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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009ORo

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


COMMISSION FILE NUMBER 1-13495

MAC-GRAY CORPORATION(Exact name of registrant as specified in its charter)

DELAWARE(State or other jurisdiction
incorporation or organization)

04-3361982(I.R.S. Employer
Identification No.)404 WYMAN STREET, SUITE 400
WALTHAM, MASSACHUSETTS

02451-1212(Address of principal executive offices)

(Zip Code)


Registrant's telephone number, including area code:(781) 487-7600

Securities
Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange
On Which RegisteredCommon Stock, par value $.01 per share

New York Stock ExchangePreferred Stock Purchase Rights

New York Stock Exchange


Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o    No ý

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. Yes ý    No o

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.305 of this chapter) during the preceding 12 months (or for such short period
that the registrant was required to submit and post such files). Yes o    No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer o

Accelerated Filer ý

Non-Accelerated Filer o (Do not check if a smaller
reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o    No ý

The aggregate market value of the voting and non-voting stock of the registrant held by non-affiliates of the registrant as of
June 30, 2009 was $120,090,057

As
of March 10, 2010, 13,772,326 shares of common stock of the registrant, par value $.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants' Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 2010, are incorporated by reference into
Items 10, 11, 12, 13 and 14 of Part III of this report. Such Proxy Statement shall not be deemed to be "filed" as part of this Annual Report on Form 10-K, except for
those parts therein which have been specifically incorporated by reference herein.



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MAC-GRAY CORPORATION        Annual Report on Form 10-K        Table of Contents



PagePart IItem 1.

Business

1Item 1A.

Risk Factors

4Item 1B.

Unresolved SEC Staff Comments

10Item 2.

Properties

10Item 3.

Legal Proceedings

12Item 4.

(Removed and Reserved)

12Part IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13Item 6.

Selected Financial Data

14Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

37Item 8.

Financial Statements and Supplementary Data

39Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

39Item 9A.

Controls and Procedures

39Item 9B.

Other Information

40Part IIIItem 10.

Directors and Executive Officers of the Registrant

41Item 11.

Executive Compensation

41Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

41Item 13.

Certain Relationships and Related Transactions

42Item 14.

Principal Accounting Fees and Services

42Part IVItem 15.

Exhibits, Financial Statements and Notes to Financial Statements

42


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PART I

Forward-Looking Statements

Some of the statements made in this report under the captions "Risk Factors," "Business," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report or in documents incorporated herein by reference are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-looking words such as "anticipate," "assume," "believe," "estimate," "expect," "intend," and other
similar expressions. Investors should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond the Company's
control and which could materially affect actual results, performance or achievements. Factors that could cause actual results, performance or achievements to differ materially from those expressed or
implied by these forward-looking statements include, without limitation, the factors described under Item 1A, "Risk Factors." Investors
should carefully review all of the factors described therein, which may not be an exhaustive list of the factors that could cause these differences.

Item 1.    Business

Overview

On February 5, 2010, the Company sold its MicroFridge ® (Intirion Corporation) business to Danby Products. The
following discussion excludes the financial results from our discontinued operations unless otherwise noted. The results from all prior periods have been reclassified to conform to this presentation.

Unless
the context requires otherwise, all references in this report to "we," "our," "Mac-Gray," the "Company," or "us" means Mac-Gray Corporation and its
subsidiaries and predecessors.

Mac-Gray
Corporation was founded in 1927 and reincorporated in Delaware in 1997. Since its founding, Mac-Gray has grown to become the second largest laundry
facilities management contractor in the United States. Through our portfolio of card- and coin-operated laundry equipment located in laundry facilities across the country, we
provide laundry convenience to residents of multi-unit housing such as apartment buildings, condominiums, colleges and university residence halls, public housing complexes and hotels and
motels. Based on our ongoing survey of colleges and universities, we believe that we are the largest provider of such services to the college and university market in the United States.

We
derive our revenue principally as a laundry facilities management contractor for the multi-unit housing industry. We manage laundry rooms under long-term
leases with property owners, property management companies and colleges and universities. We refer to these leases as "laundry leases" or "management contracts" and this business as "laundry
facilities management business." In 2009, 95% of our consolidated revenue from continuing operations was derived from our laundry facilities management business. As of December 31, 2009, our
laundry facilities management business had revenue-generating laundry equipment operating in 43 states and the District of Columbia.

Our
laundry equipment sales business sells and services commercial laundry equipment manufactured by Whirlpool Corporation, Dexter Laundry Company, American Dryer Corporation and Primus
Laundry Company. This business sells commercial laundry equipment primarily to retail laundromats, hotels and similar institutional users that operate their own on-premise laundry
facilities. We refer to this business as our "commercial laundry equipment sales business."

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Laundry Facilities Management Business

For the years ended December 31, 2008 and 2009, our laundry facilities management business accounted for approximately 94% and
95% of our total revenue from continuing operations, respectively, and 93% and 94% of our gross margin from continuing operations, respectively. Through our laundry facilities management business, we
act as a laundry facilities management contractor with property owners or managers. We lease space within a property, in some instances improve the leased space with flooring, ceilings and other
improvements ("betterments") and then install and service the laundry equipment and collect the payments. The property owner or manager is usually responsible for maintaining, cleaning, and securing
the premises and payment of utilities. Under our long-term leases, we typically receive the exclusive right to provide and service laundry equipment within a multi-unit housing
property in exchange for a negotiated percentage of the total revenue collected. We refer to this percentage as "facilities management rent." In each of the past five years, we have retained
approximately 97% of our equipment base per year. Our gross additions to our equipment base for each of the years ended December 31, 2008 and 2009 through internally generated growth equaled 3%
and 2%, respectively. Our additions, net of lost business, were 0% for the year ended December 31, 2008 and -1% for the year ended December 31, 2009. The machine base not
retained is primarily attributable to contracts the Company has chosen not to renew due to unacceptable profit margins,(including some acquired contracts that did not meet our performance criteria,)
and to a lesser degree, to property owners who chose to self-operate. We believe that our ability to retain our existing equipment base and grow it through internally generated growth in equipment
installations is indicative of our service of, and attention to, property owners and managers. We also provide our customers with proprietary technologies such as LaundryView,
LaundryLinx and our Client Resource Center, and we continue to invest in research and development of such technologies. We generally have the ability to set and adjust the vend pricing
for our equipment based upon local market conditions.

We
have centralized our administrative and marketing operations at our corporate headquarters in Waltham, Massachusetts. We also operate sales and/or service centers in Alabama, Arizona
(two locations), Colorado, Connecticut, Florida (two locations), Georgia, Illinois, Louisiana, Maine,
Maryland, Massachusetts (two locations), New Jersey, New Mexico, New York (two locations), North Carolina, Oregon, Tennessee (two locations), Texas (four locations), Utah, Virginia, and Washington.

We
also generate revenue by leasing equipment to laundry customers who choose neither to purchase equipment nor to become a laundry facilities management customer, but instead wish to
maintain their own laundry rooms. This leasing business generated revenue of $5 million for each of the years ended December 31, 2008 and 2009, and is included in the laundry facilities
management business.

Our
laundry facilities management business has certain intrinsic characteristics in both its industry and its customer base, including the following:

Revenue.We operate as a laundry facilities management contractor under long-term leases and other arrangements with property owners or
managers. Our efforts are designed to maintain these customer relationships over the long-term. Our typical leases have an initial average term of approximately seven years, with the
potential to renew if mutually agreed upon by us and the owner or manager. Renewal of a lease usually involves renegotiated terms and new equipment. In each of the past five years, we have retained
contracts representing approximately 97% of our equipment base per year.

Customers.As of February 1, 2010, we provided laundry equipment and related services to approximately 88,000 laundry rooms
located in 43
states throughout the continental United States and the District of Columbia. As of February 1, 2010, no customer contract accounted for more than 1% of our laundry facilities management
revenue. We serve customers in multi-unit housing facilities,

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including
apartment buildings, college and university residence halls, condominiums, public-housing complexes and hotels and motels.

Seasonality.We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived
from the college
and university market represented approximately 13% of the laundry facilities management revenue for 2009. Academic facilities management revenue is derived substantially during the school year in the
first, second and fourth calendar quarters. Conversely, during the third calendar quarter when most colleges and universities are not in session, the Company increases its operating and capital
expenditures when it has its greatest product installation activities.

Competition.The laundry facilities management industry is highly competitive, capital intensive and requires the delivery of reliable
and prompt
services to customers. We believe that customers consider a number of factors in selecting a laundry facilities management contractor, such as customer service, reputation, facilities management rent
rates (including incentives,) advance rents, range of products and services, and technology. We believe that different types of customers assign varied weight to each of these factors and that no one
factor alone determines a customer's selection of a laundry facilities management contractor. Within any given geographic area, we may compete with local independent operators, regional and
multi-regional operators. The industry is highly fragmented; consequently, we have grown by acquisitions, as well as through new equipment placement. We believe that we are the second largest laundry
facilities management contractor in North America.

Impact of Occupancy Rates.Our laundry facilities management revenue is affected by apartment and condominium occupancy rates.
Occupancy rates in the
multi-unit housing industry are affected by several factors. These factors include local economic conditions, local employment levels, mortgage interest rates as they relate to
first-time homebuyers, and the supply of apartments in specific markets. We are somewhat protected from revenue decreases caused by declining occupancy rates due to the variation of
markets served, the various types of multi-unit housing facilities therein, and the percentage of revenue derived from colleges and universities. We monitor independent market research
data regarding trends in occupancy rates in our markets to better understand laundry facilities revenue trends and variations.

Suppliers.We currently purchase a large majority of the equipment that we use in our laundry facilities management business from
Whirlpool
Corporation ("Whirlpool".) In addition, we derive a portion of our revenue from our position as a distributor of Whirlpool manufactured appliances. We have maintained a relationship with Whirlpool and
its predecessor, Maytag Corporation, since 1927. Either party upon written notice may terminate the purchase and distribution agreements. A termination of, or substantial revision of the terms of, the
contractual arrangements or business relationships with Whirlpool could have a material adverse effect on the Company's business, results of operations, financial condition and prospects.

Commercial Laundry Equipment Sales and Services Business

Through our commercial laundry equipment sales and services business, we are a significant distributor for several commercial laundry
equipment manufacturers, primarily Whirlpool. We do not manufacture any of the commercial laundry equipment that we sell. As an equipment distributor, we sell commercial laundry equipment to public
retail laundromats, as well as to the multi-unit housing industry. In addition, we sell commercial laundry equipment directly to institutional purchasers, including hospitals and hotels,
for use in their own on-premise laundry facilities. We are certified by the manufacturers to service the commercial laundry equipment that we sell. Installation and repair services are
provided on an occurrence basis, not on a contractual basis. Related revenue is recognized at the time the installation service, or other service, is provided to the customer. For the years ended

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December 31,
2008 and 2009, our commercial laundry equipment sales business accounted for approximately and 6% and 5%, respectively, of our total revenue.

Employee Base

As of February 22, 2010, the Company employed 879 full-time employees. No employee is covered by a collective
bargaining agreement and the Company believes that its relationship with its employees is good.

Operating Characteristics

We maintain a corporate staff as well as centralized finance, human resources, legal services, information technology, marketing and
customer service departments. Regionally, we maintain service centers and warehouses staffed by local management, service technicians, collectors and inventory handlers.

Backlog

Due to the nature of our laundry facilities management business, backlogs do not exist. There is no significant backlog of orders in
our commercial laundry equipment sales business.

Contact Information

We file our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on
Form 8-K with the Securities and Exchange Commission, or "SEC." Our reports filed with the SEC are available at the SEC's website at www.sec.gov and the Company's website at
www.macgray.com. The information contained on our website is not included as a part of, or incorporated by reference into, this annual report on Form 10-K.

Our
corporate offices are located at 404 Wyman Street, Suite 400, Waltham, Massachusetts, 02451-1212. Our telephone number is (781) 487-7600, its
fax number is (781) 487-7606, and our email address for investor relations is ir@macgray.com.

Item 1A.    Risk Factors

This annual report on Form 10-K contains statements, some of which are not historical facts and are considered
forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements contain projections of our future results of operations or financial
position or state other forward-looking information. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "should," "will" and "would" or similar words. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which
are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or
achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences are as follows:

If we are unable to establish new laundry facility management leases, renew our existing laundry facility management leases or retain relationships with our customers who
are not subject to leases, our business, results of operations, cash flows and financial condition could be adversely affected.

Our laundry facilities management business, which provided 95% of our total revenue from continuing operations for the year ended
December 31, 2009, is highly dependent upon the renewal of leases with property owners and property management companies. Approximately 90% to 92% of our

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leases
provide for an average initial term of seven years. Approximately 8% to 10% of our laundry room leases are up for renewal each year. We have traditionally relied upon exclusive,
long-term leases with our customers, as well as frequent customer interaction and an emphasis on customer service, to assure continuity of financial and operating results. We cannot
guarantee that in the future we will be able to establish long-term leases with new customers or renew existing long-term leases as they expire on favorable terms, or at all.

Failure
by us to continue to establish long-term leases with new customers, or to successfully renew existing long-term leases as they expire, could have a
material adverse effect on our business, results of operations, cash flows and financial condition. Further, approximately 10% of our customers are not subject to leases, are subject to
short-term leases of less than one year remaining, or have the right to terminate their lease with us at their option. Failure to retain these customers could have a material adverse
effect on our business, results of operations, cash flows and financial condition.

We face strong competition in the outsourced laundry facilities management industry.

The outsourced laundry facilities management industry is highly competitive, and we compete for long-term leases, both
locally and nationally, with property owners and other operators in the industry. We compete based on customer service, reputation, facilities management rent rates, incentive payments and a range of
products and services. Smaller local and regional operators typically have long-standing relationships with property owners and managers in their specific geographic market. As such, we
may have difficulty penetrating such markets, as property owners and managers may be resistant to terminating such long-standing relationships. We also compete with property owners, as
there is no guarantee that property owners will continue to outsource their laundry facilities management to operators. There is one competitor in the industry, Coinmach Corporation, with a larger
installed equipment base than us. Competition in the industry may make it more difficult and more expensive to
consummate acquisitions in the future and to maintain and expand our installed equipment base. In addition, some of our competitors may have less indebtedness than we do, and therefore more of their
cash is potentially available for business purposes other than debt service. We cannot assure you that our results of operations, cash flows or financial condition will not be materially and adversely
affected by competition, or that we will be able to maintain our profitability if the competitive environment changes.

If we are unable to continue our relationships with Whirlpool Corporation and other equipment suppliers, our revenues could be reduced, and our ability to meet customer
requirements could be materially and adversely affected.

We purchase a large majority of the equipment that we use in our laundry facilities management business from Whirlpool. In addition, we
derive a portion of our commercial laundry equipment sales revenue from our position as a distributor of Whirlpool commercial laundry products. We cannot assure you that Whirlpool will continue its
relationship with us. If Whirlpool terminates its relationship with us, our results of operations, cash flows and financial condition could be materially and adversely affected, and further, we may be
unable to replace our relationship with Whirlpool with a comparable manufacturer on favorable terms, or at all.

A decrease in multi-unit housing sector occupancy rates in the markets in which we conduct business could adversely affect our laundry facilities management
revenue.

Our laundry facilities management revenue from our operation of card- and coin-operated laundry equipment,
particularly in the multi-unit housing sector, depends partially upon the level of tenant occupancy. The number of apartments occupied in an apartment building with a vended laundry
facility directly affects our revenue. Extended periods of reduced occupancy in our clients' buildings could

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adversely
affect our operations. The level of occupancy can be adversely affected by many market and general economic conditions, all of which are beyond our control,
including:



Our cash flows may not be sufficient to finance the significant capital expenditures required to replace equipment, implement new technology, or make incentive payments to
property managers.

We must continue to make capital expenditures in order to maintain and replace our installed equipment base and implement new
technology in our equipment. We must also make incentive payments to some property managers in order to secure new laundry leases and renew existing laundry leases. We cannot assure you that our
resources or cash flows will be sufficient to finance anticipated capital expenditures and incentive payments for at least the next year. To the extent that available resources are insufficient to
fund our capital needs, we may need to raise additional funds through public or private financings or curtail certain expenditures. These financings may not be available on favorable terms, or at all,
and, in the case of equity financings, could result in dilution to stockholders. If we cannot maintain or replace our equipment as required or implement our new technologies, our results of
operations, cash flows and financial condition could be materially and adversely affected.

If we are unable to comply with our debt service requirements under existing or future indebtedness, our indebtedness could become payable immediately.

Our current financing agreements require us to meet certain financial covenants. If we are unable to meet those requirements, our
indebtedness could become immediately due and payable. If our debt were accelerated we would need to refinance or restructure our debt agreement as our current cash flow would be inadequate to retire
our debt, which we may not be able to consummate on commercially reasonable terms, or at all.

If we are unable to access capital on acceptable financial terms, our ability to consummate acquisitions will be limited.

The success of our long-term growth strategy is partially dependent upon our ability to identify, finance and consummate
acquisitions on acceptable financial terms. Access to capital is subject to the following risks:



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We may have difficulties integrating future acquisitions into our business.

We have in the past, and intend to in the future, engage in acquisitions to continue the expansion of our laundry facilities management
business. The failure to successfully complete the integration of any acquisition would adversely affect our business and results of operations.

Any
future acquisitions could involve numerous risks, including:



We
may not be successful in addressing these risks or any other problems encountered in connection with any acquisitions.

Our internal controls over financial reporting may not be adequate and our independent auditors may not be able to certify as to their effectiveness, which could have a
significant and adverse effect on our business and reputation.

Section 404 of the Sarbanes-Oxley Act of 2002 requires a reporting company such as ours to, among other things, annually review
its internal controls over financial reporting, and evaluate and disclose changes in its internal controls over financial reporting quarterly. If we are not able to achieve and maintain adequate
compliance, or our independent auditors are not able to certify as to the effectiveness of our internal control over financial reporting, we may be subject to sanctions or investigation by regulatory
authorities, such as the SEC. As a result, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may
be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could adversely affect our results of operations and financial condition.

Inability to protect our trademarks and other proprietary rights could adversely impact our competitive position.

