: Independent contractor
     field services                     $ 4,183        $ 7,970        $15,941        $22,926
                                        =======        =======        =======        =======

  SMSI: Field management
     services                           $   946        $ 1,939        $ 3,561        $ 5,701
                                        =======        =======        =======        =======

  SIT: Internet and computer
     programming services               $   218        $   359        $   897        $ 1,215
                                        =======        =======        =======        =======

Reimbursed costs from affiliates:       $    24        $    61        $    87        $   169
                                        =======        =======        =======        =======
</TABLE>


<TABLE>
<CAPTION>
              Accrued expenses due to affiliates (in thousands):       September 30,     December 31,
                                                                            2004           2003
                                                                     ---------------------------------
<S>                                                                        <C>         <C>
                  SMS                                                      $ 1,200     $    397
                  SMSI                                                         343          517
                  SIT                                                          346          177
                                                                     ---------------------------------
                                                                           $ 1,889      $ 1,091
</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>
                                                                          Nine Months Ended
                                                                      -------------------------
                                                                   September 30,       September 30,
                                                                        2004               2003
                                                                      --------         --------
<S>                                                                   <C>              <C>
    Net (loss) income, as reported                                    $(12,755)        $  1,541
    Stock based employee compensation expense
      under the fair market value method                              $    367         $  1,188
                                                                      --------         --------
    Adjusted pro forma net (loss) income                              $(13,122)        $    353


    Basic and diluted net (loss) income per share, as reported        $  (0.68)        $   0.08

    Basic and diluted adjusted pro forma net (loss) income            $  (0.70)        $   0.02
      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 nine months ended September 30, 2004,  under the provision of SFAS
No. 123 dealing with  non-employee  stock option grants awarded to the employees
of the Company's affiliates, there was a recovery of amounts previously expensed
of  approximately  $114,000  as a result of the  declining  market  price of the
Company's  stock from  December  31, 2003 to  September  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 40,648 of repurchased  shares to issue stock for the
exercise of stock options during the nine months ended September 30, 2004. As of
September 30, 2004,  the Company has 35,408 shares of treasury  stock,  which it
acquired  at a cost of  approximately  $176,000.  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 (the "Term Loans"),
which due to their speculative nature were fully reserved.

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

      On September 10, 2004, in consideration for a new Promissory Note totaling
$764,271,  which  represented the amount  outstanding under the SPGI Revolver at
that time,  and in the event of a change in control of STIMULYS,  a share in the
net proceeds  resulting  from such change in control the Company  terminated the
SPGI Revolver and the Term Loans.  SPAR also  released its security  interest in
any collateral  previously pledged by STIMULYS.  The first payment due under the
Promissory  Note was received on October 29, 2004.  Due to the  collection  risk
associated  with the Promissory  Note, the Company has established a reserve for
the remaining amount due,  totaling  approximately  $344,000.  The STIMULYS note
receivable is recorded in Other Current Assets.

      As a result of the  termination  of the SPGI  Revolver,  the  reserve  for
collection of advances and accrued  interest under the SPGI Revolver  previously
established  by  the  Company  totaling  approximately  $984,000  is  no  longer
required.  The release of this  reserve net of the new reserve  required for the
Promissory Note resulted in Other Income totaling approximately $640,000 for the
three months ending September 30, 2004.

                                       13
<PAGE>

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

11.   Income Taxes

      During the three months  ended June 30,  2004,  as a result of the loss of
several significant clients,  current year losses and the lack of certainty of a
return to profitability  in the next twelve months,  the Company recorded a full
valuation  allowance  against its net deferred tax assets  resulting in a charge
totaling  approximately   $709,000.  The  valuation  allowance  was  reduced  by
approximately  $75,000  representing income taxes in excess of minimum taxes for
the three months  ending  September  30, 2004.  The income tax provision for the
three months ending September 30, 2004 represents minimum state tax liabilities.

12.   Customer Deposits

      In  June  2004,  the  Company   received  a   non-refundable   deposit  of
approximately  $900,000 from a customer.  The deposit is to be applied to future
invoices  for  services  that will be  provided  by the  Company  under a master
service agreement through December 31, 2006. Each invoice will be reduced by 20%
until the deposit is  depleted.  As of September  30,  2004,  there have been no
reductions of the deposit.

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 to 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 September 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 September 30, 2004, would be 50 million Yen or approximately $0.5 million.