We rely on patents, copyrights, trademarks, trade secrets, confidentiality provisions and employee and third party
non-disclosure and non-solicitation agreements to establish and protect our intellectual property and proprietary rights. We cannot be certain that steps we have taken to
protect our intellectual property and proprietary rights will be adequate or that third parties will not infringe or misappropriate any of our intellectual property or proprietary rights. While we
have periodically made

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filings
with the U.S. Patent and Trademark Office, we have traditionally relied upon the protections afforded by contract rights and common law ownership rights, and we cannot assure you that these
contract rights and common law ownership rights will adequately protect our intellectual property and proprietary rights. Any infringement or misappropriation of our intellectual property and
proprietary rights could damage their value and could have a material adverse effect on our business, results of operations and financial condition. We may have to engage in litigation to protect our
rights to our intellectual property and proprietary rights, which could result in significant litigation expenses and require a significant amount of management's time.

We
own or license several registered and unregistered trademarks, including Mac-Gray®, Web®, Hof, Automatic Laundry Company,
Intelligent Laundry®, LaundryView®, LaundryLinx, PrecisionWash, TechLinx, VentSnake, LaundryAudit and
e-issues that we use in the marketing and sale of our products. However, the degree of protection that these trademarks afford us is unknown and these trademarks may expire or
be terminated. In the event that someone infringes on or misappropriates our trademarks, the brand images and reputation that we have developed could be damaged, which could have a material adverse
effect on our business, results of operations and financial condition.

We are dependent on key personnel, and the loss of any of our key personnel could have a material adverse effect on our business, results of operations and financial
condition.

Our continued success will depend largely on the efforts and abilities of our executive officers, management teams and other key
employees. The loss of any of these officers or other key employees could result in inefficiencies in our operations, lost business opportunities or the loss of one or more customers.

Our financial results have been and could further be negatively impacted by impairments of goodwill or other intangible assets required by the application of existing or
future accounting policies or interpretations of existing accounting policies.

The Company assesses goodwill for impairment at least annually and whenever events or circumstances indicate that the carrying amount
of the goodwill may be impaired. Important factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results;
significant negative industry or economic trends; and the Company's market capitalization relative to its book value. The Company evaluated its goodwill for impairment as of December 31, 2009.
The goodwill impairment review consists of a two-step process of first assessing the fair value and comparing to the carrying value. If this fair value exceeds the carrying value, no
further analysis or goodwill impairment charge is required. If the fair value is below the carrying value, we would proceed to the next step, which is to measure the amount of the impairment loss. The
impairment loss is measured as the difference between the carrying value and implied fair value of goodwill. Any such impairment loss would be recognized in the Company's results of operations in the
period the impairment loss arose. Any charge could have a significant negative effect on our reported earnings. In addition, our financial results could be negatively impacted by the application of
existing and future accounting policies or interpretations of existing accounting policies.

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We face risks associated with environmental regulation.

Our businesses and operations are subject to federal, state and local environmental laws and regulations, including those governing the
discharge of pollutants, the handling, generation, storage and disposal of hazardous materials, substances and wastes and the cleanup of contaminated sites. In connection with current or historical
operations by us or at our sites, we could incur substantial costs, including clean-up costs, fines and civil or criminal sanctions, and third-party claims for property damage or personal
injury, as a result of violations of, or liabilities under, environmental laws and regulations. While we are not aware of any existing or potential environmental claims against us that are likely to
have a material adverse effect on our business or financial condition, we cannot guarantee you that we will not in the future incur liability or other costs under environmental laws and regulations
that could have a material adverse effect on our business or financial condition.

We are controlled by a concentrated group of stockholders, whose interests could be in conflict with yours.

As of December 31, 2009, our directors, executive officers, and certain of our stockholders related to such persons and their
affiliates beneficially owned in the aggregate approximately 33.1% of the outstanding shares of our common stock (See Item 12, "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholders Matters" below). This percentage ownership does not include options to purchase 1,089,881 shares of our common stock held by some of these persons, which options were
exercisable at, or within 60 days subsequent to, December 31, 2009. If all of these options had been exercised as of December 31, 2009, then these stockholders and their
affiliates would have beneficially owned 38.1% of the outstanding shares of our common stock. Additionally, we are party to a shareholders' agreement, dated June 26, 1997, with some of these
stockholders that gives them rights of first offer to purchase shares of our common stock offered for sale by another stockholder party thereto (See Item 13, "Certain Relationships and Related
Transactions below.) As a result of this concentration in ownership, should these stockholders, act together, they have the ability to influence the outcome of the election of directors and all other
matters requiring approval by a majority of stockholders. Circumstances may arise in which the interests of this group of stockholders could be in conflict with interests of other stockholders.

Provisions in our charter and bylaws, Delaware law, and the shareholders agreement could have the effect of discouraging takeovers.

Specific provisions of our charter and bylaws, as described below and in Footnote 12 to the Consolidated Financial Statements; sections
of the corporate law of Delaware; the shareholder agreement, and powers of our Board of Directors may discourage takeover attempts not first approved by the Board of Directors, including takeovers
which some stockholders may deem to be in their best interests. The shareholder rights agreement described below could make it more difficult for a third party to acquire, or could discourage a third
party from acquiring, us or a large block of our common stock without the support of our Board of Directors. These provisions and powers of the Board of Directors could delay or prevent the removal of
incumbent directors or the assumption of control by stockholders, even if the particular removal or assumption of control would be beneficial to stockholders. These provisions and powers of the Board
of Directors could also discourage or make more difficult a merger, tender offer or proxy contest, even if these events would be beneficial, in the short term, to the interests of some shareholders.
The anti-takeover provisions and powers of the Board of Directors include, among other things:



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Item 1B.    Unresolved SEC Staff Comments.

None.

Item 2.    Properties.

Mac-Gray rents approximately 32,000 square feet in Waltham, Massachusetts that it uses as its corporate headquarters and
which houses the Company's administrative and central services. At December 31, 2009, Mac-Gray leased the following regional facilities, which are largely operated as

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sales
and service facilities, although limited administrative functions are also performed at many of them:

Location

Approximate Square Footage

Expiration DateAlbany, New York


1,500


7/2012Albuquerque, New Mexico


6,600


4/2011Beltsville, Maryland


22,432


8/2012Buda, Texas


7,000


1/2011Buffalo, New York


10,000


9/2010Carlstadt, New Jersey


17,094


5/2015Charlotte, North Carolina


10,640


3/2013Chesapeake, Virginia


6,430


7/2013College Station, Texas


1,250


12/2010Colorado Springs, Colorado


4,800


5/2011Commerce City, Colorado


5,000


9/2010Deerfield Beach, Florida


10,469


5/2010Denver, Colorado


21,688


3/2013East Brunswick, New Jersey


14,400


7/2010East Hartford, Connecticut


14,900


5/2013El Paso, Texas


6,250


3/2012Eugene, Oregon


2,500


6/2010Euless, Texas


10,000


4/2011Grand Junction, Colorado


3,575


5/2011Gurnee, Illinois


22,521


4/2011Gurnee, Illinois


12,000


7/2011Hendersonville, Tennessee


11,000


4/2010Hollywood, Florida


16,494


9/2015Houston, Texas


10,687


10/2010Jessup, Maryland


10,361


3/2012Lake City, Florida


1,125


4/2012Lithia Springs, Georgia


10,675


2/2011Lynnwood, Washington


17,467


6/2013Madison, Tennessee


17,625


4/2017Memphis, Tennessee


11,250


10/2014Metairie, Louisiana


4,000


4/2011Oklahoma City, Oklahoma


2,250


11/2010Orlando, Florida


2,100


12/2012Pelham, Alabama


9,000


4/2010Phoenix, Arizona


25,920


4/2011Portland, Oregon


10,000


3/2011Riverview, Florida


17,518


4/2017Salt Lake City, Utah


6,675


6/2013Syracuse, New York


8,400


10/2013Tucson, Arizona


6,265


4/2014Walpole, Massachusetts


3,000


5/2011Waltham, Massachusetts


32,000


11/2015Westbrook, Maine


5,625


4/2017Woburn, Massachusetts


40,000


2/2016


All
properties are primarily utilized for both the laundry facilities management and commercial laundry equipment sales businesses.

11

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Table of Contents

We
believe that our properties are generally well maintained and in good condition. We believe that our properties are adequate for present needs and that suitable additional or
replacement space will be available as required.

Item 3.    Legal Proceedings

From time to time, we are a party to litigation arising in the ordinary course of business. There can be no assurance that our
insurance coverage will be adequate to cover any liabilities resulting from such litigation. In the opinion of management, any liability that we might incur upon the resolution of currently pending
litigation will not, individually or in the aggregate, have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our
business and operations are subject to federal, state and local environmental laws and regulations, including those governing the discharge of pollutants, the handling, generation,
disposal and storage of hazardous materials and wastes, and the cleanup of contaminated sites. In connection with current or historical operations by us or at our sites, we could incur substantial
costs, including clean-up costs, fines and civil or criminal sanctions, and third-party claims for property damage or personal injury, as a result of violations of, or liabilities under,
environmental laws and regulations. We believe that our operations are in material compliance with applicable environmental laws and regulations.

Item 4.    (Removed and Reserved).

12

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Table of Contents

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the New York Stock Exchange, or NYSE, under the symbol "TUC."

The
following table sets forth the high and low sales prices for our common stock on the NYSE for the periods indicated.

Year Ended
December 31, 2008

Year Ended
December 31, 2009High

Low

High

LowFirst Quarter

$
12.89

$
10.60

$
7.62

$
4.60Second Quarter

$
11.92

$
8.58

$
14.36

$
4.95Third Quarter

$
12.75

$
9.77

$
13.79

$
9.57Fourth Quarter

$
11.41

$
6.13

$
11.73

$
7.84


As
of March 9, 2010 there were 129 shareholders of record of our common stock.

The
Company's Board of Directors has approved the initiation of a quarterly dividend policy to commence in 2010. The first dividend under this new policy will be in the amount of $0.05
per share and payable on April 1, 2010 to shareholders of record of the Company's common stock as of the close of business March 1, 2010. The Company's Board of Directors has not
previously paid dividends on any of its shares of capital stock.

For
information related to our stock option plans and employee stock purchase plans, see Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters" below.

13

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Table of Contents

Item 6.    Selected Financial Data (Dollars in thousands, except per share data)

Set forth below are selected historical financial data as of the dates and for the periods indicated. The selected financial data set
forth below should be read in conjunction with, and are qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of Mac-Gray and the notes thereto included elsewhere in this report.

Years Ended December 31,2005(1)

2006

2007(2)

2008(3)

2009Statement of Income Data:Revenue from continuing operations

$
230,110

$
248,917

$
262,484

$
327,229

$
325,924Cost of revenue


184,633


201,988


214,705


271,681


270,832Operating expenses:General and administration


12,341


16,346


16,381


18,341


17,819Sales and marketing


12,722


13,361


13,097


14,970


14,249Incremental costs of proxy contest














971Depreciation and amortization


1,082


1,473


1,491


1,614


1,600Gain on sale of assets


(11,370
)

(32
)

(302
)

(69
)

(648
)Loss on early extinguishment of debt


668


73





207


Impairment of assets





2,502








Total operating expenses


15,443


33,723


30,667


35,063


33,991Income from continuing operations


30,034


13,206


17,112


20,485


21,101Interest expense, net


10,657


13,234


13,421


20,605


19,675(Gain) loss related to derivative instruments


(1,876
)

96


1,737


1,804


(893
)Income (loss) from continuing operations before provision for income taxes


21,253


(124
)

1,954


(1,924
)

2,319Provision for income taxes


11,217


(291
)

707


(758
)

1,278Income (loss) from continuing operations, net


10,036


167


1,247


(1,166
)

1,041Income from discontinued operations, net


2,016


689


1,272


1,707


1,074Net income

$
12,052

$
856

$
2,519

$
541

$
2,115Earnings (loss) per sharebasiccontinuing operations

$
0.78

$
0.01

$
0.09

$
(0.09
)
$
0.08Earnings (loss) per sharedilutedcontinuing operations

$
0.76

$
0.01

$
0.09

$
(0.09
)
$
0.07Earnings per sharebasicdiscontinued operations

$
0.16

$
0.05

$
0.10

$
0.13

$
0.08Earnings per sharediluteddiscontinued operations

$
0.15

$
0.05

$
0.09

$
0.13

$
0.08Earnings per sharebasic

$
0.94

$
0.07

$
0.19

$
0.04

$
0.16Earnings per sharediluted

$
0.91

$
0.06

$
0.18

$
0.04

$
0.15Weighted average common shares outstandingbasic


12,864


13,008


13,209


13,346


13,529Weighted average common shares outstandingdiluted


13,283


13,448


13,680


13,346


13,940


14

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Table of Contents

Years Ended December 31,2005(1)

2006

2007(2)

2008(3)

2009Other Financial Data:EBITDA from continuing operations(4)


63,938


49,370


54,030


67,456


71,860Depreciation and amortization


32,028


36,260


38,655


48,775


49,866Capital expenditures(5)


25,844


25,332


26,711


24,313


21,341Cash flows provided by operating activities from continuing operations


37,338


35,957


43,202


55,735


60,720Cash flows used in investing activites from continuing operations


(119,715
)

(44,396
)

(72,944
)

(130,111
)

(20,074
)Cash flows provided by (used in) financing activities from continuing operations


86,904


9,416


31,073


79,887


(37,883
)Balance Sheet Data (at end of period):Working capital from continuing operations


(7,799
)

(1,497
)

671


(2,203
)

(7,656
)Long-term debt and capital lease obligations, including current portion


166,678


177,068


208,521


301,292


263,868Long-term debt and capital lease obligations, net of current portion


165,493


175,823


207,169


295,821


258,325Total assets


324,917


339,004


383,537


490,004


464,276Stockholders' equity


88,601


91,640


97,844


97,964


104,535


(1)Includes
the results of operations of the western region laundry facilities management assets acquired on January 10, 2005 from Web Service
Company, Inc. for approximately $113,000.(2)Includes
the results of operations of the Maryland laundry facilities management assets acquired on August 8, 2007 from Hof Service
Company, Inc. for approximately $43,000.(3)Includes
the results of operations of the western and southern region laundry facilities management assets acquired on April 1, 2008 from Automatic
Laundry Company, Ltd. for approximately $116,000.(4)EBITDA
from continuing operations is defined as income from continuing operations before provision for income taxes, depreciation and amortization expense
and interest expense. Adjusted EBITDA from continuing operations is EBITDA from continuing operations further adjusted to exclude the items described in the table below. We have excluded these items
because we believe they are not reflective of our ongoing operating performance. EBITDA from continuing operations and Adjusted EBIDTA from continuing operations are included in this report because
they are a basis upon which our management and Board of Directors assess our operating performance. EBITDA from continuing operations and Adjusted EBITDA from continuing operations are not measures of
our liquidity or financial performance under GAAP and should not be considered as alternatives to net income or any other performance measure derived in accordance with GAAP, or as an alternative to
cash flows from operating activities as a measure of our liquidity. The use of EBITDA from continuing operations and Adjusted EBITDA from continuing operations instead of net income has limitations as
an analytical tool, including the exclusion of interest expense and depreciation and amortization expense, which represent significant and unavoidable operating costs given the level of indebtedness
and the capital expenditures needed to maintain our business. Management compensates for these limitations by relying primarily on our GAAP results and by using EBITDA from continuing operations and
Adjusted EBITDA from continuing operations only supplementally. Our management believes EBITDA from continuing operations and Adjusted EBITDA from continuing operations are useful to investors because
they help enable investors to evaluate our business in the same manner as our management and because they are frequently used by securities analysts, investors and other interested parties in the
evaluation of companies


15

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Table of Contents

with
substantial financial leverage. Our measures of EBITDA from continuing operations and Adjusted EBITDA from continuing operations are not necessarily comparable to other similarly titled captions
of other companies due to potential inconsistencies in the methods of calculation. (5)Excludes
$1,499, $1,776, $2,003, $1,774 and $1,628 in 2005, 2006, 2007, 2008, and 2009, respectively, of capital leases associated with vehicles acquired
and used in the operation of the Company.


The
following is a reconciliation of income (loss) from continuing operations to EBITDA from continuing operations and Adjusted EBITDA from continuing operations:

Years Ended December 31,2005(1)

2006

2007(2)

2008(3)

2009Income (loss) from continuing operations, net

$
10,036

$
167

$
1,247

$
(1,166
)
$
1,041Income from discontinued operations, net


2,016


689


1,272


1,707


1,074Net income

$
12,052

$
856

$
2,519

$
541

$
2,115Net income (loss) from continuing operations

$
10,036

$
167

$
1,247

$
(1,166
)
$
1,041Add:Provision for income taxes


11,217


(291
)

707


(758
)

1,278Cost of revenue depreciation and amortization expense


30,946


34,787


37,164


47,161


48,266Operating expense depreciation and amortization expense


1,082


1,473


1,491


1,614


1,600Interest expense, net


10,657


13,234


13,421


20,605


19,675EBITDA from continuing operations(4)


63,938


49,370


54,030


67,456


71,860Add (Subtract):Gain on sale of certain assets, net


(10,767
)(9)










(403
)(10)Stock compensation expense





883


1,755


2,242


2,344Impairment of assets(5)





2,502








(Gain) loss related to derivative instruments(6)


(1,876
)

96


1,737


1,804


(893
)Loss related to 2005 hurricanes(7)


316











Loss on early extinguishment of debt(8)


668


73





207


Incremental costs of 2009 proxy contest














971Adjusted EBITDA from continuing operations(4)

$
52,279

$
52,924

$
57,522

$
71,709

$
73,879


(1)Includes
the results of operations of the western region laundry facilities management assets acquired on January 10, 2005 from Web Service
Company, Inc. for approximately $113,000.(2)Includes
the results of operations of the Maryland laundry facilities management assets acquired on August 8, 2007 from Hof Service
Company, Inc. for approximately $43,000.(3)Includes
the results of operations of the western and southern region laundry facilities management assets acquired on April 1, 2008 from Automatic
Laundry Company, Ltd. for approximately $116,000.(4)EBITDA
from continuing operations is defined as income from continuing operations before provision for income taxes, depreciation and amortization expense
and interest expense. Adjusted EBITDA from continuing operations is EBITDA from continuing operations further adjusted to exclude the items described in the table above. We have excluded these items
because we believe they are not reflective of our ongoing operating performance. EBITDA from continuing operations and Adjusted EBIDTA from continuing operations are included in this report because
they are a


16

---



Table of Contents

basis
upon which our management and Board of Directors assess our operating performance. EBITDA from continuing operations and Adjusted EBITDA from continuing operations are not measures of our
liquidity or financial performance under GAAP and should not be considered as alternatives to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash
flows from operating activities as a measure of our liquidity. The use of EBITDA from continuing operations and Adjusted EBITDA from continuing operations instead of net income has limitations as
an analytical tool, including the exclusion of interest expense and depreciation and amortization expense, which represent significant and unavoidable operating costs given the level of indebtedness
and the capital expenditures needed to maintain our business. Management compensates for these limitations by relying primarily on our GAAP results and by using EBITDA from continuing operations and
Adjusted EBITDA from continuing operations only supplementally. Our management believes EBITDA from continuing operations and Adjusted EBITDA from continuing operations are useful to investors because
they help enable investors to evaluate our business in the same manner as our management and because they are frequently used by securities analysts, investors and other interested parties in the
evaluation of companies with substantial financial leverage. Our measures of EBITDA from continuing operations and Adjusted EBITDA from continuing operations are not necessarily comparable to other
similarly titled captions of other companies due to potential inconsistencies in the methods of calculation. (5)Represents
a pre-tax charge associated with our former reprographics business unit.(6)The
(gain) loss related to derivative instruments is the consequence of interest rate swaps which had previously qualified for hedge accounting no longer
qualifying for such treatment as a result of a separate and distinct refinancing of our credit facility in 2005. The paying down of the term loan with the proceeds from the sale of Intirion will
result in additional derivative instruments no longer qualifying for hedge accounting treatment. For interest rate swaps that do qualify as hedged instruments, changes in mark to market will continue
to be recorded in Other Comprehensive Income and not in the income statement. Including the fluctuation in the fair value of the derivative instruments in the reconciliation of net income as reported
to net income as adjusted allows for a more consistent comparison of the operating results of the Company. The fair value of the derivatives is ultimately zero at the time of settlement. Thus, over
the life of the derivative instruments the net impact to the Company's operating results will be zero as any income or loss recorded in prior periods will be reversed in subsequent periods.(7)Represents
a loss of fixed assets and inventory incurred during the hurricanes of 2005.(8)Each
of the losses on early extinguishment of debt resulted from separate and distinct refinancings of our senior credit facility in 2005, 2006 and 2008 and
is not related to the performance of the Company's business. Each of the losses reflects only the unamortized cost of the prior bank financing which had been allocated to banks which did not
participate in the replacement financing agreement. Because the losses were triggered by refinancings of our senior credit facility and the Company does not currently expect further refinancings of
the facility prior to its maturity in 2013, management believes that the impact of this item on the Company's financial results will not continue beyond 2008.(9)Represents
a pretax gain recognized in connection with the sale of a facility in Cambridge, Massachusetts on June 30, 2005.(10)Represents
a pretax gain recognized in connection with the sale of a facility in Tampa, Florida on January 2, 2009.


17

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Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Continuing Operations. (Dollars in thousands)

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes
thereto presented elsewhere in this report.

This
report contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. These forward-looking statements reflect our current views
about future events and financial performance. Investors should not rely on forward-looking statements because they are subject to a variety of factors that could cause actual results to differ
materially from our expectations. Factors that could cause, or contribute to such differences include, without limitation, the factors described under Item 1A "Risk Factors."

Our
actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no
assurances that any of
the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations or financial condition. In view of these
uncertainties, investors are cautioned not to place undue reliance on these forward-looking statements. We assume no obligation to update or revise publicly any forward-looking statements, whether as
a result of new information, future events or otherwise.

Overview

Mac-Gray was founded in 1927 and re-incorporated in Delaware in 1997. We derive our revenue principally as a
laundry facilities management contractor for the multi-unit housing industry. We also derive revenue through the sales of commercial laundry equipment primarily to public retail
laundromats, as well as to the multi-unit housing industry. In addition, we sell commercial laundry equipment directly to institutional purchasers, including hospitals and hotels, for use
in their own on-premise laundry facilities. Our core business model is built on a stable demand for laundry services, combined with long-term leases, strong customer
relationships, a broad customer base and predictable capital needs. For the years ended December 31, 2008 and 2009, our total revenue was $327,229 and $325,924, respectively. Approximately 94%
and 95% of our total revenue for these periods, respectively, was generated by our laundry facilities management business. We generate laundry facilities management revenue primarily through
long-term leases with property owners or property management companies granting us the exclusive right to install and maintain laundry equipment in common area laundry rooms within their
properties, in exchange for a negotiated portion of the revenue we collect. As of December 31, 2009, approximately 90% of our installed machine base was located in laundry facilities subject to
long-term leases, with a weighted average remaining term of approximately five years. Our capital costs are typically incurred in connection with new or renewed leases, and include
investments in laundry equipment and card- and coin-operated systems, incentive payments to property owners or property management companies and/or expenses to refurbish
laundry facilities. Our capital expenditures consist of a large number of relatively small amounts associated with our entry into or renewal of leases. Accordingly, our capital needs are predictable
and largely within our control. For the years ended December 31, 2008 and 2009, we incurred approximately $24,300 and $21,300 of capital expenditures, respectively. In addition, we make
incentive payments to property owners and property management companies to secure our lease arrangements. We paid $4,465 and $1,807 in incentive payments in the years ended December 31, 2008
and 2009, respectively.

In
addition, through our Commercial Laundry Equipment Sales business, we generate revenue by selling commercial laundry equipment For the years ended December 31, 2008 and 2009,
our Commercial Laundry Equipment Sales business accounted for approximately 6% and 5% of our total revenue, respectively, and less than 1% of our gross margin, for both 2008 and 2009.

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Table of Contents

Our
financial objective is to maintain and enhance profitability by retaining existing customers, adding customers in areas in which we currently operate, selectively expanding our
geographic footprint and density through acquisitions, and controlling costs. One of the key challenges we face is maintaining and expanding our customer base in a competitive industry. We experience
competition from other industry participants, including national, regional and local laundry facilities management operators and from property owners and property management companies who
self-operate their laundry facilities. We devote substantial resources to our marketing and sales efforts and we focus on continued innovation in order to distinguish us from competitors.
Approximately 8% to 10% of our laundry room leases are up for renewal each year. Over the past five calendar years, we have been able to retain, on average, approximately 97% of our total installed
equipment base each year. Our gross additions to our equipment base for each of the years ended December 31, 2008 and 2009 through internally generated growth equaled 3% and 2%, respectively.
Our additions, net of lost business, were 0% for the year ended December 31, 2008 and -1% for the year ended December 31, 2009. The machine base not retained is primarily
attributable to contracts the Company has chosen not to renew due to unacceptable profit margins, (including some acquired contracts that did not meet our performance criteria,) and to a lesser
degree, to property owners who chose to self-operate.

On
January 4, 2010, the Company entered into an interest rate swap agreement to manage the interest rate risk associated with its debt. The swap agreement effectively converts a
portion of our fixed rate senior notes to a variable rate. Under this agreement, we receive the fixed rate on our senior notes (7.625%) and pay a variable rate of LIBOR plus the applicable margin
charged by the banks.

On
February 5, 2010, the Company sold its MicroFridge® (Intirion Corporation) business to Danby Products. The transaction is valued at approximately $11,500. Danby
Products paid Mac-Gray $8,500 in cash, and assumed existing liabilities and financial obligations for MicroFridge totaling approximately $3,000. The discontinued operations are related
solely to the sale of MicroFridge® (Intirion Corporation). Concurrent with this transaction, the Company paid $8,000 on its Secured Term Loan.

On
February 5, 2010, the Company's Board of Directors approved the initiation of a quarterly dividend policy for its common stock. The Company declared a dividend of $0.05 per
share payable on April 1, 2010 to shareholders of record of the Company's common stock as of the close of business on March 1, 2010.

Results of Continuing Operations (Dollars in thousands, except per share data)

On February 5, 2010, the Company sold its MicroFridge ® (Intirion Corporation) business to Danby Products. The
following discussion excludes the financial results from our discontinued operations unless otherwise noted. The information presented below for the years ended December 31, 2008 and 2009 is
derived from Mac-Gray's consolidated financial statements and related notes included in this report.

Revenue from continuing operations

2009 to 20082008

2009

Increase
(Decrease)

%
ChangeLaundry facilities management revenue

$
306,089

$
309,028

$
2,939


1
%Commercial laundry equipment sales revenue


21,140


16,896


(4,244
)

(20
)%Total revenue from continuing operations

$
327,229

$
325,924

$
(1,305
)

0
%


19

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Table of Contents

Fiscal year ended December 31, 2009 compared to fiscal year ended December 31, 2008

Total revenue decreased by $1,305 or less than 1%, to $325,924 for the year ended December 31, 2009 compared to $327,229 for the
year ended December 31, 2008.

Laundry facilities management revenue.Laundry facilities management revenue increased by $2,939, or 1%, to $309,028 for the year ended
December 31, 2009 compared to $306,089 for the year ended December 31, 2008. The increase in revenue is the net of an increase of $10,682 attributable to the laundry facilities
management businesses acquired in 2008, offset by a decline of $7,743 resulting from reduced usage of the Company's equipment in apartment building laundry rooms as a result of increased apartment
vacancy rates in some markets. To a lesser extent, the decrease in revenue is attributable to the termination of contracts we have chosen not to renew, partially offset by the Company's vend increase
program. We expect vacancy rates to continue to have a negative impact on our facilities management business in 2010. We track the change in revenue month over month and quarter over quarter in our
markets to better understand the revenue trend for our multi-family housing customers. This analysis is used to enable us to respond to changing trends in different geographic markets and to enable us
to better allocate capital spending.

Commercial laundry equipment sales revenue.Revenue in the commercial laundry equipment sales business decreased $4,244, or 20%, to
$16,896 for the
year ended December 31, 2009 compared to $21,140 for the year ended December 31, 2008. One single transaction accounted for $1,718, or 8% of the revenue in 2008. Sales in the commercial
laundry equipment sales business are sensitive to the strength of the local economy, consumer confidence, local permitting and the availability and cost of financing to small businesses, and
therefore, tend to fluctuate from period to period. We anticipate that tight credit markets will continue to make obtaining financing a challenge for some potential customers.

Cost of revenue

Cost of laundry facilities management revenue.Cost of laundry facilities management revenue includes rent paid to customers as well as
costs
associated with installing and servicing machines, costs of
collecting, counting, and depositing facilities management revenue and the costs of delivering and servicing rented facilities management equipment. Cost of laundry facilities management revenue
increased $1,681, or 1%, to $208,914 for the year ended December 31, 2009, as compared to $207,233 for the year ended December 31, 2008. The increase is due primarily to the $803
increased rent associated with the increase in facility management revenue resulting from the facilities management business we acquired from Automatic Laundry Company, Ltd. ("ALC") on
April 1, 2008 as well as increased employee health insurance costs of $1,590. These increases were offset by cost control measures implemented by the Company. As a percentage of facilities
management revenue, cost of facilities management revenue was 68% for each of the years ended December 31, 2009 and 2008. Facilities management rent as a percentage of facilities management
revenue was 48% and 49% for the years ended December 31, 2009 and 2008, respectively. Facilities management rent can be affected by new and renewed laundry leases, lease portfolios acquired and
by other factors such as the amount of incentive payments and laundry room betterments invested in new or renewed laundry leases. As we vary the amount invested in a facility, the facilities
management rent as a function of facilities management revenue can vary. Incentive payments and betterments are amortized over the life of the related lease.

Depreciation and amortization related to operations.Depreciation and amortization related to operations increased by $1,105, or 2%, to
$48,266 for
the year ended December 31, 2009 as compared to $47,161 for the year ended December 31, 2008. The increase in depreciation and amortization for the year ended December 31, 2009 as
compared to the same period in 2008 is primarily attributable to having a full year of depreciation and amortization in 2009 associated with the contract rights and equipment we acquired as part of
our acquisition of a facilities management business on April 1, 2008

20

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Table of Contents

compared
to only nine months of such depreciation and amortization in the comparable period in 2008. Laundry facilities management equipment and contract rights are depreciated and amortized using the
straight-line method. In addition, due to management's decision not to recondition and redeploy equipment that is in need of significant repairs and is not as energy efficient as newer
equipment, we disposed of certain laundry equipment in 2009 and 2008 that had a remaining net book value of $662 and $642, respectively. These costs are included in depreciation expense.

Cost of commercial laundry equipment sales.Cost of commercial laundry equipment sales consists primarily of the cost of laundry
equipment and parts
and supplies sold, as well as salaries, warehousing and distribution expenses. Cost of commercial laundry equipment sales decreased by $3,635, or 21%, to $13,652 for the year ended December 31,
2009 as compared to $17,287 for the year ended December 31, 2008. As a percentage of sales, cost of product sold was 81% for the year ended December 31, 2009 compared to 82% in 2008. The
gross margin in the commercial laundry equipment sales business unit increased to 19% for the year ended December 31, 2009 as compared to 18% for the same period in 2008. The change in gross
margin from period to period is primarily a function of the mix of products sold.

Operating expenses

General, administration, sales, marketing and depreciation and amortization expense.General, administration, sales, marketing and depreciation and amortization expense decreased by $286, or 1%, to $34,639 for the year ended December 31, 2009 as compared to $34,925 for the year
ended December 31, 2008. Such decrease for the year ended December 31, 2009 includes incremental costs of our proxy contest of $971. Excluding these costs, the decrease would have been
$1,257. As a percentage of total revenue, general, administration, sales, marketing, depreciation and amortization expense decreased to 10% for the year ended December 31, 2009 compared to 11%
for the year ended December 31, 2008. The decrease in expenses for the year ended December 31, 2009 as compared to December 31, 2008 is primarily attributable to reduced personnel
costs and a reduction in professional fees.

Loss on early extinguishment of debt.Effective April 1, 2008 and in conjunction with our acquisition of ALC, we amended our bank
credit
facilities. As a result of this amendment, a portion of the unamortized financing costs amounting to $207, which had been incurred as part of the prior credit facility, was expensed in 2008.

Gain on sale of assets.The gain on sale of assets is primarily attributable to the gain on the sale of our facility in Tampa, Florida
in 2009. It
has been our objective to sell all operating facilities and property, thus increasing our flexibility relating to facility costs and locations. The sale of the Tampa facility completes the disposal of
Company owned properties. Gain on sale of assets also includes the gain from the sale of vehicles and other non-inventory assets in the ordinary course of business.

Income from continuing operations.

Income from continuing operations increased by $616, or 3%, to $21,101 for the year ended December 31, 2009 as compared to
$20,485 for the year ended December 31, 2008. Excluding loss on early extinguishment of debt and the gain on sale of real estate, income from continuing operations, as adjusted, would have been
$20,692 for the year ended December 31, 2008, compared to $20,698 for the year ended 2009. We have supplemented the consolidated financial statements presented according to generally accepted
accounting principles (GAAP), using a non-GAAP financial measure of adjusted income from continuing operations. Non-GAAP financial measures are not in accordance with, or an
alternative for, generally accepted accounting principles in the United States. The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for
comparable GAAP financial measures, and should be read only in conjunction with the Company's

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consolidated
financial statements prepared in accordance with GAAP. Management believes presentation of this measure is useful to investors to enhance an overall understanding of our historical
financial performance and future prospects. Adjusted income from continuing operations, which is adjusted to exclude certain gains and losses from the comparable GAAP income from operations, is an
indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. The presentation of this additional
information is not meant to be considered in isolation or as a substitute for income from operations or other measures prepared in accordance with GAAP.

A
reconciliation of income from continuing operations in accordance with GAAP to income from operations, as adjusted, is provided below:

Years ended December 31,2008

2009Income from continuing operations

$
20,485

$
21,101Loss on early extinguishment of debt(1)


207


Gain on sale of real estate(2)





(403
)Income from continuing operations, as adjusted

$
20,692

$
20,698


(1)The
loss on early extinguishment of debt resulted from a refinancing of our senior credit facility and is not related to the performance of the Company's
business. The loss reflects only the unamortized cost of the prior bank financing which had been allocated to banks which did not participate in the replacement financing agreement. Because the loss
was triggered by a refinancing of the Company's senior credit facility and the Company does not currently expect further refinancings of the facility prior to its maturity in 2013, management believes
that the impact of this item on the Company's financial results will not continue beyond 2008.(2)Represents
a pretax gain recognized in connection with the sale of a facility in Tamp, Florida on January 2, 2009


Interest expense, net

Interest expense, net of interest income, decreased by $1,096, or 5%, to $19,937 for the year ended December 31, 2009 as
compared to $21,033 for the year ended December 31, 2008. The decrease is due to lower outstanding debt balances resulting from our concerted effort to reduce interest-bearing debt. Included in
interest expense for the year ended December 31, 2008 is nine months interest on our debt resulting from the April, 2008 ALC acquisition. Included in the year ended December 31, 2009 is
twelve months interest on our debt resulting from the ALC acquisition. Our average effective interest rates are not significantly affected by fluctuations in the market as a significant amount of our
debt have fixed rates through our derivative instruments. Our average borrowing rate was 5.9% for the year ended December 31, 2009 as compared to 6.7% for the year ended December 31,
2008.

Gain or loss related to derivative instruments

We are party to interest rate swap agreements which we entered into to hedge the interest rates on our debt. Certain of these swap
agreements do not qualify as cash flow hedges. In accordance with the guidelines for accounting for derivatives, a non-cash gain of $893 and a non-cash loss of $1,804 have been
charged to the income statement for the years ended December 31, 2009 and 2008, respectively.

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Provision for income taxes

The provision for income taxes increased by $2,036, to an expense of $1,278 for the year ended December 31, 2009 compared to a
benefit of $758 for the year ended December 31, 2008. The increase is primarily the result of positive income before the provision for income taxes in 2009 compared to a loss before the
provision for income taxes in 2008. The effective tax rate for 2009 is 55.1%. The effective tax rate is comprised of the federal statutory rate of 34%, the state rate net of federal taxes of 11.7%,
permanent book/ tax differences of 6.4% and changes to deferred rates and valuation reserves of 3.0%. The effective tax rate of 39.4% in 2008 was favorably impacted by an amendment to Massachusetts
tax laws which reduced the Company's provision for income taxes by $198 and the release of reserves for uncertain tax positions of $204 in conjunction with the completion of the Internal Revenue
Service tax audits through 2005.