      The  Company  has  recorded   approximately   $0.2  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.  In December  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

                                       14
<PAGE>

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

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 currently scheduled for
trial in March 2005 and is being vigorously contested by the Company.

      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 nine month periods ending  September
30, 2004, is as follows (in thousands):

<TABLE>
<CAPTION>
                                                          Three Months Ending       Nine Months Ending
                                                          -------------------------------------------
                                                          September 30,                 September 30,
                                                             2004                          2004
                                                          -------------------------------------------
<S>                                                       <C>                             <C>
    Net revenue:
    United States                                         $  9,236                        $ 32,467
    International                                         $  1,447                        $  2,951

    Operating loss:
    United States                                         $   (349)                       $(10,910)
    International                                         $   (234)                       $ (1,763)

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

    Long lived asset as of September 30, 2004:
    United States                                                                         $  2,616
    International                                                                         $    299
</TABLE>

      With  the  exception  of  the  joint  venture  in  South  Africa,  no  one
international geographic market is greater than 10% of consolidated net revenue.
South Africa  accounted for 11% of total  consolidated net revenue for the three
months ended September 30, 2004.


                                       15
<PAGE>

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

15.  Supplemental Balance Sheet Information

<TABLE>
<CAPTION>
                                                             September 30,              December 31,
    Prepaid expenses and other current assets                     2004                      2003
                                                       ------------------------------------------------------
<S>                                                    <C>                            <C>
    STIMULYS Promissory Note, net of reserve (see
      Note 10)                                              $         422             $           -
    Prepaid insurance                                                 344                       245
    Tax refund due                                                    317                       244
    Prepaid rents                                                      49                        70
    Other                                                             135                       100
                                                       ------------------------------------------------------
                                                            $       1,267             $         659

<CAPTION>
                                                             September 30,              December 31,
    Other assets, long-term                                       2004                      2003
                                                       ------------------------------------------------------
<S>                                                    <C>                            <C>
    Deposit on domestic acquisition                         $           -             $         350
    Prepaid insurance, long-term                                      189                       289
    Refundable deposits                                               118                       129
    Other                                                             124                       158
                                                       ------------------------------------------------------
                                                            $         431             $         926

<CAPTION>
                                                             September 30,              December 31,
    Accrued expenses and other current liabilities                2004                       2003
                                                       ------------------------------------------------------
<S>                                                    <C>                            <C>
    Merger related payables                                 $         450             $       1,495
    STIMULYS cash deposits                                              -                       794
    SPGI Revolver                                                       -                       740
    Accrued medical expenses                                          294                       100
    State taxes payable                                               169                       139
    Accrued accounting and legal expenses                             109                       219
    Accrued salary payable                                             78                       241
    Other                                                              94                       353
                                                       ------------------------------------------------------
                                                            $       1,194             $       4,081
</TABLE>

16.   Reclassification

      Certain amounts in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.


                                       16
<PAGE>

                                SPAR Group, Inc.


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

Forward-Looking Statements

         Statements contained in this Quarterly Report on Form 10-Q for the nine
months ended September 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,  South  Africa and
India.

                                       17
<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.  Also in April 2004,
the Company  announced the establishment of a joint venture in India and started
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

                                       18
<PAGE>

                                SPAR Group, Inc.


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:

       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 $577,000 and  $444,000 at  September  30,  2004,  and
December 31, 2003, respectively.

       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  $298,000  and  $802,000  of costs  related to
software developed for internal use in the nine months ended September 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
nine-month period ending September 30, 2004.


                                       19
<PAGE>

                                SPAR Group, Inc.


Results of Operations


Three months ended September 30, 2004,  compared to three months ended September
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
                                                     --------------------------------------------------------
                                                     September 30, 2004      September 30, 2003       (Decrease)
                                                     Amount          %       Amount           %        Increase %
                                                    --------       -----    --------        -----       -----
<S>                                                 <C>            <C>      <C>             <C>         <C>
Net revenues                                        $ 10,683       100.0%   $ 16,615        100.0%      (35.7)%

Cost of revenues                                       6,963        65.2      11,380         68.5       (38.8)

Selling, general and administrative expense            4,028        37.7       5,334         32.1       (24.5)

Depreciation and amortization                            275         2.6         385          2.3       (28.7)