Income from continuing operations, net

As a result of the foregoing, income from continuing operations, net, increased by $2,207 to $1,041 for the year ended
December 31, 2009 as compared to a loss of $1,166 for the year ended December 31, 2008. Income from continuing operations, net, as adjusted for the items in the table below, increased by
$842 to $895 for the year ended December 31, 2009 as compared to $53 for the year ended December 31, 2008.

A
reconciliation of income from continuing operations, net, as reported to income from continuing operations, net, as adjusted is provided below:

Years Ended December 31,2008

2009Income (loss) from continuing operations, net, as reported

$
(1,166
)
$
1,041Income from discontinued operations, net


1,707


1,074Net income, as reported

$
541

$
2,115Income (loss) from continuing operations before provision for income taxes, as reported

$
(1,924
)
$
2,319Loss (gain) related to derivative instruments(1)


1,804


(893
)Loss on early extinguishment of debt(2)


207


Gain on sale of real estate(3)





(403
)Incremental costs of 2009 proxy contest





971Income from continuing operations before provision for income taxes, as adjusted


87


1,994Provision for income taxes, as adjusted


34


1,099Income (loss) from continuing operations, net, as adjusted

$
53

$
895Diluted earnings per share from continuing operations, net, as adjusted

$
0.00

$
0.06


(1)Represents
the unrealized loss on interest rate protection contracts, which do not qualify for hedge accounting treatment. The (gain) loss related to
derivative instruments is the consequence of interest rate swaps which had previously qualified for hedge accounting no longer qualifying for such treatment as a result of a separate and distinct
refinancing of our credit facility in 2005. Management does not expect its other interest rate swaps to fail to qualify for hedge accounting treatment in future periods because the Company does not
currently expect further refinancings of the facility prior to its maturity in 2013. For interest rate swaps that do qualify as hedged instruments, changes in mark to market will continue to be
recorded in Other Comprehensive Income and not in the income statement. Including the fluctuation in the fair value of the


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derivative
instruments in the reconciliation of net income as reported to net income as adjusted allows for a more consistent comparison of the operating results of the Company. (2)The
loss on early extinguishment of debt resulted from a refinancing of our senior credit facility and is not related to the performance of the Company's
business. The loss reflects only the unamortized cost of the prior bank financing which had been allocated to banks which did not participate in the replacement financing agreement. Because the loss
was triggered by a refinancing of the Company's senior credit facility and the Company does not currently expect further refinancings of the facility prior to its maturity in 2013, management believes
that the impact of this item on the Company's financial results will not continue beyond 2008.(3)Represents
the sale of a facility in Tampa, Florida on January 2, 2009.


To
supplement the Company's consolidated financial statements presented on a generally accepted accounting principles (GAAP) basis, management has used a non-GAAP measure of
net income. Management believes presentation of this measure is appropriate to enhance an overall understanding of our historical financial performance and future prospects. Adjusted income from
continuing operations, net, which is adjusted to exclude certain gains and losses from the comparable GAAP income from continuing operations, net is an indication of our baseline performance before
gains, losses or other charges that are considered by management to be outside of our core operating results. These non-GAAP results are among the primary indicators management uses as a
basis for evaluating the Company's financial performance as well as for forecasting future periods. For these reasons, management believes these non-GAAP measures can be useful to
investors, potential investors and others.

Non-GAAP
financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The Company's
non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's
consolidated financial statements prepared in accordance with GAAP.

Income from Discontinued Operations, net

Income from discontinued operations decreased by $633, or 37%, to $1,074 for the year ended December 31, 2009 as compared to
$1,707 for the year ended December 31, 2008. Revenue from the discontinued operation decreased by $6,066 to $30,298 for the year ended December 31, 2009 as compared to $36,364 for the
year ended December 31, 2008.

Fiscal year ended December 31, 2008 compared to fiscal year ended December 31, 2007

The information presented below for the years ended December 31, 2007 and 2008 is derived from Mac-Gray's
consolidated financial statements and related notes included in this report.

Revenue from continuing operations

2008 to 20072007

2008

Increase
(Decrease)

%
ChangeLaundry facilities management revenue

$
242,803

$
306,089

$
63,286


26
%Commercial laundry equipment sales revenue


19,681


21,140


1,459


7
%Total revenue from continuing operations

$
262,484

$
327,229

$
64,745


25
%


Total
revenue increased by $64,745, or 25%, to $327,229 for the year ended December 31, 2008 compared to $262,484 for the year ended December 31, 2007.

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Laundry facilities management revenue.Laundry facilities management revenue increased $63,286, or 26%, to $306,089 for the year ended
December 31, 2008 compared to $262,484 for the year ended December 31, 2007. This increase is attributable to the revenue associated with the laundry facilities management businesses
acquired on August 8, 2007 and April 1, 2008, which accounted for $14,407 and $46,904, respectively, of the total increase. Higher apartment vacancy rates, and consequently reduced usage
of our equipment in some of our markets, eclipsed some of the growth in other of our markets. Management tracks apartment vacancy rates with independent geographical market data which generally
corresponds with changes in equipment usage and related revenue.

Commercial laundry equipment sales revenue.Revenue in the commercial laundry equipment sales business unit increased $1,459, or 7%, to
$21,140 for
the year ended December 31, 2008 compared to $19,681 for the year ended December 31, 2007. One single transaction accounted for $1,718, or 8% of the revenue in 2008. Sales in the
commercial laundry equipment sales business unit are sensitive to the strength of the local economy, consumer confidence, local permitting and the availability and cost of financing to small
businesses, and therefore, tend to fluctuate from period to period. We anticipate that tight credit markets will continue to make obtaining financing a challenge for some potential customers.

Cost of revenue

Cost of laundry facilities management revenue.Cost of laundry facilities management revenue includes rent paid to customers as well as
costs
associated with installing and servicing machines, costs of collecting, counting, and depositing facilities management revenue and the costs of delivering and servicing rented facilities management
equipment. Cost of laundry facilities management revenue increased by $44,394, or 27%, to $207,233 for the year ended December 31, 2008, as compared to $162,839 for the year ended
December 31, 2007. This increase is attributable primarily to the $30,704 increase in the cost of facilities management rent associated with the increase in facilities management revenue. The
balance of the cost increase is primarily attributable to the cost of servicing the acquired portfolio. Cost of laundry facilities management revenue as a percentage of laundry facilities management
revenue was 68% for the years ended December 31, 2008 compared to 67% and December 31, 2007. The change in facilities management rent as a percentage of facilities management revenue was
caused primarily by the acquired portfolio. It can also be affected by new and renewed laundry leases and by other factors such as the amount of incentive payments and laundry room betterments
invested in new or renewed laundry leases. As we vary the amount invested in a facility, the facilities management rent as a function of facilities management revenue can vary. Incentive payments and
room betterments are amortized over the life of the laundry lease.

Depreciation and amortization related to operations.Depreciation and amortization related to operations increased by $9,997, or 27%,
to $47,161 for
the year ended December 31, 2008 as compared to $37,164 for the year ended December 31, 2007. Laundry facilities management equipment and contract rights are depreciated and amortized
using the straight-line method. The increased depreciation and amortization expense is attributable to the amortization of contracts acquired in 2007 and 2008, new equipment placed in
laundry facilities at new locations, and replacement of older equipment with new equipment as contracts were renegotiated. In addition, due to management's decision not to recondition and redeploy
equipment that is in need of significant repairs and is not as energy efficient as newer equipment, we disposed of certain laundry equipment in 2008 and 2007 that had a remaining net book value of
$642 and $542, respectively. These costs are included in depreciation expense.

Cost of commercial laundry equipment sales.Cost of commercial laundry equipment sales consists primarily of the cost of laundry
equipment, and parts
and supplies sold, as well as salaries and related warehousing expenses as part of the commercial laundry equipment sales segment. Cost of commercial laundry equipment sales increased by $2,585, or
18%, to $17,287 for the year ended December 31, 2008

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as
compared to $14,702 for the year ended December 31, 2007. As a percentage of sales, cost of product sold was 82% for the year ended December 31, 2008 compared to 75% in 2007. The
gross margin in the commercial laundry equipment sales business unit decreased to 18% for the year ended December 31, 2008 as compared to 25% for the same period in 2007. The decrease in margin
is primarily the result of competitive pricing pressures. We expect competitive pressures to continue to affect gross margins. Also contributing to changes in gross margin were costs incurred to enter
into three new markets for which there was little revenue in 2008.

Operating expenses

General, administration, sales, marketing and depreciation and amortization expense.General, administration, sales, marketing and
depreciation and
amortization expense increased by $3,956, or 13%, to $34,925 for the year ended December 31, 2008 as compared to $30,969 for the year ended December 31, 2007. As a percentage of total
revenue, general, administration, sales, marketing,
depreciation and amortization expense decreased to 11% for the year ended December 31, 2008 compared to 12% for the year ended December 31, 2007. The increased expense for the year ended
December 31, 2008 as compared to 2007 is primarily attributable to additional costs related to our acquisition of ALC. The synergies realized in the acquisition contributed to the reduction of
costs as a percentage of revenue.

Loss on early extinguishment of debt.Effective April 1, 2008 and in conjunction with our acquisition of ALC, we amended our bank
credit
facilities. As a result of this amendment, a portion of the unamortized financing costs amounting to $207, which had been incurred as part of the prior credit facility, was expensed in 2008.

Gain on sale of assets.Gain on sale of assets represents the gain from the sale of vehicles and other non-inventory assets in the
ordinary course of business.

Income from continuing operations.

Income from continuing operations increased by $3,373, or 10%, to $20,485 for the year ended December 31, 2008 as compared to
$17,112 for the year ended December 31, 2007. Excluding loss on early extinguishment of debt, income from continuing operations, as adjusted, would have been $20,692 for the year ended
December 31, 2008, compared to $17,112 for the year ended 2007, or an increase of 21%. This increase is primarily due to our acquisition of ALC as well as the other reasons discussed above. We
have supplemented the consolidated financial statements presented according to generally accepted accounting principles (GAAP), using a non-GAAP financial measure of adjusted income from
continuing operations. Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The Company's
non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's
consolidated financial statements prepared in accordance with GAAP. Management believes presentation of this measure is useful to investors to enhance an overall understanding of our historical
financial performance and future prospects. Adjusted income from continuing operations, which is adjusted to exclude certain gains and losses from the comparable GAAP income from continuing
operations, is an indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. The presentation of this
additional information is not meant to be considered in isolation or as a substitute for income from operations or other measures prepared in accordance with GAAP.

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A
reconciliation of income from continuing operations in accordance with GAAP to income from continuing operations, as adjusted, is provided below:

Years ended December 31,2007

2008Income from continuing operations

$
17,112

$
20,485Loss on early extinguishment of debt(1)





207Income from continuing operations, as adjusted

$
17,112

$
20,692


(1)The
loss on early extinguishment of debt resulted from a refinancing of our senior credit facility and is not related to the performance of the Company's
business. The loss reflects only the unamortized cost of the prior bank financing which had been allocated to banks which did not participate in the replacement financing agreement. Because the loss
was triggered by a refinancing of the Company's senior credit facility and the Company does not currently expect further refinancings of the facility prior to its maturity in 2013, management believes
that the impact of this item on the Company's financial results will not continue beyond 2008.


Interest expense, net

Interest expense, net of interest income, increased by $7,080, or 51%, to $21,033 for the year ended December 31, 2008 as
compared to $13,953 for the year ended December 31,
2007. The increase is attributable to an increase in the average borrowing in 2008 compared to 2007 resulting from our acquisition of ALC. The increase in borrowing was offset, in part, by lower
average interest rates. The average borrowing rate was 6.7% for the year ended December 31, 2008 as compared to 7.1% for the year ended December 31, 2007.

Gain or loss related to derivative instruments

We are party to interest rate swap agreements which we entered into to protect the interest rates on our debt. Certain of these swap
agreements do not qualify as cash flow hedges. In accordance with the guidelines for accounting for derivatives, a non-cash expense of $1,804 and a $1,737 has been charged to the income
statement for the years ended December 31, 2008 and 2007, respectively.

Provision for income taxes

The provision for income taxes decreased by $1,465 to a benefit of $758 for the year ended December 31, 2008 compared to an
expense of $707 for the year ended December 31, 2007. The change is the result of a decrease in income before taxes, a reduction in the reserve for uncertain tax positions and the impact of an
amendment to Massachusetts tax laws which decreased payment on timing items that became taxable after January 1, 2009. The Company reduced its reserve for uncertain tax positions by $204 in
conjunction with the completion of the Internal Revenue Service tax audits through 2005. The Company recorded a benefit for income taxes of $198 in conjunction with the amendment to Massachusetts tax
laws. The decrease was partially offset by increases in state income taxes and an increase in the state net operating loss valuation allowance. The increase in the effective tax rate for the year
ended December 31, 2008 compared to the same period in 2007 is due primarily to an increase in the non-deductible expenses as a percent of total taxable income

Income from continuing operations, net

As a result of the foregoing, income from continuing operations, net, decreased by $2,413 to a loss of $1,166 for the year ended
December 31, 2008 as compared to income of $1,247 for the year ended December 31, 2007. Income from continuing operations, net, as adjusted for the items in the table

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below,
decreased $2,303 to $53 for the year ended December 31, 2008 as compared to income of $2,356 for the year ended December 31, 2007.

A
reconciliation of income from continuing operations, net, as reported to income from continuing operations, net, as adjusted is provided below:

Years Ended December 31,2007

2008Income (loss) from continuing operations, net, as reported

$
1,247

$
(1,166
)Income from discontinued operations, net


1,272


1,707Net income

$
2,519

$
541Income (loss) from continuing operations before provision for income taxes, as reported

$
1,954

$
(1,924
)Loss related to derivative instruments(1)


1,737


1,804Loss on early extinguishment of debt(2)





207Income from continuing operations before provision for income taxes, as adjusted


3,691


87Provision for income taxes, as adjusted


1,335


34Income from continuing operations, net, as adjusted

$
2,356

$
53Diluted earnings per share from continuing operations, net, as adjusted

$
0.15

$
0.00


(1)Represents
the unrealized loss on interest rate protection contracts, which do not qualify for hedge accounting treatment. The (gain) loss related to
derivative instruments is the consequence of interest rate swaps which had previously qualified for hedge accounting no longer qualifying for such treatment as a result of a separate and distinct
refinancing of our credit facility in 2005. Management does not expect its other interest rate swaps to fail to qualify for hedge accounting treatment in future periods because the Company does not
currently expect further refinancings of the facility prior to its maturity in 2013. For interest rate swaps that do qualify as hedged instruments, changes in mark to market will continue to be
recorded in Other Comprehensive Income and not in the income statement. Including the fluctuation in the fair value of the derivative instruments in the reconciliation of net income as reported to net
income as adjusted allows for a more consistent comparison of the operating results of the Company.(2)The
loss on early extinguishment of debt resulted from a refinancing of our senior credit facility and is not related to the performance of the Company's
business. The loss reflects only the unamortized cost of the prior bank financing which had been allocated to banks which did not participate in the replacement financing agreement. Because the loss
was triggered by a refinancing of the Company's senior credit facility and the Company does not currently expect further refinancings of the facility prior to its maturity in 2013, management believes
that the impact of this item on the Company's financial results will not continue beyond 2008.


To
supplement the Company's consolidated financial statements presented on a generally accepted accounting principles (GAAP) basis, management has used a non-GAAP measure of
net income. Management believes presentation of this measure is appropriate to enhance an overall understanding of our historical financial performance and future prospects. Adjusted net income, which
is adjusted to exclude certain gains and losses from the comparable GAAP net income, is an indication of our baseline performance before gains, losses or other charges that are considered by
management to be outside of our core operating results. These non-GAAP results are among the primary indicators management uses as a basis for evaluating the Company's financial
performance as well as for

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forecasting
future periods. For these reasons, management believes these non-GAAP measures can be useful to investors, potential investors and others.

Non-GAAP
financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The Company's
non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's
consolidated financial statements prepared in accordance with GAAP.

Income from Discontinued Operations, net

Income from discontinued operations increased by $435, or 23%, to $1,707 for the year ended December 31, 2008 as compared to
$1,272 for the year ended December 31, 2007. Revenue from the discontinued operation increased by $2,946 to $36,364 for the year ended December 31, 2008 as compared to $33,418 for the
year ended December 31, 2007.

Liquidity and Capital Resources (Dollars in thousands)

We believe that we can satisfy our working capital requirements and funding of capital needs with internally generated cash flow and,
as necessary, borrowings under our revolving loan facility described below. Included in the capital requirements that we expect to be able to fund during 2010 are laundry equipment, laundry room
betterments, and contract incentives incurred in connection with new customer leases and the renewal of existing leases.

We
historically have not needed sources of financing other than our internally generated cash flow and our revolving credit facilities to fund our working capital, capital expenditures
and smaller acquisitions. As a result, we anticipate that our cash flow from operations and revolving credit facilities will be sufficient to meet our anticipated cash requirements for at least the
next twelve months.

From
time to time, we consider potential acquisitions. We believe that any future acquisitions of significant size would likely require us to obtain additional debt or equity financing.
In the past, we have been able to obtain such financing for other material transactions on terms that we believed to be reasonable. However, the availability of such funds depends in large measure on
credit and capital markets and other factors outside our control. It is possible that we may not be able to obtain acquisition financing on reasonable terms, or at all, in the future.

Our
current long-term liquidity needs are principally the repayment of the outstanding principal amounts of our long-term indebtedness, including borrowings under
our senior credit facility and our senior notes. We are unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our
long-term debt when it comes due. If this cash flow were insufficient, then we would need to refinance such indebtedness or otherwise amend its terms to extend the maturity dates. We
cannot make any assurances that such financing would be available on reasonable terms, if at all.

Operating Activities

For the years ended December 31, 2007, 2008 and 2009, cash flows provided by operating activities from continuing operations
were $43,202, $55,735, and $60,720, respectively. Cash flows from operations consist primarily of facilities management revenue and equipment sales, offset by the cost of facilities management
revenues, cost of product sold, and selling, general and administration expenses. The increase for the year ended December 31, 2009 as compared to the year ended December 31, 2008 is
primarily attributable to ordinary changes in working capital. In 2009, the most significant increases in cash flows provided by operating activities were depreciation and amortization expense, an
increase in deferred taxes, accounts payable, accrued facilities management rent, accrued expenses and other

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liabilities,
and a decrease in accounts receivable. The increase in depreciation and amortization expense and related deferred income taxes is primarily attributable to the contract rights and
equipment acquired in 2008. The most significant decreases in cash flows provided by operating activities was caused by an increase in prepaid facilities management rent and other assets attributable
to our ALC acquisition.

Investing Activities

For the years ended December 31, 2007, 2008 and 2009, cash flows used in investing activities from continuing operations were
$72,944, $130,111, and $20,074, respectively. Included in the cash flows used in investing activities are payments for acquisitions of $46,626 and $106,213 in 2007 and 2008, respectively. Other
capital expenditures for the years ended December 31, 2007, 2008, and 2009 totaled $26,711, $24,313, and $21,341, respectively.

Financing Activities

For the years ended December 31, 2007, 2008 and 2009, cash flows provided by (used in) financing activities from continuing
operations were $31,073, $79,887 and ($37,883), respectively. Cash flows provided by financing activities consist primarily of borrowings to fund acquisitions. Cash flows used in financing activities
consist primarily of repayments of bank borrowings.

The
Company has a senior secured credit agreement (the "Secured Credit Agreement") pursuant to which the Company may borrow up to $163,000 in the aggregate, including $33,000 pursuant to
a Term Loan and up to $130,000 pursuant to a Revolver. The Term Loan requires quarterly principal payments of $1,000 at the end of each calendar quarter through December 31, 2012, with the
remaining principal balance of $21,000 due on April 1, 2013. Concurrent with the sale of MicroFridge® (Intirion Corporation) the Company paid $8,000 towards its Secured Term Loan.
The Secured Credit Agreement also provides for Bank of America, N. A. to make swingline loans to us of up to $10,000 (the "Swingline Loans") and any Swingline Loans will reduce the borrowings
available under the Revolver. Subject to certain terms and conditions, the Secured Credit Agreement gives the company the option to establish additional term and/or revolving credit facilities there
under, provided that the aggregate commitments under the Secured Credit Agreement cannot exceed $220,000.

Borrowings
outstanding under the Secured Credit Agreement bear interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate (adjusted for
statutory reserves) plus an applicable percentage, ranging from 2.00% to 2.50% per annum (currently 2.25%), determined by reference to our senior secured leverage ratio, and (ii) in the case of
base rate loans and Swingline Loans, the higher of (a) the federal funds rate plus 0.5% or (b) the annual rate of interest announced by Bank of America, N.A. as its "prime rate," in each
case, plus an applicable percentage, ranging from 1.00% to 1.50% per annum (currently 1.25%), determined by reference to the Company's senior secured leverage ratio.

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The obligations under the Secured Credit Agreement are guaranteed by the Company's subsidiaries and secured by (i) a pledge of 100% of the ownership
interests in the subsidiaries, and (ii) a first-priority security interest in substantially all our tangible and intangible assets.

Under
the Secured Credit Agreement, the Company is subject to customary lending covenants, including restrictions pertaining to, among other things: (i) the incurrence of
additional indebtedness, (ii) limitations on liens, (iii) making distributions, dividends and other payments, (iv) the making of certain investments and loans, (v) mergers,
consolidations and acquisitions, (vi) dispositions of assets, (vii) the maintenance of a maximum total leverage ratio of not greater than 4.25 to 1.00, a maximum senior secured leverage
ratio of not greater than 2.50 to 1.00, and a minimum consolidated cash flow coverage ratio of not less than 1.20 to 1.00, (viii) transactions with affiliates, and (ix) changes to
governing documents and subordinate debt documents, in each case subject to baskets, exceptions and thresholds. The Company was in compliance with these and all other financial covenants at
December 31, 2009.

The
Secured Credit Agreement provides for customary events of default with, in some cases, corresponding grace periods, including (i) failure to pay any principal or interest when
due, (ii) failure to comply with covenants, (iii) any representation or warranty made by us proving to be incorrect in any material respect, (iv) payment defaults relating to, or
acceleration of, other material indebtedness, (v) certain bankruptcy, insolvency or receivership events affecting us, (vi) a change in our control, (vii) the Company or its
subsidiaries becoming subject to certain material judgments, claims or liabilities, or
(viii) a material defect in the lenders' lien against the collateral securing the obligations under the Secured Credit Agreement.

In
the event of an event of default, the Administrative Agent may, and at the request of the requisite number of lenders under the Secured Credit Agreement must, terminate the lenders'
commitments to make loans under the Secured Credit Agreement and declare all obligations under the Secured Credit Agreement immediately due and payable. For certain events of default related to
bankruptcy, insolvency and receivership, the commitments of the lenders will be automatically terminated and all outstanding obligations of the Company under the Secured Credit Agreement will become
immediately due and payable.

The
Company pays a commitment fee equal to a percentage of the actual daily-unused portion of the Secured Revolver under the Secured Credit Agreement. This percentage, currently 0.375%
per annum, is determined quarterly by reference to the senior secured leverage ratio and will range between 0.300% per annum and 0.500% per annum.

As
of December 31, 2009, there was $77,592 outstanding under the Revolver, $33,000 outstanding under the Term Loan and $1,380 in outstanding letters of credit. The available
balance under the Revolver was $51,028 at December 31, 2009. The average interest rates on the borrowings outstanding under the Secured Credit Agreement at December 31, 2008 and 2009
were 5.28% and 4.37%, respectively, including the applicable spread paid to the banks.

On
April 1, 2008, the Company issued a $10,000 unsecured note to the seller in the ALC acquisition. This note bore interest at 9% and was to mature on April 1, 2010 with
interest payments due quarterly on the first day of July, October, January and April each year until maturity. The Company paid this note in full on June 16, 2009.

On
August 16, 2005, the Company issued senior unsecured notes in the amount of $150,000. These notes bear interest at 7.625% payable semi-annually each February and
August. The maturity date of the notes is August 15, 2015. The proceeds from the senior notes, less financing costs, were used to pay down senior bank debt.

On
and after August 15, 2010, the Company has the option to redeem all or a portion of the senior notes at the redemption prices (expressed in percentages of principal amount on
the redemption

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date),
plus accrued interest to the redemption date, if redeemed, during the 12-month period commencing on August 15 of the years set forth below:

Period

Redemption
Price2010


103.813
%2011


102.542
%2012


101.271
%2013 and thereafter


100.000
%


The
terms of the senior notes include customary covenants, including, but not limited to, restrictions pertaining to: (i) incurrence of additional indebtedness and issuance of
preferred stock, (ii) payment of dividends on or making of distributions in respect of capital stock or making certain other restricted payments or investments, (iii) entering into
agreements that restrict distributions from restricted subsidiaries, (iv) sale or other disposition of assets, including capital stock of restricted subsidiaries, (v) transactions with
affiliates, (vi) incurrence of liens, (vii) sale/leaseback transactions, and (viii) merger, consolidation or sale of substantially all of our assets, in each case subject to
numerous baskets, exceptions and thresholds. The Company was in compliance with these and all other financial covenants at December 31, 2009.

The
terms of the senior notes provide for customary events of default, including, but not limited to: (i) failure to pay any principal or interest when due, (ii) failure to
comply with covenants and limitations, (iii) certain insolvency or receivership events affecting us or any of our subsidiaries and (iv) unsatisfied material judgments, claims or
liabilities against us. There were no events of default under the senior notes at December 31, 2009.

Capital
lease obligations on the Company's fleet of vehicles totaled $3,352 and $3,276 at December 31, 2008 and 2009, respectively.

Required
payments under the Company's long-term debt and capital lease obligations are as follows:

Amount2010

$
5,5432011


4,9362012


4,5352013


98,8542014


Thereafter


150,000$
263,868


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Contractual Obligations

A summary of our contractual obligations and commitments related to its outstanding long-term debt and future minimum lease
payments related to our vehicle
fleet, corporate headquarters and warehouse rent and minimum facilities management rent as of December 31, 2009 is as follows:

Fiscal Year

Long-term
debt

Interest on
senior notes

Interest on
variable rate
debt

Facilities
rent
commitments

Capital lease
commitments

Operating lease
commitments

Total2010

$
4,000

$
11,438

$
4,833

$
16,939

$
1,543

$
3,238

$
41,9912011


4,000


11,438


4,658


12,855


936


2,978

$
36,8652012


4,000


11,438


4,483


10,759


535


2,567

$
33,7822013


98,592


11,438


4,308


8,577


262


2,124

$
125,3012014





11,438





6,850





1,868

$
20,156Thereafter


150,000


11,438





12,203





2,039

$
175,680Total

$
260,592

$
68,628

$
18,282

$
68,183

$
3,276

$
14,814

$
433,775


Off Balance Sheet Arrangements

At the years ended December 31, 2007, 2008 and 2009, we had no relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or variable interest entities, which would have been established for the purpose of facilitating off balance sheet arrangements,
or other contractually narrow or limited purposes.

Seasonality

We experience moderate seasonality as a result of our operations in the college and university market. Revenues derived from the
college and university market represented approximately 13%, or $40,500, of our total laundry facilities management revenue in 2009. Academic facilities management and rental revenues are derived
substantially during the school year in the first, second and fourth calendar quarters. Conversely, our operating and capital expenditures have historically been higher during the third calendar
quarter when we install a large amount of equipment while colleges and universities are generally on summer break.

Inflation

We do not believe that our financial performance has been materially affected by inflation.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with GAAP requires management to make judgments, assumptions and
estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if
another, also reasonable, amount was used or a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we
believe are reasonable under the circumstances. Actual results could differ significantly from these estimates.

Our
critical accounting policies, as described in Note 2 to the Mac-Gray audited consolidated financial statements included elsewhere in this report, "Significant
Accounting Policies," state our policies as they relate to significant matters: cash and cash equivalents, revenue recognition, provision for doubtful accounts, inventories, provision for inventory
reserves, goodwill and intangible assets, impairment of long-lived assets, financial instruments and fair value of financial instruments.

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Cash and cash equivalents.We consider all highly liquid investments with original maturities of three months or less to be cash
equivalents.
Included in cash and cash equivalents is an estimate of cash not yet collected at period-end that remains at laundry facilities management locations. At December 31, 2009 and 2008,
this totaled $10,524 and $11,295, respectively. We record the estimated cash not yet collected as cash and cash equivalents and facilities management revenue. We also record the estimated related
facilities management rent expense. We calculate the estimated cash not yet collected at the end of a period by first identifying only those accounts that have had activity in the last ninety days of
the period, since each account is collected at least once every ninety days. We calculate the average collection per day by account for the corresponding period one year prior. The prior year per day
collection amount is multiplied by the number of days between the account's most recent collection prior to the end of the current period and the end of the current period. The corresponding period
one year prior is used to allow for any seasonality at each account. The average collection per day since inception of the account is used for accounts acquired subsequent to the corresponding period
in the prior year.

We
have cash deposited with financial institutions in excess of the $250 insured limit of the Federal Deposit Insurance Corporation.

Revenue recognition.We recognize laundry facilities management revenue on the accrual basis. Rental revenue on commercial laundry
equipment is
recognized ratably over the related contractual period. We recognize revenue from commercial laundry equipment sales upon shipment of the products unless otherwise specified. Shipping and handling
fees charged to customers are recognized upon shipment of the products and are included in revenue with related cost included in cost of sales.

We
believe our accounting for laundry facilities management revenue and commercial laundry equipment sales are appropriate for us, properly matching the earnings process with the proper
reporting period.

Allowance for doubtful accounts.On a regular basis, we review the adequacy of our provision for doubtful accounts for trade accounts
receivable
based on historical collection results and current economic conditions, using factors based on the aging of our trade accounts receivable. In addition, we estimate specific additional allowances based
on indications that a specific customer may be experiencing financial difficulties.

Inventories.Inventories are stated at the lower of cost (as determined using the average cost method) or market and primarily consist
of finished
goods. In accordance with Generally Accepted Accounting Principles, we account for our inventory based upon the lower of cost or market principle.

Provision for inventory reserves.On a regular basis, we review the adequacy of our reserve for inventory obsolescence based on
historical
experience, product knowledge and frequency of shipments.

Goodwill and intangible assets.Intangible assets primarily consist of various non-compete agreements, goodwill and contract rights
recorded in connection with acquisitions. The non-compete agreements are amortized using the straight-line method over the life of the agreements, which range from five to
fifteen years. Contract rights are amortized using the straight-line method over fifteen or twenty years. The life assigned to acquired contracts is based on several factors, including:
(i) the seller's renewal rate of the contract portfolio for the most recent years prior to the acquisition, (ii) the number of years the average contract has been in the seller's
contract portfolio, (iii) the overall level of customer satisfaction within the contract portfolio and (iv) our ability to maintain or exceed the level of customer satisfaction
maintained by the seller prior to the acquisition by us. We are accounting for acquired contract rights on a pool-basis based on the fact that, in general, no single contract accounts for
more than 2% of the revenue of any acquired portfolio and the fact that few of the contracts are predicted to be terminated, either prior to or at the end of the contract term. Based on our
experience,

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we
believe that these costs associated with various acquisitions are properly recognized and amortized over a reasonable length of time.

We
test goodwill at least annually for impairment by reporting unit. The goodwill impairment review consists of a two-step process of first assessing the fair value and
comparing to the
carrying value. If this fair value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value is below the carrying value, we would proceed to the
next step, which is to measure the amount of the impairment loss. The impairment loss is measured as the difference between the carrying value and implied fair value of goodwill. Any such impairment
loss would be recognized in the Company's results of operations in the period the impairment loss arose.

We
also evaluate our trade names annually for impairment using the relief from royalty method. We estimate what it would cost to license the trade names based upon estimated future
revenue, an estimated royalty rate, a capitalization rate and a discount rate which is subject to change from year to year. If the discounted present value of future tax effected royalty payments is
less than the carrying value, the trade name would be written down to its implied fair value. Our evaluation in 2009 did not result in an impairment. However, a 1% increase in either the discount rate
or the capitalization rate used would have resulted in an impairment of $200 for one of our trade names.

Impairment of Long-Lived Assets.We review long-lived assets, including fixed assets (primarily washing machines and dryers)
and intangible assets with definite lives (primarily laundry facilities management contract rights ("contract rights")) for impairment whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.

Assets
acquired in business combinations, which include contract rights, an amortizing intangible asset, and equipment are defined to be the asset group for which the portfolio of
contracts was acquired. The contract rights were fair valued and recorded in purchase accounting on an aggregate basis for each market and are being amortized over
15  20 years. Triggering events that could indicate the carrying value of the contract rights intangible is not fully recoverable may include the loss of significant
customers, adverse changes to volumes and/or profitability in specific markets and changes in the Company's business strategy that result in a significant reduction in cash flows generated in a
specific market. Management also performs an annual assessment of the useful lives of the contract rights and accelerates amortization, if necessary. The results of this analysis may also indicate
potential impairment triggering events. For contract rights the useful life assessment consists primarily of comparing the percent of revenue declines for acquired contracts in the market where the
contract right was acquired to the percent of amortization recorded on the contract rights. A triggering event is deemed to have occurred if the revenues are declining at a rate in excess of the
amortization rate. If a triggering event has occurred the recoverability of the carrying amount of the contract rights and fixed assets for that acquired asset group is calculated by comparing the
carrying amount of the asset group to the projected future undiscounted cash flows from the operation and disposition of the assets, taking into consideration the remaining useful life of the assets,
the length of the contract for that acquisition, as well as any expected renewals. If it is determined that the carrying value of the assets is not recoverable, the Company would write down the
long-lived assets by the amount by which the carrying value exceeds fair value.

For
the purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For our long-lived assets acquired in business combinations, the Company has
determined the lowest level for which identifiable cash flows are largely independent is at the market level consistent with the approach used in purchase accounting. In particular, the contract
rights intangible assets, which comprise thousands of individual contracts, are valued and recorded on an aggregate market basis at the time of acquisition, depreciated

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in
the aggregate, and the recovery of these intangible assets is achieved through the collective cash flows of the market. The Company believes this approach will ensure any significant impairment
that occurs is recognized in the appropriate period and that it is not practical to allocate individual contract intangible assets to each of the thousands of locations.

For
assets associated with organic contracts, the Company performs its impairment assessment of the long-lived assets (principally laundry equipment) at the individual
location level. An impairment test is performed when a triggering event has occurred with respect to individual locations. Triggering events are those events that could indicate the carrying value of
the asset group is not fully recoverable and include changes in the current use of the equipment, environmental regulations and technological advancements. If a triggering event has occurred, the
recoverability of the carrying amount of the fixed assets for that location is calculated by comparing to the projected future undiscounted cash flows of the assets, taking into consideration the
remaining useful life of the assets, the length of the contract for that location, any expected renewals as well as giving consideration to whether or not those assets could be redeployed to another
location. If it is determined that the carrying value of the assets is not recoverable, the Company would write down the assets by the amount by which the carrying value exceeds fair value.

Financial instruments.We account for derivative instruments on our balance sheet at fair value. Derivatives that are not hedges must
be adjusted to
fair value through earnings. If the derivative is a hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the intended use of the derivative. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings. We have designated some of our interest rate swap agreements as cash flow hedges. Accordingly, the change in fair value of
the agreements is recognized in other comprehensive income and the ineffective portion of the change is recognized in earnings immediately.

Fair value of financial instruments.For purposes of financial reporting, we have determined that the fair value of financial
instruments
approximates book value at December 31, 2009 and 2008, based upon terms currently available to us in financial markets. The fair value of the interest rate swaps is the
estimated amount that we would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter party.

New Accounting Pronouncements

On January 1, 2008, we adopted new accounting guidance on fair value measurements. This new guidance defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Refer to Note 6 for additional information
regarding our fair value measurements for financial assets and liabilities.

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On January 1, 2009, we adopted new accounting guidance effective for non-financial assets and liabilities recognized or disclosed at fair value
on a non-recurring basis.