Interest expense                                          29         0.2          69          0.4       (57.7)

Other income                                             773         7.2           -          -           -
                                                    --------       -----    --------        -----

Income (loss) before provision for income taxes          161         1.5        (553)        (3.3)     (129.1)

Provision (benefit) for income tax                        15         0.1        (208)        (1.3)     (107.3)
                                                    --------       -----    --------        -----

Net income (loss) before minority interest               146         1.4        (345)        (2.0)     (142.3)

Minority interest                                         64         0.6           -            -           -
                                                    --------       -----    --------        -----

Net income (loss)                                   $    210         2.0%   $   (345)       (2.0)%    (160.8)%
                                                    ========       =====    ========        =====
</TABLE>


         Net revenues for the three months ended  September 30, 2004, were $10.7
million,  compared to $16.6  million for the three  months ended  September  30,
2003,  a  decrease  of 35.7%.  The  decrease  in net  revenues  was due to lower
domestic  sales as a result  of  reduced  business  from the  Company's  largest
customer,  which was sold during the third quarter,  as well as, the loss of two
other large clients  offset by increases in  international  sales  totaling $1.4
million.

                                       20
<PAGE>

                                SPAR Group, Inc.


         One customer,  a division of a major retailer,  accounted for 16.9% and
27.7% of the  Company's  net revenues for the three months ended  September  30,
2004, and 2003,  respectively.  This customer also  accounted for  approximately
14.6%  and  32.6% of  accounts  receivable  at  September  30,  2004,  and 2003,
respectively. This customer was sold by its parent on August 2, 2004. During the
third  quarter of 2004,  the Company  experienced  a decline in net revenue from
this retailer, a trend which is expected to continue into 2005. The loss of this
business will have a material adverse effect on the Company's business,  results
of operations and financial condition.

         A second  customer  accounted  for 13.9% and 9.7% of the  Company's net
revenue for the three months ended  September 30, 2004, and 2003,  respectively.
This  customer  also  accounted  for  approximately  21.7% and 8.9% of  accounts
receivable at September 30, 2004, and 2003, respectively.

         In  addition,  approximately  17.2%  and  13.8%  of the  Company's  net
revenues for the three months ended September 30, 2004, and 2003,  respectively,
resulted from  merchandising  services performed for manufacturers and others at
Kmart. Kmart 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 65.2% for the
three months ended  September  30, 2004,  compared to 68.5% for the three months
ended  September  30,  2003.  The  decrease is primarily a result of the Company
reducing its domestic field structure to reflect its reduction of business.

         Approximately  73.7% and 87.1% of the Company's  cost of revenue in the
three months ended  September 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 decrease in selling,  general and  administrative  expenses of $1.3
million  consists of reductions  in domestic  operations'  selling,  general and
administrative cost structure to reflect its reduction of business totaling $2.1
million offset by increases in international selling, general and administrative
expense  primarily as a result of joint venture  startups  totaling $0.3 million
and restructure expenses totaling $0.5 million.


                                       21
<PAGE>

                                SPAR Group, Inc.


Other Income

         Other income of  approximately  $0.8 million for the three months ended
September 30, 2004,  primarily  represents  the release of the STIMULYS  reserve
(see Note 10 to the Financial Statements in this Quarterly Report).

Income Taxes

         The Company  recorded an income tax  provision of $15,000 for the three
months ended  September  30, 2004.  The provision was primarily for state taxes.
For the three months ended September 30, 2003, the income tax benefit represents
a  combined  federal  and  state  income  tax  rate of 38%  (see  Note 11 to the
Financial Statements in this Quarterly Report).

Net Income

         The Company had a net income of $0.2 million for the three months ended
September 30, 2004, or $0.01 per diluted  share,  compared to a net loss of $0.3
million, or $0.02 per diluted share, for the corresponding period last year.


                                       22
<PAGE>

                                SPAR Group, Inc.


Results of Operations

Nine months ended  September 30, 2004,  compared to nine months ended  September
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>
                                                                                   Nine Months Ended
                                                   ---------------------------------------------------------------------------------

                                                       September 30, 2004               September 30, 2003
                                                                                                                          % Incr.
                                                       Amount             %              Amount               %            (Decr.)
                                                   ---------------- --------------- ----------------- -----------------   --------
<S>                                                 <C>                 <C>         <C>                     <C>             <C>
Net revenues                                        $     35,418        100.0%      $    52,704             100.0%          (32.8)%

Cost of revenues                                          24,474         69.1             33,777             64.1           (27.5)

Selling, general, and administrative expense              14,471         40.9             15,044             28.5            (3.8)

Impairment charges                                         8,141         23.0                  -              -               -

Depreciation and amortization                              1,005          2.8              1,162              2.2           (13.6)

Interest expense                                             127          0.4                209              0.4           (39.2)

Other income (expense)                                       764          2.2               (28)             (0.1)        (2828.6)
                                                   ---------------- --------------- ----------------- -----------------

(Loss) income before provision for income taxes          (12,036)       (34.0)             2,484              4.7          (584.4)

Provision for income taxes                                   783          2.2                943              1.8           (16.9)
                                                   ---------------- --------------- ----------------- -----------------

Net (loss) income before minority interest               (12,819)       (36.2)             1,541              2.9          (931.9)

Minority interest                                             64          0.2                  -              -               -
                                                   ---------------- --------------- ----------------- -----------------

Net (loss) income                                   $    (12,755)       (36.0)%     $      1,541              2.9%         (927.8)%
                                                   ================ =============== ================= =================
</TABLE>

         Net revenues from  operations  for the nine months ended  September 30,
2004,  were $35.4  million,  compared to $52.7 million for the nine months ended
September 30, 2003, a decrease of 32.8%. The decrease in net revenues was due to
lower  domestic  sales  resulting  primarily  from  reduced  business  from  the
Company's largest customer,  which was sold during the third quarter,  decreased
project  revenue

                                       23
<PAGE>

                                SPAR Group, Inc.


from another  client and the loss of two other large clients offset by increases
in  international  sales  totaling $3.0 million.

         One customer,  a division of a major retailer,  accounted for 30.2% and
31.1% of the  Company's  net revenues for the nine months  ended  September  30,
2004, and 2003,  respectively.  This customer also  accounted for  approximately
14.6%  and  32.6% of  accounts  receivable  at  September  30,  2004,  and 2003,
respectively.  The customer was sold by its parent on August 2, 2004. During the
third  quarter of 2004,  the Company  experienced  a decline in net revenue from
this retailer, a trend which is expected to continue into 2005. The loss of this
business will have a material adverse effect on the Company's business,  results
of operations and financial condition.

         A second  customer  accounted  for 10.1% and 7.5% of the  Company's net
revenue for the nine months ended  September 30, 2004,  and 2003,  respectively.
This  customer  also  accounted  for  approximately  21.7% and 8.9% of  accounts
receivable at September 30, 2004, and 2003, respectively.

         Approximately  15% of the  Company's  net  revenues for the nine months
ended  September  30,  2004,  and 2003,  resulted  from  merchandising  services
performed at Kmart for various  customers.  Kmart 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 69.1% for the nine months ended
September  30, 2004,  compared to 64.1% for the nine months ended  September 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  that
occurred  in the  first  six  months of 2004,  offset  by the  reduction  of the
Company's field structure to reflect the reduction in business.

         Approximately  79.7% and 84.8% of the Company's costs of revenue in the
nine months ended  September  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 decrease in selling,  general and  administrative  expenses of $0.6
million  consists of reductions  in domestic  operations'  selling,  general and
administrative cost structure to reflect its reduction of business totaling $1.7
million offset by increases in international selling, general and administrative
expenses  primarily as a result of joint venture startups totaling $0.6 million,
and restructuring expenses totaling $0.5 million.

         Impairment  charges  were  $8.1  million  for  the  nine  months  ended
September  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

                                       24
<PAGE>

                                SPAR Group, Inc.


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.

Other Income

         Other  income of  approximately  $0.8 million for the nine months ended
September 30, 2004,  primarily  represents  the release of the STIMULYS  reserve
(see Note 10 to the Financial Statements in this Quarterly Report).

Income Taxes

      The Company  recorded an income tax provision of $0.8 million for the nine
months ended  September 30, 2004.  The provision  represents  estimated  minimum
taxes due as well as the  establishment of a valuation  reserve for net deferred
tax assets  previously  recorded  by the Company  (see Note 11 to the  Financial
Statements in this Quarterly  Report).  For the nine months ended  September 30,
2003 the income tax provision represents a combined federal and state income tax
rate of 38%.