On
January 1, 2009, we adopted new accounting guidance on disclosures about derivative instruments and hedging activities. The new guidance impacts disclosures only and requires
additional qualitative and quantitative information on the use of derivatives and their impact on an entity's financial position, results of operations and cash flows. Refer to Note 6 for
additional information regarding our risk management activities, including derivative instruments and hedging activities.

On
January 1, 2009, we adopted new accounting guidance on business combinations. This new guidance requires the acquiring entity in a business combination to recognize the full
fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective
for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the
information needed to evaluate and understand the nature and financial effect of the business combination. This guidance applies to all transactions or other events in which the Company obtains
control of one or more businesses, including those sometimes referred to as "true mergers" or "mergers of equals" and combinations achieved without the transfer of consideration, for example, by
contract alone or through the lapse of minority veto rights.

In
June 2009, we adopted new accounting guidance on interim disclosures about fair value of financial instruments. This guidance requires disclosure about fair value of financial
instruments in interim financial statements as well as in annual financial statements.

In
June 2009, the FASB issued the FASB Accounting Standards Codification (Codification). The Codification is the single source for all authoritative GAAP recognized by the FASB and
applies to financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and will not have an affect on our financial position, results of
operations or liquidity.

No
other new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the Consolidated Financial Statements.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of risks, including changes in interest rates on borrowings. In the normal course of business, we manage
our exposure to these risks as described below. We do not engage in trading market-risk sensitive instruments for speculative purposes.

Interest Rates

The table below provides information about our debt obligations that are sensitive to changes in interest rates. For debt obligations,
the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The fair market value of long-term variable rate debt approximates book
value at December 31, 2009.

December 31, 2009Expected Maturity Date (In Thousands)2010

2011

2012

2013

2014

Thereafter

TotalLong-Term Debt:Variable rate

$
4,000

$
4,000

$
4,000

$
98,592

$


$


$
110,592Average interest rate


4.37
%

4.37
%

4.37
%

4.37
%

4.37
%




4.37
%


Effective
January 1, 2008, the Company adopted new accounting guidance regarding fair value measurements, which defines fair value, establishes a framework for measuring fair
value, and expands

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disclosures
about fair value measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The
following is a brief description of those three levels:

Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:
Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:
Unobservable inputs that reflect the reporting entity's own assumptions.

We
have entered into standard International Swaps and Derivatives Association ("ISDA") interest rate swap agreements (the "Swap Agreements") to manage the interest rate risk associated
with its debt. The Swap Agreements effectively convert a portion of our variable rate debt to a long-term fixed rate. Under these agreements, we receive a variable rate of LIBOR plus the
applicable margin charged by the banks and pay a fixed rate. The fair value of these interest rate derivatives are based on quoted prices for similar instruments from a commercial bank and, therefore,
the interest rate derivatives are considered a Level 2 item.

Certain
of our Swap Agreements qualify as cash flow hedges while others do not. The change in the fair value of the Swap Agreements that do not qualify for hedge accounting treatment is
recognized in the income statement in the period in which the change occurs. The change in the fair value of these contracts resulted in a gain of $893 for the year ended December 31, 2009 and
a loss of $1,804 for the year ended December 31, 2008.

The
table below outlines the details of each remaining Swap Agreement:

Date of Origin

Original
Notional
Amount

Fixed/
Amortizing

Notional
Amount
December 31,
2009

Expiration
Date

Fixed
RateMay 8, 2008

$
45,000

Amortizing

$
40,000


Apr 1, 2013


3.78
%May 8, 2008

$
40,000

Amortizing

$
33,000


Apr 1, 2013


3.78
%May 2, 2005

$
17,000

Fixed

$
17,000


Dec 31, 2011


4.69
%May 2, 2005

$
10,000

Fixed

$
10,000


Dec 31, 2011


4.77
%


In
accordance with the Swap Agreements and on a quarterly basis, interest expense is calculated based on the floating 90-day LIBOR and the fixed rate noted above. If interest
expense as calculated is greater based on the 90-day LIBOR, the financial institution pays the difference to us; if interest expense as calculated is greater based on the fixed rate, we
pay the difference to the financial institution. Depending on fluctuations in the LIBOR, our interest rate exposure and its related impact on interest expense and net cash flow may increase or
decrease. The counter party to the swap agreement exposes us to credit loss in the event of non-performance; however, nonperformance is not anticipated.

The
fair value of the Swap Agreements is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current interest
rates and the credit worthiness of the counter party. At December 31, 2008 and 2009, the fair value of the Swap Agreements was a liability of $7,775 and $5,141 respectively. These amounts have
been included in other liabilities on the consolidated balance sheets.

On
January 4, 2010, the Company entered into an interest rate swap agreement to manage the interest rate risk associated with its debt. The swap agreement effectively converts a
portion of our

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fixed
rate senior notes to a variable rate. Under this agreement, we receive the fixed rate on our senior notes (7.625%) and pay a variable rate of LIBOR plus the applicable margin charged by the
banks.

As
of December 31, 2009, there was $77,592 outstanding under the 2008 Secured Revolver, $33,000 outstanding under the 2008 Secured Term Loan and $1,380 in outstanding letters of
credit. The available balance under the 2008 Secured Revolver was $51,028 at December 31, 2009. The average interest rate on the borrowings outstanding under the 2008 Secured Credit Facility at
December 31, 2008 and December 31, 2009 were 5.28% and 4.37%, respectively, including the applicable spread paid to the banks.

On
April 1, 2008, the Company issued a $10,000 unsecured note to the seller in the ALC acquisition. This note bore interest at 9% and was to mature on April 1, 2010. The
Company paid this note in full on June 16, 2009.

Item 8.    Financial Statements and Supplementary Data.

Financial statements and supplementary data are contained in pages F-1 through F-35 hereto.

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

None.

Item 9A.    Controls and Procedures.

(a)   Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by our management, with the participation of our chief executive officer and
chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")). Based upon that evaluation, our chief executive officer and chief financial officer concluded that these disclosure controls and procedures were effective as of
December 31, 2009 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives and management necessarily was required to apply its
judgment in designing and evaluating the controls and procedures. On an on-going basis, we review and document our disclosure controls and procedures and our internal control over
financial reporting and may from time to time make changes aimed at enhancing
their effectiveness and to ensure that our systems evolve with our business. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or
Rule 15(d)-15(f) under the Exchange Act) that occurred during the fourth quarter of our fiscal year ended December 31, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

(b)   Management's Annual Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company's
internal control over financial reporting is a process designed under the supervision of the Company's principal executive and principal financial officers to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with accounting principles generally accepted in the
United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even

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when
determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As
of the end of the Company's 2009 fiscal year, management conducted assessments of the effectiveness of the Company's internal control over financial reporting based on the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal ControlIntegrated Framework. Based on these
assessments, management has determined that the Company's internal control over financial reporting as of December 31, 2009 was effective. Our internal control over financial reporting includes
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and
that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on our financial statements.

The
Company's internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report appearing on page F-2, which expresses an unqualified opinion on the effectiveness of the firm's internal control over financial reporting as of
December 31, 2009.

NYSE Annual CEO Certification.On June 8, 2009, Stewart Gray MacDonald, Jr., Chief Executive Officer of the Company, submitted to
the New York
Stock Exchange (the "NYSE") the Annual CEO Certification required by Section 303A of the Corporate Governance Rules of the NYSE certifying that he was not aware of any violation by the Company
of NYSE corporate governance listing standards.

(c)   Changes in Internal Control over Financial Reporting

There were no material changes to management's internal control over financial reporting during the year ended December 31, 2009.

Item 9B.    Other Information.

None.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance.

We will furnish to the SEC a definitive Proxy Statement no later than 120 days after the close of the fiscal year ended
December 31, 2009. Certain information required by this Item 10 is incorporated herein by reference to the Proxy Statement.

Item 11.    Executive Compensation.

The information required by this Item 11 is incorporated herein by reference to the Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item 12 is incorporated herein by reference to the Proxy Statement.

Stock Option Plan Information and Employee Stock Purchase Plan Information

The following tables provide information as of December 31, 2009 regarding shares of our common stock that may be issued under
our equity compensation plans consisting of the 1997 Stock Option and Incentive Plan (the "1997 Plan"), the 2001 Employee Stock Purchase Plan (the "ESPP"), the 2005 Stock Option and Incentive Plan
(the "2005 Plan") and the 2009 Stock Option and Incentive Plan (the "2009 Plan"). There are no equity compensation plans that have not been approved by the shareholders.

Plan category

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights(2)

Weighted average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
referenced in column (a))(a)

(b)

(c)Equity compensation plans approved by security holders(1)


2,318,329

$
8.63


816,585
(3)Equity compensation plans not approved by security holders








Total


2,318,329

$
8.63


816,585
(3)


(1)Represents
outstanding options and restricted shares granted but not yet issued under the 1997 Plan and the 2005 Plan. There are no options, warrants or
rights outstanding under the ESPP (does not include the purchase rights accruing under the ESPP because the purchase price, and therefore the number of shares to be purchased, is not determinable
until the end of the purchase period).(2)Includes
an aggregate of 104,908 shares underlying restricted stock units granted under the 2005 Plan and the 2009 Plan for which the performance criteria
have not yet been established. Accordingly, for accounting purposes, such awards are not considered to be granted under FAS 123R.(3)Includes
594,377 shares available for future issuance under the 2009 Plan, and 222,208 shares available for future issuance under the ESPP. No new awards
may be granted under the 1997 Plan or the 2005 Plan.


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Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 is incorporated herein by reference to the Proxy Statement.

Item 14.    Principal Accounting Fees and Services

The information required by this Item 14 is incorporated herein by reference to the Proxy Statement.

PART IV

Item 15.    Exhibits, Financial Statement Schedules

(a)   1.
and 2. An Index to Consolidated Financial Statements and Financial Statement Schedules is on Page F-1 of this Report.

(b)   3.
Exhibits:

Exhibits
required by Item 601 of Regulation S-K and Additional Exhibits. Unless otherwise indicated, all exhibits are part of Commission File
Number 1-13495. Certain exhibits indicated below are incorporated by reference to documents of Mac-Gray on file with the Commission.

Each
exhibit marked by a cross (+) was previously filed as an exhibit to Mac-Gray's Registration Statement on Form S-1 filed on August 14, 1997
(No. 333-33669) and the number in parentheses following the description of the exhibit refers to the exhibit number in the Form S-1.

Each
exhibit marked by a number sign (#) was previously filed as an exhibit to Amendment No. 1 to Mac-Gray's Registration Statement on Form S-1,
filed on September 25, 1997 (No. 333-33669) and the number in parentheses following the description of the exhibit refers to the exhibit number in the
Form S-1.

Each
exhibit marked by a (z) was previously filed as an exhibit to Amendment No. 1 of Mac-Gray's Registration Statement on Form S-1, filed on
April 17, 1998 (No. 333-49795) and the number in parentheses following the description of the exhibit refers to the exhibit number in the Form S-1.

Each
exhibit marked by a (v) was previously filed as an exhibit to Mac-Gray's Form 10-K filed on March 29, 2002 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 10-K.

Each
exhibit marked by an (s) was previously filed as an exhibit to Mac-Gray's Form 10-K/A filed on April 11, 2002 and the number in
parenthesis following the description of the exhibit refers to the exhibit number in the Form 10-K/A.

Each
exhibit marked by an (r) was previously filed as an exhibit to Mac-Gray's Form 10-K filed on March 31, 2005, and the number in
parenthesis following the description of the exhibit refers to the exhibit number in the Form 10-K.

Each
exhibit marked by a (p) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on May 31, 2005 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (o) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on July 28, 2005 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (n) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on August 18, 2005 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

42

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Table of Contents

Each
exhibit marked by a (i) was previously filed as an exhibit to Mac-Gray's Form 10-Q filed on May 15, 2006 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 10-Q.

Each
exhibit marked by a (h) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on March 13, 2007 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (g) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on August 13, 2007 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (e) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on January 24, 2008 and the number in
parentheses following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (c) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on March 7, 2008 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by an (b) was previously filed as an exhibit to Mac-Gray's Form 10-K filed on March 14, 2008, and the number in
parenthesis following the description of the exhibit refers to the exhibit number in the Form 10-K.

Each
exhibit marked by a (a) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on April 7, 2008 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (yy) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on June 12, 2008 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (xx) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on November 7, 2008 and the number in
parentheses following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (vv) was previously filed as an exhibit to Mac-Gray's Form 10-K filed on March 16, 2009 and the number in
parentheses following the description of the exhibit refers to the exhibit number in the Form 10-K.

Each
exhibit marked by a (uu) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on May 5, 2009 and the number in parentheses following
the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (tt) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on May 21, 2009 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (ss) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on June 10, 2009 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (rr) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on June 18, 2009 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (qq) was previously filed as an exhibit to Mac-Gray's Form 10-Q filed on August 10, 2009 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 10-Q.

43

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Table of Contents

Each
exhibit marked by a (pp) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on January 11, 2010 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

Each
exhibit marked by a (oo) was previously filed as an exhibit to Mac-Gray's Form 8-K filed on February 11, 2010 and the number in parentheses
following the description of the exhibit refers to the exhibit number in the Form 8-K.

The
following is a complete list of exhibits filed or incorporated by reference as part of this Annual Report on Form 10-K.

3.01

Amended and Restated Certificate of Incorporation (3.1)+3.02

Amended and Restated By-laws (3.1)xx3.03

Amended and Restated Certificate of Designations, Preferences and Rights of a Series of Preferred Stock of Mac-Gray Corporation classifying and designating the Series A Junior Participating Cumulative Preferred
Stock (3.1)rr4.01

Specimen certificate for shares of Common Stock, $.01 par value, of the Registrant (4.1)#4.02

Indenture, dated August 16, 2005, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation and Wachovia Bank, National Association (4.1)n4.03

Shareholder Rights Agreement, dated as of June 8, 2009, Mac-Gray Corporation and American Stock Transfer & Trust Company, LLC, as Rights Agent (4.1)ss10.01

Stockholders' Agreement, dated as of June 26, 1997, by and among the Registrant and certain stockholders of the Registrant (10.2)+10.02

Form of Maytag Distributorship Agreements (10.13)+10.03

The Registrant's 1997 Stock Option and Incentive Plan (with form of option agreements attached as exhibits) (10.16)+***10.04

Form of Noncompetition Agreement between the Registrant and its executive officers (10.15)v***10.05

Form of Director Indemnification Agreement between the Registrant and each of its Directors (10.16)v***10.06

April 2001 Amendment to the Mac-Gray Corporation 1997 Stock Option and Incentive Plan (10.17)v***10.07

Form of executive severance agreement between the Registrant and each of its chief financial officer and chief operating officer (10.18)s***10.08

Form of executive severance agreement between the Registrant and its chief executive officer (10.19)s***10.09

Trademark License Agreement dated January 10, 2005 by and between Web Service Company, Inc. ("Licensor") and Mac-Gray Services, Inc. ("Licensee") (10.19)r10.10

Mac-Gray Corporation 2005 Stock Option and Incentive Plan (10.1)p***10.11

Form of Incentive Stock Option Agreement under the Mac-Gray Corporation 2005 Stock Option and Incentive Plan (10.2)p***10.12

Form of Non-Qualified Stock Option Agreement for Company Employees under the Mac-Gray Corporation 2005 Stock Option and Incentive Plan (10.3)p***


44

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Table of Contents

10.13

Form of Restricted Stock Award Agreement for awards under the Mac-Gray Corporation 2005 Stock Option and Incentive Plan (10.5)p***10.14

Lease Agreement, dated July 22, 2005, between Mac-Gray Services, Inc. and 404 Wyman LLC (99.1)o10.15

Form of Mac-Gray Corporation 75/8% Senior Notes due 2015 (4.2)n10.16

Form of Employment Agreement between the Company and certain executive officers (10.1)h***10.17

Mac-Gray Senior Executive Incentive Plan (10.4)e***10.18

Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Mac-Gray Corporation 2005 Stock Option and Incentive Plan (10.5)e***10.19

Form of executive severance agreement, dated March 3, 2008, between the Registrant and each of Linda Serafini, Robert Tuttle and Phil Emma (10.1)c***10.20

Form of first amendment to executive severance agreement, dated March 3, 2008, between the Registrant and each of Stewart MacDonald, Michael Shea and Neil MacLellan III (10.42)b***10.21

Form of first amendment to employment agreement, dated March 3, 2008, between the Registrant and each of Stewart MacDonald, Michael Shea and Neil MacLellan III (10.43)b***10.22

Partnership Interest Purchase Agreement, dated as of April 1, 2008, among Automatic Laundry Company, Ltd., the partners listed on the signature pages thereto, Mac-Gray Newco, LLC, and Mac-Gray Services,
 Inc. (10.1)a10.23

Senior Secured Credit Agreement, dated as of April 1, 2008, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation, the lenders party thereto, Bank of America, N.A., as Administrative
Agent and Collateral Agent, and Banc of America Securities LLC, as Sale Lead Arranger and Sole Book Manager (10.3)a10.24

Form of Revolving Note pursuant to the Senior Secured Credit Agreement in favor of the Secured Revolving Lenders, in an aggregate total amount of up to $130,000,000 (10.4)a10.25

Form of Swingline Note pursuant to the Senior Secured Credit Agreement in favor of the Swingline Lenders, in an aggregate total amount of up to $10,000,000 (10.5)a10.26

Form of Term Loan Note pursuant to the Senior Secured Credit Agreement in favor of the Secured Term Lenders, in an aggregate total amount of $40,000,000 (10.6)a10.27

Guarantee and Collateral Agreement, dated as of April 1, 2008, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation, the Subsidiaries of the Borrowers identified therein, and Bank of
America, N.A., as Administrative Agent (10.7)a10.28

Mac-Gray Corporation Director Stock Ownership Guidelines, effective as of July 1, 2008 (10.1)yy***10.29

Form of Indemnification Agreement between the Registrant and each of its non-employee directors (10.1)xx***10.30

Form of second amendment to executive severance agreement, dated December 22, 2008, between the Registrant and each of Stewart MacDonald, Michael Shea and Neil MacLellan III (10.59)vv***10.31

Form of second amendment to employment agreement, dated December 22, 2008, between the Registrant and each of Stewart MacDonald, Michael Shea and Neil MacLellan III (10.60)vv***


45

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Table of Contents

10.32

Form of first amendment to executive severance agreement, dated December 22, 2008, between the Registrant and each of Linda Serafini, Robert Tuttle and Phil Emma (10.61)vv***10.33

Amendment No. 1 to Senior Secured Credit Agreement, dated as of May 1, 2009, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation, the lenders party thereto, and Bank of America,
N.A., as Administrative Agent and Collateral Agent (10.1)uu10.34

Mac-Gray Corporation 2009 Stock Option and Incentive Plan (10.1)tt***10.35

Form of Non-Qualified Stock Option Agreement for Company Employees under the Mac-Gray Corporation 2009 Stock Option and Incentive Plan (10.5)qq***10.36

Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Mac-Gray Corporation 2009 Stock Option and Incentive Plan (10.6)qq***10.37

Form of Restricted Stock Unit Agreement for cash settled awards under the Mac-Gray Corporation 2009 Stock Option and Incentive Plan (10.7)qq***10.38

Form of Restricted Stock Unit Agreement for stock settled awards under the Mac-Gray Corporation 2009 Stock Option and Incentive Plan (10.8)qq***10.39

Form of Restricted Stock Unit Agreement for awards under the Mac-Gray Corporation 2009 Stock Option and Incentive Plan (10.9)qq***10.40

Mac-Gray Corporation Non-Employee Director Compensation Policy (10.10)qq***10.41

Amendment No. 2 to Senior Secured Credit Agreement, dated as of January 8, 2010, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation, the lenders party thereto, and Bank of America,
 N.A., as Administrative Agent and Collateral Agent (10.1)pp10.42

Amendment No. 3 to Senior Secured Credit Agreement, dated as of February 5, 2010, among Mac-Gray Corporation, Mac-Gray Services, Inc., Intirion Corporation, the lenders party thereto, and Bank of
America, N.A., as Administrative Agent and Collateral Agent (10.1)oo10.43

Stock Purchase Agreement, dated as of February 5, 2010, between Mac-Gray Corporation and MF Acquisition Corp. (10.2)oo10.44

Mac-Gray Corporation Long Term Incentive Plan (filed herewith)***10.45

Mac-Gray Corporation 2001 Employee Stock Purchase Plan (filed herewith)***21.1

Subsidiaries of the Registrant (21.1)z23.1

Consent of PricewaterhouseCoopers LLP (filed herewith)31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith)32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)


***Management
compensatory plan or arrangement


46

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Table of Contents

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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, THIS 15th DAY OF MARCH, 2010.