Net Loss/Income

         The Company had a net loss of $12.8  million for the nine months  ended
September 30, 2004,  or $0.68 per diluted  share  compared to net income of $1.5
million or $0.08 per diluted share for the corresponding period last year.

Liquidity and Capital Resources

         In the nine months ended September 30, 2004, the Company had a net loss
of $12.8 million. Included in the net loss were non-cash charges of $8.1 million
for impairment, $0.7 million for deferred tax asset valuation adjustments,  $1.0
million for  depreciation  and $0.1  million for minority  interest  earnings in
subsidiaries.

         Net cash  provided by  operating  activities  for the nine months ended
September  30,  2004,  was $2.8  million,  comparable  to net cash  provided  by
operating  activities  of $1.8 million for the nine months ended  September  30,
2003.  The increase of $1.0 million in cash provided by operating  activities is
due to lower  accounts  receivable  levels,  higher  accruals for  restructuring
charges  and accrued  expenses  due  affiliates,  lower  reductions  in accounts
payable,  accrued  expenses and other current  liabilities,  lower  increases in
prepaid expenses offset by net operating losses.

         Net  cash  used in  investing  activities  for the  nine  months  ended
September  30, 2004,  was $1.4 million  comparable to net cash used in investing
activities  of $1.7 million for the nine months ended  September  30, 2003.  The
decrease in net cash used in investing  activities resulted from lower purchases
of property and equipment in the current year.

         Net  cash  used in  financing  activities  for the  nine  months  ended
September 30, 2004,  was $1.1 million,  compared with net cash used in financing
activities  of $0.2 million for the nine months ended  September  30, 2003.  The
increase  of net cash used in  financing  activities  was  primarily a result of
higher net payments on the line of credit.

                                       25
<PAGE>

                                SPAR Group, Inc.


         The above  activity  resulted in a change in cash and cash  equivalents
for the nine months ended September 30, 2004 of $0.2 million.

         At September 30, 2004, the Company had positive working capital of $0.9
million,  as compared to a positive  working capital of $4.1 million on December
31, 2003. The decrease in working capital is due primarily to decreases in sales
levels and the related impact on accounts  receivable and deferred income taxes.
The Company's current ratio was 1.11 at September 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,  taxes,  depreciation  and
amortization.  At September  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, reduced the
revolving  credit  facility  from $10.0  million to $7.0  million,  changed  the
covenant  compliance testing for certain covenants from quarterly to monthly and
reduced certain advance rates. The amendment does not change the future covenant
levels.

         The Credit Facility contains certain  financial  covenants that must be
met by the Company on a consolidated  basis,  including,  a minimum  monthly and
cumulative  "EBITDA",  minimum "Net Worth",  a minimum  "Fixed  Charge  Coverage
Ratio",  as such terms are defined in the Credit  Facility.  The Credit Facility
also  limits  certain  expenditures  including,  but  not  limited  to,  capital
expenditures  and other  investments.  The Company was in  violation  of certain
quarterly  covenants  at September  30, 2004,  and expects to be in violation at
future  measurement  dates.  Webster  issued a waiver for the September 30, 2004
covenant violations, however, there can be no assurances that Webster will issue
such waivers in the future.

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

       The revolving loan balances  outstanding  under the Credit  Facility were
$2.8  million and $4.1 million at  September  30,  2004,  and December 31, 2003,
respectively. There were letters of credit

                                       26
<PAGE>

                                SPAR Group, Inc.


outstanding under the Credit Facility of $0.7 million at September 30, 2004, and
December  31,  2003.  As of  September  30,  2004,  the SPAR  Group  had  unused
availability  under the Credit  Facility of $0.2  million  out of the  remaining
maximum  $3.5  million  unused  revolving  line of  credit  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,  sources of cash  availability
will be sufficient to support  ongoing  operations  over the next twelve months.
However, delays in collection of receivables due from any of the Company's major
clients,  or a significant  further reduction in business from such clients,  or
the inability to acquire new clients,  or the  Company's  inability to 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.

         On September  10, 2004,  in  consideration  for a new  Promissory  Note
totaling  $764,271,  which  represented  the amount  outstanding  under the SPGI
Revolver at that time,  and in the event of a change in control of  STIMULYS,  a
share in the net  proceeds  resulting  from such  change in control  the Company
terminated the SPGI Revolver and the Term Loans. SPAR also released its security
interest in any collateral previously pledged by STIMULYS. The first payment due
under  the  Promissory  Note  was  received  on  October  29,  2004.  Due to the
collection risk associated with the Promissory Note, the Company has established
a reserve for the remaining amount due,  totaling  approximately  $344,000.  The
STIMULYS note receivable is recorded in Other Assets.

         As a result of the  termination of the SPGI  Revolver,  the reserve for
collection of advances and accrued  interest under the SPGI Revolver  previously
established  by  the  Company  totaling  approximately  $984,000  is  no  longer
required.  The  release of this  reserve  net of the  reserve  required  for the
Promissory Note resulted in Other Income totaling approximately $640,000 for the
three months ending September 30, 2004.

Certain Contractual Obligations

       The  following  table  contains a summary  of  certain  of the  Company's
contractual obligations by category as of September 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                                 $2,809        $2,809     $       -        $    -          $    -
--------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations                      1,673           816           800            57               -
--------------------------------------------------------------------------------------------------------------------
Total                                           $4,482        $3,625       $   800         $  57          $    -
--------------------------------------------------------------------------------------------------------------------
</TABLE>


         The Company also had $0.7 in outstanding Letters of Credit at September
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

                                       27
<PAGE>

                                SPAR Group, Inc.


Revolving  Credit  Agreement with a Japanese  bank. The bank required  Paltac to
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
September  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 September 30, 2004,  would be 50 million Yen or
approximately $0.5 million.

         The  Company  has  recorded  approximately  $0.2  million in  long-term
liabilities  for its share of the cumulative  losses  associated with this joint
venture.


                                       28
<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 third quarter of 2004.


                                       29
<PAGE>

                                SPAR Group, Inc.


PART II: OTHER INFORMATION

Item1.   Legal Proceedings

         No change.

Item 2:  Changes in Securities and Use of Proceeds

         Item 2(a): Not applicable

         Item 2(b): Not applicable

         Item 2(c): Not applicable

Item 3:  Defaults upon Senior Securities

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

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

         The Company held its Annual Meeting of Stockholders on August 12, 2004.
         The  meeting  was held (1) to elect the Board of  Directors  and (2) to
         ratify  the   appointment  of  Ernst  &  Young  LLP  as  the  Company's
         independent auditors for the year ending December 31, 2004.

         The number of votes cast for each proposal are set both below:

<TABLE>
<CAPTION>
           Name:                                 For:                                        Abstention:
         ----------------------------------- ---------------------------------- ---------------------------------
<S>                                          <C>                                <C>
         Robert G. Brown                     17,236,722                         19,182
         ----------------------------------- ---------------------------------- ---------------------------------
         William H. Bartels                  17,228,422                         27,482
         ----------------------------------- ---------------------------------- ---------------------------------
         Robert O. Aders                     17,235,752                         20,152
         ----------------------------------- ---------------------------------- ---------------------------------
         Jerry B. Gilbert                    17,237,452                         18,452
         ----------------------------------- ---------------------------------- ---------------------------------
         Jack W. Partridge                   17,238,422                         17,482
         ----------------------------------- ---------------------------------- ---------------------------------
         Lorrence T. Kellar                  17,237,452                         18,452
         ----------------------------------- ---------------------------------- ---------------------------------
<CAPTION>
         Each of the nominees was elected to the Board of Directors.

         Proposal  Number 2 - Ratification  of the  appointment of Ernst & Young
         LLP as the Company's  independent auditors for the year ending December
         31, 2004:

           For:                                           Against:                           Abstention:
         ------------------------------------ --------------------------------- ---------------------------------
<S>                                          <C>                                <C>
         17,252,770                           1,387                             1,747
         ------------------------------------ --------------------------------- ---------------------------------
</TABLE>


                                       30
<PAGE>

                                SPAR Group, Inc.


Item 5:  Other Information

         Not applicable.


Item 6:  Exhibits

         Exhibits.

         10.1     Waiver  and  Amendment  No. 6 to Third  Amended  and  Restated
                  Revolving Credit and Security Agreement among Webster Business
                  Credit  Corporation,  SPAR  Group,  Inc.,  and  certain of its
                  subsidiaries dated as of November 12, 2004, 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.

         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.


                                       31
<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:  November 15, 2004      SPAR Group, Inc., Registrant


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



                                       32