MAC-GRAY CORPORATIONBy:

/s/ STEWART GRAY MACDONALD, JR. Stewart Gray MacDonald, Jr. Chief Executive Officer
(Principal Executive Officer)Date: March 15, 2010


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

Signature

Title

Date/s/ DAVID W. BRYAN David W. Bryan

Director

March 15, 2010/s/ THOMAS E. BULLOCK Thomas E. Bullock

Director

March 15, 2010/s/ BRUCE C. GINSBERG Bruce C. Ginsberg

Director

March 15, 2010/s/ CHRISTOPHER T. JENNY Christopher T. Jenny

Director

March 15, 2010/s/ EDWARD F. MCCAULEY Edward F. McCauley

Director

March 15, 2010/s/ WILLIAM F. MEAGHER William F. Meagher

Director

March 15, 2010/s/ ALASTAIR G. ROBERTSON Alastair G. Robertson

Director

March 15, 2010/s/ MARY ANN TOCIO Mary Ann Tocio

Director

March 15, 2010/s/ MICHAEL J. SHEA Michael J. Shea

Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting
Officer)

March 15, 2010


47

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Table of Contents

Items 15(a)(1) and (2)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

Item 15(a)(1)

The following consolidated financial statements of the registrant and its subsidiaries required to be included in Item 8 are
listed below.



MAC-GRAY CORPORATIONReport of Independent Registered Public Accounting Firm


F-2Consolidated Balance Sheets at December 31, 2008 and 2009


F-3Consolidated Income Statements for the Years Ended December 31, 2007, 2008 and 2009


F-4Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2007, 2008 and 2009


F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2008 and 2009


F-6Notes to Consolidated Financial Statements


F-7Item 15(a)(2)The following consolidated financial statement schedule of Mac-Gray Corporation should beread in conjunction with the financial statements included herein.Schedule II Valuation and Qualifying Accounts


F-35


All
other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are
not material, and therefore have been omitted.

F-1

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Table of Contents

Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Stockholders of Mac-Gray Corporation:

In
our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial
position of Mac-Gray Corporation (the "Company") and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index under 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in "Management's Annual Report on Internal Control Over
Financial Reporting" appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company's internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.

As
discussed in Note 2 to the consolidated financial statements, effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/
PricewaterhouseCoopers LLC

Boston,
Massachusetts
March 16, 2010

F-2

---





Table of Contents

MAC-GRAY CORPORATION        CONSOLIDATED BALANCE SHEETS        (In thousands, except share data)

December 31,
2008

December 31,
2009AssetsCurrent assets:Cash and cash equivalents

$
18,836

$
21,599Trade receivables, net of allowance for doubtful accounts


6,688


5,081Inventory of finished goods, net


2,265


2,172Deferred income taxes


610


559Prepaid facilities management rent and other current assets


14,643


14,286Current assets from discontinued operations


6,421


6,864Total current assets


49,463


50,561Property, plant and equipment, net


141,651


130,541Goodwill


59,478


59,043Intangible assets, net


221,759


208,499Prepaid facilities management rent and other assets


12,868


11,199Non-current assets from discontinued operations


4,785


4,433Total assets

$
490,004

$
464,276Liabilities and Stockholders' EquityCurrent liabilities:Current portion of long-term debt and capital lease obligations

$
5,471

$
5,543Trade accounts payable


2,541


6,957Accrued facilities management rent


22,211


21,075Accrued expenses


15,011


17,749Deferred revenue and deposits


11


29Current liabilites from discontinued operations


4,208


3,087Total current liabilities


49,453


54,440Long-term debt and capital lease obligations


295,821


258,325Deferred income taxes


34,597


39,159Other liabilities


10,794


6,393Non-current liabilities from discontinued operations


1,375


1,424Commitments and contingencies (Note 14)Stockholders' equity:Preferred stock ($.01 par value, 5 million shares authorized no shares issued or outstanding)





Common stock ($.01 par value, 30 million shares authorized, 13,443,754 issued and 13,381,387 outstanding at December 31, 2008, and 13,631,706
issued and 13,631,530 outstanding at December 31, 2009)


134


136Additional paid in capital


74,669


78,032Accumulated other comprehensive loss


(3,117
)

(2,048
)Retained earnings


26,925


28,41798,611


104,537Less common stock in treasury, at cost (62,367 shares at December 31, 2008 and 176 shares at December 31, 2009)


(647
)

(2
)Total stockholders' equity


97,964


104,535Total liabilities and stockholders' equity

$
490,004

$
464,276


The accompanying notes are an integral part of these consolidated financial statements.

F-3

---





Table of Contents

MAC-GRAY CORPORATION        CONSOLIDATED INCOME STATEMENTS        (In thousands, except share data)

Years Ended December 31,2007

2008

2009Revenue from continuing operations:Facilities management revenue

$
242,803

$
306,089

$
309,028Laundry equipment sales


19,681


21,140


16,896Total revenue


262,484


327,229


325,924Cost of revenue:Cost of facilities management revenue


162,839


207,233


208,914Depreciation and amortization


37,164


47,161


48,266Cost of laundry equipment sales


14,702


17,287


13,652Total cost of revenue


214,705


271,681


270,832Gross margin


47,779


55,548


55,092Operating expenses:General and administration


16,381


18,341


17,819Sales and marketing


13,097


14,970


14,249Depreciation and amortization


1,491


1,614


1,600Gain on sale of assets, net


(302
)

(69
)

(648
)Incremental costs of proxy contest








971Loss on early extinguishment of debt





207


Total operating expenses


30,667


35,063


33,991Income from continuing operations


17,112


20,485


21,101Interest expense, net


13,421


20,605


19,675(Gain) loss related to derivative instruments


1,737


1,804


(893
)Income (loss) before provision for income taxes from continuing operations


1,954


(1,924
)

2,319Provision (benefit) for income taxes


707


(758
)

1,278Income (loss) from continuing operations, net


1,247


(1,166
)

1,041Income from discontinued operations, net


1,272


1,707


1,074Net income

$
2,519

$
541

$
2,115Earnings (loss) per sharebasiccontinuing operations

$
0.09

$
(0.09
)
$
0.08Earnings (loss) per sharedilutedcontinuing operations

$
0.09

$
(0.09
)
$
0.07Earnings per sharebasicdiscontinued operations

$
0.10

$
0.13

$
0.08Earnings per sharediluteddiscontinued operations

$
0.09

$
0.13

$
0.08Earnings per sharebasic

$
0.19

$
0.04

$
0.16Earnings per sharediluted

$
0.18

$
0.04

$
0.15Weighted average common shares outstandingbasic


13,209


13,346


13,529Weighted average common shares outstandingdiluted


13,680


13,346


13,940


The
accompanying notes are an integral part of these consolidated financial statements.

F-4

---



Table of Contents

MAC-GRAY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share data)

Common stock









Treasury StockAccumulated
Other
Comprehensive
(Loss) GainNumber
of shares

Value

Additional
Paid in
Capital

Comprehensive
Income

Retained
Earnings

Number
of shares

Cost

TotalBalance, December 31, 2006


13,443,754

$
134

$
70,553

$
183




$
24,571


366,060

$
(3,801
)
$
91,640Cumulative change related to the adoption of FIN 48

















500








50013,443,754


134


70,553


183





25,071


366,060


(3,801
)

92,140Net income













$
2,519


2,519








2,519Other comprehensive income:Unrealized loss on derivative instruments, net of tax benefit of $124 (Note 6)











(138
)

(138
)










(138
)Comprehensive income













$
2,381











Options exercised

















(527
)

(128,955
)

1,340


813Stock compensation expense








1,679

















1,679Net tax benefit (shortfall) from share based payment arrangements








338

















338Stock issuanceEmployee Stock Purchase Plan

















(22
)

(49,446
)

514


492Stock granted








16








(229
)

(20,769
)

214


1Balance, December 31, 2007


13,443,754


134


72,586


45





26,812


166,890


(1,733
)

97,844Net income














541


541








541Other comprehensive income:Unrealized loss on derivative instruments, net of tax benefit of $1,989 (Note 6)











(3,162
)

(3,162
)










(3,162
)Comprehensive income













$
(2,621
)










Options exercised

















(69
)

(26,333
)

273


204Stock compensation expense








2,120

















2,120Net tax benefit (shortfall) from share based payment arrangements








(44
)
















(44
)Stock issuanceEmployee Stock Purchase Plan

















(34
)

(36,545
)

380


346Stock granted








7








(325
)

(41,645
)

433


115Balance, December 31, 2008


13,443,754


134


74,669


(3,117
)




26,925


62,367


(647
)

97,964Net income














2,115


2,115








2,115Other comprehensive income:Unrealized loss on derivative instruments, net of tax benefit of $672 (Note 6)











1,069


1,069











1,069Comprehensive income













$
3,184











Options exercised


102,746


1


683








(14
)

(9,597
)

113


783Stock compensation expense








2,213

















2,213Purchase of common stock




















9,597


(113
)

(113
)Net tax benefit (shortfall) from share based payment arrangements








(47
)
















(47
)Stock issuanceEmployee Stock Purchase Plan


67,372


1


363











0


0


364Stock granted


17,658





151








(609
)

(62,191
)

645


187Balance, December 31, 2009


13,631,530

$
136

$
78,032

$
(2,048
)



$
28,417


176

$
(2
)
$
104,535


The accompanying notes are an integral part of these consolidated financial statements.

F-5

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Table of Contents

MAC-GRAY CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

Years ended December 31,2007

2008

2009Cash flows from operating activities:Net income

$
2,519

$
541

$
2,115Adjustments to reconcile net income to net cash flows provided by operating activities, net of effects of acquisitions:Depreciation and amortization


38,655


48,775


49,866Loss on early extinguishment of debt





207


(Decrease) increase in allowance for doubtful accounts and lease reserves


(4
)

60


(159
)Gain on disposition of assets


(302
)

(69
)

(648
)Stock grants


1


115


187Non-cash derivative interest expense (income)


1,737


1,804


(893
)Deferred income taxes


1,147


(1,842
)

4,781Excess tax benefits from share based payment arrangements


(338
)

(20
)

(136
)Non cash-stock compensation


1,679


2,120


2,213Decrease (increase) in accounts receivable


(1,345
)

222


1,766Decrease in inventory


10


1,911


93Increase in prepaid facilities management rent and other assets


(3,819
)

(1,235
)

(1,329
)Increase in accounts payable, accrued facilities management rent, accrued expenses and other liabilities


4,534


4,842


3,920Increase in deferred revenues and customer deposits





11


18Net cash flows used in operating activities from discontinued operations


(829
)

(717
)

(738
)Net cash flows provided by operating activities


43,645


56,725


61,056Cash flows from investing activities:Capital expenditures


(26,711
)

(24,313
)

(21,341
)Payments for acquisitions


(46,626
)

(106,213
)

Proceeds from sale of assets


393


415


1,267Net cash flows used in investing activities from discontinued operations


(443
)

(990
)

(336
)Net cash flows used in investing activities


(73,387
)

(131,101
)

(20,410
)Cash flows from financing activities:Payments on capital lease obligations


(1,550
)

(1,943
)

(1,705
)Borrowings on 2005 secured revolving credit facility


63,000


8,000


Payments on 2005 secured revolving credit facility


(32,000
)

(63,000
)

Payments on 2008 secured revolving credit facility





(33,500
)

(118,154
)Borrowings on 2008 secured revolving credit facility





134,440


94,806Borrowings on 2008 secured term credit facility





40,000


Payments on 2008 secured term credit facility





(3,000
)

(4,000
)Borrowings on 2008 unsecured revolving credit facility





1,781


Payments on 2008 unsecured revolving credit facility





(1,781
)

Payments on acquisition note








(10,000
)Financing costs


(20
)

(1,680
)

Excess tax benefits from share based payment arrangements


338


20


136Purchase of common stock








(113
)Proceeds from exercise of stock options


813


204


783Proceeds from issuance of common stock


492


346


364Net cash flows provided by financing activities


31,073


79,887


(37,883
)Increase in cash and cash equivalents


1,331


5,511


2,763Cash and cash equivalents, beginning of period


11,994


13,325


18,836Cash and cash equivalents, end of period

$
13,325

$
18,836

$
21,599Supplemental cash flow information:Interest paid

$
13,637

$
20,919

$
19,967Income taxes paid

$
78

$
211

$
227


Supplemental disclosure of non-cash investing activities:

During
the years ended December 31, 2007, 2008 and 2009, the Company acquired various vehicles under capital lease agreements totaling $2,003, $1,774 and $1,628 respectively.

During
the years ended December 31, 2007 and 2008, the Company incurred liabilities in the amount of $1,670 and $10,000 in the form of future cash payments related to
acquisitions.

The
accompanying notes are an integral part of these consolidated financial statements.

F-6

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Table of Contents

MAC-GRAY CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (In thousands, except per share data)

1. Description of the Business and Basis of Presentation

Description of the Business.Mac-Gray Corporation ("Mac-Gray" or the "Company") generates the majority of its revenue from
card- and coin-operated laundry rooms located in 43 states and the District of Columbia. The Company's principal customer base is the multi-unit housing market,
which includes apartments, condominium units, colleges and universities, and military bases. The Company also sells and services commercial laundry equipment to commercial laundromats,
multi-unit housing properties and institutions. The majority of the Company's purchases of laundry equipment is from one supplier.

Basis of Presentation.The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
significant
intercompany transactions and balances have been eliminated
in consolidation. On February 5, 2010, the Company sold its MicroFridge® (Intirion Corporation) business to Danby Products. Since this business was held for sale as of
December 31, 2009 and the operations and cash flows of this business will be eliminated from the ongoing operations of the Company as a result of this disposal transaction and the Company will
not have any significant continuing involvement in the operations of this business after this disposal transaction, the Company accounted for this business as a discontinued operation. All current and
prior period financial information has been classified to reflect this as a discontinued operation.

2. Significant Accounting Policies

Cash and Cash Equivalents.The Company considers all highly liquid investments with original maturities of three months or less to be
cash
equivalents. Included in cash and cash equivalents is an estimate of cash not yet collected at period-end that remains at laundry facilities management customer locations. At
December 31, 2008 and 2009, this totaled $11,295 and $10,524, respectively. The Company records the estimated cash not yet collected as cash and cash equivalents and facilities management
revenue. The Company also records the estimated related facilities management rent expense. The Company calculates the estimated cash not yet collected at the end of a period by first identifying only
those accounts that have had activity in the last ninety days of the period, since each account is collected at least once every ninety days. The Company calculates the average collection per day by
account for the corresponding period one year prior. The prior year per day collection amount is multiplied by the number of days between the account's most recent collection prior to the end of the
current period and the end of the current period. The corresponding period one year prior is used to allow for any seasonality at each account. The average collection per day since inception of the
account is used for accounts acquired subsequent to the corresponding period in the prior year.

The
Company has cash deposited with financial institutions in excess of the $250 insured limit of the Federal Deposit Insurance Corporation.

Revenue Recognition.The Company recognizes facilities management revenue on the accrual basis. Rental revenue is recognized ratably
over the related
contractual period. The Company recognizes revenue from sales upon shipment of the products, unless otherwise specified. Shipping and handling fees charged to customers are recognized upon shipment of
the products and are included in revenue with the related cost included in cost of sales. Installation and repair services are provided on an occurrence basis, not on a contractual basis. Related
revenue is recognized at the time the installation service, or other service, is provided to the customer.

F-7

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

Allowance for Doubtful Accounts.On a regular basis, the Company reviews the adequacy of its provision for doubtful accounts for trade
accounts
receivable based on historical collection results and current economic conditions using factors based on the aging of its trade accounts. In addition, the Company estimates specific additional
allowances based on indications that a specific customer may be experiencing financial difficulties. The Company maintains an allowance for doubtful trade accounts of $357 and $198 at
December 31, 2008 and 2009, respectively.

Concentration of Credit Risk.Financial instruments which potentially expose the Company to concentration of credit risk include trade
receivables
generated by the Company as a result of the selling and leasing of laundry equipment. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed and reserves are
maintained. The Company typically does not require collateral. No individual Laundry Equipment Sales customer accounted for more than 10% of revenues or accounts receivable for any period presented.

Inventories.Inventories are stated at the lower of cost (as determined using the average cost method) or market, and consist primarily
of finished
goods.

Provision for Inventory Reserves.On a regular basis, the Company reviews the adequacy of its reserve for inventory obsolescence based
on historical
experience, product knowledge and frequency of shipments.

Prepaid Facilities Management Rent.Prepaid facilities management rent consists of cash advances paid to property owners and managers
under laundry
service contracts.

Property, Plant and Equipment.Property, Plant and Equipment are stated at cost and depreciated using the straight-line method over the
estimated useful lives of the respective assets. Expenditures for maintenance and repairs are charged to operations as incurred; acquisitions, major renewals, and betterments are capitalized. Upon
retirement or sale, the cost of assets disposed of and their related accumulated depreciation or amortization are removed from the accounts, with the resulting gain or loss reflected in income.

Facilities Management EquipmentNot Yet Placed in Service.These assets represent laundry machines that management estimates will
be
installed in facilities management laundry rooms over the next twelve months and have not been purchased for commercial sale. These assets are grouped in Property, Plant and Equipment and are not
depreciated until placed in service under a facilities management lease agreement.

Advertising Costs.Advertising costs are expensed as incurred. These costs were $797, $696 and $553 for the years ended December 31,
 2007,
2008 and 2009, respectively.

Goodwill and Intangible Assets.Intangible assets primarily consist of various non-compete agreements, goodwill, trade name and
contract
rights recorded in connection with acquisitions. The non-compete agreements are amortized using the straight-line method over the life of the agreements, which range from five
to fifteen years. The majority of contract rights are amortized using the straight-line method over twenty years, with the balance amortized on a straight-line method over
fifteen years. The life assigned to acquired contracts is based on several factors, including: the seller's renewal rate of the contract portfolio for the most recent years prior to the acquisition,
the number of

F-8

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

years
the average contract has been in the seller's contract portfolio, the overall level of customer satisfaction within the contract portfolio and the ability of the Company to maintain or exceed
the level of customer satisfaction maintained by the seller prior to the acquisition by the Company. The
Company is accounting for acquired contract rights on a pool-basis based on the fact that, in general, no single contract accounts for more than 2% of the revenue of any acquired portfolio
and the fact that few of the contracts are predicted to be terminated, either prior to or at the end of the contract term.

We
test goodwill at least annually for impairment by reporting unit. The goodwill impairment review consists of a two-step process of first assessing the fair value and
comparing to the carrying value. If this fair value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value is below the carrying value, we would
proceed to the next step, which is to measure the amount of the impairment loss. The impairment loss is measured as the difference between the carrying value and implied fair value of goodwill. Any
such impairment loss would be recognized in the Company's results of operations in the period the impairment loss arose.

We
also evaluate our trade names annually for impairment using the relief from royalty method. We estimate what it would cost to license the trade names based upon estimated future
revenue, an estimated royalty rate, a capitalization rate and a discount rate which is subject to change from year to year. If the discounted present value of future tax effected royalty payments is
less than the carrying value, the trade name would be written down to its implied fair value. Our evaluation in 2009 did not result in an impairment. However, a 1% increase in either the discount rate
or the capitalization rate used would have resulted in an impairment of $200 for one of our trade names.

Impairment of Long-Lived Assets.The Company reviews long-lived assets, including fixed assets (primarily washing machines
and dryers) and intangible assets with definite lives (primarily laundry facilities management contract rights ("contract rights")) for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate.

Assets
acquired in business combinations, which include contract rights, an amortizing intangible asset, and equipment are defined to be the asset group for which the portfolio of
contracts was acquired. The contract rights were fair valued and recorded in purchase accounting on an aggregate basis for each market and are being amortized over 1520 years.
Triggering events that could indicate the carrying value of the contract rights intangible is not fully recoverable may include the loss of significant customers, adverse changes to volumes and/or
profitability in specific markets and changes in the Company's business strategy that result in a significant reduction in cash flows generated in a specific market. Management also performs an annual
assessment of the useful lives of the contract rights and accelerates amortization, if necessary. The results of this analysis may also indicate potential impairment triggering events. For contract
rights the useful life assessment consists primarily of comparing the percent of revenue declines for acquired contracts in the market where the contract right was acquired to the percent of
amortization recorded on the contract rights. A triggering event is deemed to have occurred if the revenues are declining at a rate in excess of the amortization rate. If a triggering event has
occurred the recoverability of the carrying amount of the contract rights and fixed assets for that acquired asset group is calculated by comparing the carrying amount of the asset group to the
projected future undiscounted cash flows from the operation and disposition of the assets, taking

F-9

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

into
consideration the remaining useful life of the assets, the length of the contract for that acquisition, as well as any expected renewals. If it is determined that the carrying value of the assets
is not recoverable, the Company would write down the long-lived assets by the amount by which the carrying value exceeds fair value.

For
the purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For our long-lived assets acquired in business combinations, the Company has
determined the lowest level for which identifiable cash flows are largely independent is at the market level consistent with the approach used in purchase accounting. In particular, the contract
rights intangible assets, which comprise thousands of individual contracts, are valued and recorded on an aggregate market basis at the time of acquisition, depreciated in the aggregate, and the
recovery of these intangible assets is achieved through the collective cash flows of the market. The Company believes this approach will ensure any significant impairment that occurs is recognized in
the appropriate period and that it is not practical to allocate individual contract intangible assets to each of the thousands of locations.

For
assets associated with organic contracts, the Company performs its impairment assessment of the long-lived assets (principally laundry equipment) at the individual
location level. An impairment test is performed when a triggering event has occurred with respect to individual locations. Triggering events are those events that could indicate the carrying value of
the asset group is not fully recoverable and include changes in the current use of the equipment, environmental regulations and technological advancements. If a triggering event has occurred, the
recoverability of the carrying amount of the fixed assets for that location is calculated by comparing to the projected future undiscounted cash flows of the assets, taking into consideration the
remaining useful life of the assets, the length of the contract for that location, any expected renewals as well as giving consideration to whether or not those assets could be redeployed to another
location. If it is determined that the
carrying value of the assets is not recoverable, the Company would write down the assets by the amount by which the carrying value exceeds fair value.

Income Taxes.The Company utilizes the asset and liability method of accounting for income taxes, as set forth in accounting guidance.
This guidance
requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of the existing
assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled.

Stock Compensation.Accounting guidance requires the Company to measure the cost of employee services received in exchange for an award
of equity
instruments based on the grant-date fair value of the award. That cost is recognized on a straight-line basis over the period during which an employee is required to provide
service in exchange for the awardthe requisite service period (usually the vesting period).

The
grant-date fair value of employee share options and similar instruments is estimated using the Black-Scholes option-pricing model. The expected life of options and the
expected forfeiture rates are estimated based on historical experience. The historical volatility The weighted average volatility of the Company's stock price over the prior number of years equal to
the expected life and the two most

F-10

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

recent
years is used to estimate the expected volatility at the measurement date. Awards for which the recipient has the choice of receiving equity instruments or cash are valued at the market price
of the underlying equity instrument as of the reporting date.

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

Earnings Per Share.Accounting guidance requires the presentation of basic earnings per share ("EPS") and diluted earnings per share.
Basic EPS
includes no dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity. Diluted EPS has been calculated using the treasury stock method.

Comprehensive Income.Comprehensive income includes all changes in stockholders' equity during a period except those resulting from
investments by
stockholders and distributions to stockholders.

Financial Instruments.The Company accounts for derivative instruments on its balance sheet at fair value. Derivatives that are not
hedges must be
adjusted to fair value through earnings. If the derivative is a hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities
or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the intended use of the derivative. The ineffective
portion of a derivative's change in fair value will be immediately recognized in earnings.

Effective
January 1, 2008, the Company adopted accounting guidance, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief
description of those three levels:

Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:
Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:
Unobservable inputs that reflect the reporting entity's own assumptions.

The
fair value of the Company's interest rate derivatives are based on quoted prices for similar instruments from a commercial bank and, therefore, the interest rate derivatives are
considered a Level 2 item.

Fair Value of Financial Instruments.For purposes of financial reporting, the Company has determined that the fair value of financial
instruments
approximates book value at December 31, 2008 and 2009, based upon terms currently available to the Company in financial markets. The fair value of

F-11

---



Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

2. Significant Accounting Policies (Continued)

the
Company's interest rate swaps is the estimated amount that the Company would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the
credit worthiness of the counter party.

New Accounting Pronouncements.On January 1, 2008, we adopted new accounting guidance on fair value measurements. This new
guidance defines
fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Refer to Note 6 for additional
information regarding our fair value measurements for financial assets and liabilities.

On
January 1, 2009, we adopted new accounting guidance effective for non-financial assets and liabilities recognized or disclosed at fair value on a
non-recurring basis.

On
January 1, 2009, we adopted new accounting guidance on disclosures about derivative instruments and hedging activities. The new guidance impacts disclosures only and requires
additional qualitative and quantitative information on the use of derivatives and their impact on an entity's financial position, results of operations and cash flows. Refer to Note 6 for
additional information regarding our risk management activities, including derivative instruments and hedging activities.

On
January 1, 2009, we adopted new accounting guidance on business combinations. This new guidance requires the acquiring entity in a business combination to recognize the full
fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective
for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the
information needed to evaluate and understand the nature and financial effect of the business combination. This guidance applies to all transactions or other events in which the Company obtains
control of one or more businesses, including those sometimes referred to as "true mergers" or "mergers of equals" and combinations achieved without the transfer of consideration, for example, by
contract alone or through the lapse of minority veto rights.

In
June 2009, the FASB issued the FASB Accounting Standards Codification (Codification). The Codification is the single source for all authoritative GAAP recognized by the FASB and
applies to financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and will not have an affect on our financial position, results of
operations or liquidity.

In
June 2009, we adopted new accounting guidance on interim disclosures about fair value of financial instruments. This guidance requires disclosure about fair value of financial
instruments in interim financial statements as well as in annual financial statements.

No
other new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the Consolidated Financial Statements.

3. Discontinued Operations

On February 5, 2010, the Company sold its MicroFridge® (Intirion Corporation) business to Danby Products. The transaction is valued at approximately $11,500. Danby
Products paid Mac-Gray $8,500 in cash, and assumed existing liabilities and financial obligations for MicroFridge totaling approximately $3,000. Since this business was held for sale as of
December 31, 2009 and the operations and cash flows

F-12

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

3. Discontinued Operations (Continued)

of
this business will be eliminated from the ongoing operations of the Company as a result of this disposal transaction and the Company will not have any significant continuing involvement in the
operations of this business after this disposal transaction, the Company accounted for this business as a Discontinued Operation. All current and prior period financial information has been classified
to reflect this as a discontinued operation. The Company will record a pre-tax gain as a result of this transaction in the amount of approximately $750 subject to post-closing adjustments.
Concurrent with this transaction, the Company paid $8,000 on its Secured Term Loan.

Included
in the table below are the key financial items related to the discontinued operation:

2007

2008

2009Revenue

$
33,418

$
36,364

$
30,298Interest expense(1)

$
532

$
428

$
262Income before provision for income taxes

$
2,074

$
2,742

$
1,742Income taxes

$
802

$
1,035

$
668


---

4. Acquisitions

On April 1, 2008, the Company acquired Automatic Laundry Company, Ltd., ("ALC"), a laundry facilities management business, which operates in several western and southern
states. This acquisition has been reflected in the accompanying consolidated financial statements from the date of the acquisition, and has been accounted for as a purchase business combination in
accordance with accounting guidance. The total purchase price of this acquisition has been allocated to the acquired assets and liabilities, based on estimates of their relative fair value. A
twenty-year amortization period has been assigned to the acquired contract rights and the acquired used laundry equipment has been assigned an average life of four years based upon
physical inspection of the equipment. The Company's operations were fully integrated at December 31, 2008. The acquisition of this business addresses the Company's growth objectives by creating
density within several markets the Company already serves.

The
total purchase price for this acquisition was allocated as follows:

AmountContract rights

$
79,800Equipment


24,313Goodwill


17,799Inventory


1,356Incentive payments


173Accrued expenses


(699
)122,742Deferred tax liability


(6,529
)Total Purchase Price

$
116,213


F-13

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

4. Acquisitions (Continued)

Goodwill
includes $6,529 of tax goodwill due to the difference between the book value and the tax value assigned to the acquired equipment. The depreciation of the book and tax values
over time will create a deferred tax asset equal to the deferred tax liability recorded as part of the acquisition.

The
purchase price includes a non-recourse note payable to the seller in the amount of $10,000 due on April 1, 2010. The Company paid this note in full on
June 16, 2009. As part of this acquisition, the Company also leased from a third party a fleet of vehicles previously owned by ALC.

The
following unaudited pro forma operating results of the Company assume the acquisition took place on January 1, 2007. Such information includes adjustments to reflect
additional depreciation, amortization and interest expense, and is not necessarily indicative of what the results of operations would have been or the results of operations in future periods.

Year Ended
December 31,
2007

Year Ended
December 31,
2008Net revenue from continuing operations

$
328,357

$
344,084Loss from continuing operations

$
(2,583
)
$
(1,434
)Loss per share from continuing operations:Basic

$
(0.19
)
$
(0.11
)Diluted

$
(0.19
)
$
(0.11
)


5. Long-Term Debt

The Company has a senior secured credit agreement (the "Secured Credit Agreement") pursuant to which the Company may borrow up to $163,000 in the aggregate, including $33,000 pursuant to
a Term Loan and up to $130,000 pursuant to a Revolver. The Term Loan requires quarterly principal payments
of $1,000 at the end of each calendar quarter through December 31, 2012, with the remaining principal balance of $21,000 due on April 1, 2013. The Secured Credit Agreement also provides
for Bank of America, N. A. to make swingline loans to us of up to $10,000 (the "Swingline Loans") and any Swingline Loans will reduce the borrowings available under the Revolver. Subject to certain
terms and conditions, the Secured Credit Agreement gives the company the option to establish additional term and/or revolving credit facilities there under, provided that the aggregate commitments
under the Secured Credit Agreement cannot exceed $220,000.

Borrowings
outstanding under the Secured Credit Agreement bear interest at a fluctuating rate equal to (i) in the case of Eurodollar rate loans, the LIBOR rate (adjusted for
statutory reserves) plus an applicable percentage, ranging from 2.00% to 2.50% per annum (currently 2.25%), determined by reference to our senior secured leverage ratio, and (ii) in the case of
base rate loans and Swingline Loans, the higher of (a) the federal funds rate plus 0.5% or (b) the annual rate of interest announced by Bank of America, N.A. as its "prime rate," in each
case, plus an applicable percentage, ranging from 1.00% to 1.50% per annum (currently 1.25%), determined by reference to the Company's senior secured leverage ratio.

The
obligations under the Secured Credit Agreement are guaranteed by the Company's subsidiaries and secured by (i) a pledge of 100% of the ownership interests in the subsidiaries,
and (ii) a first-priority security interest in substantially all our tangible and intangible assets.

F-14

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

5. Long-Term Debt (Continued)

Under
the Secured Credit Agreement, the Company is subject to customary lending covenants, including restrictions pertaining to, among other things: (i) the incurrence of
additional indebtedness, (ii) limitations on liens, (iii) making distributions, dividends and other payments, (iv) the making of certain investments and loans, (v) mergers,
consolidations and acquisitions, (vi) dispositions of assets, (vii) the maintenance of a maximum total leverage ratio of not greater than 4.25 to 1.00, a maximum senior secured leverage
ratio of not greater than 2.50 to 1.00, and a minimum consolidated cash flow coverage ratio of not less than 1.20 to 1.00, (viii) transactions with affiliates, and (ix) changes to
governing documents and subordinate debt documents, in each case subject to baskets, exceptions and thresholds. The Company was in compliance with these and all other financial covenants at
December 31, 2009.

The
Secured Credit Agreement provides for customary events of default with, in some cases, corresponding grace periods, including (i) failure to pay any principal or interest when
due, (ii) failure to comply with covenants, (iii) any representation or warranty made by us proving to be incorrect in any material respect, (iv) payment defaults relating to, or
acceleration of, other material indebtedness, (v) certain bankruptcy, insolvency or receivership events affecting us, (vi) a change in our control, (vii) the Company or its
subsidiaries becoming subject to certain material judgments, claims or liabilities, or
(viii) a material defect in the lenders' lien against the collateral securing the obligations under the Secured Credit Agreement.

In
the event of an event of default, the Administrative Agent may, and at the request of the requisite number of lenders under the Secured Credit Agreement must, terminate the lenders'
commitments to make loans under the Secured Credit Agreement and declare all obligations under the Secured Credit Agreement immediately due and payable. For certain events of default related to
bankruptcy, insolvency and receivership, the commitments of the lenders will be automatically terminated and all outstanding obligations of the Company under the Secured Credit Agreement will become
immediately due and payable.

The
Company pays a commitment fee equal to a percentage of the actual daily-unused portion of the Secured Revolver under the Secured Credit Agreement. This percentage, currently 0.375%
per annum, is determined quarterly by reference to the senior secured leverage ratio and will range between 0.300% per annum and 0.500% per annum.

As
of December 31, 2009, there was $77,592 outstanding under the Revolver, $33,000 outstanding under the Term Loan and $1,380 in outstanding letters of credit. The available
balance under the Revolver was $51,028 at December 31, 2009. The average interest rates on the borrowings outstanding under the Secured Credit Agreement at December 31, 2008 and 2009
were 5.28% and 4.37%, respectively, including the applicable spread paid to the banks.

On
April 1, 2008, the Company issued a $10,000 unsecured note to the seller in the Automatic Laundry Company, Ltd., ("ALC"), acquisition. This note bore interest at 9% and
was to mature on April 1, 2010 with interest payments due quarterly on the first day of July, October, January and April each year until maturity. The Company paid this note in full on
June 16, 2009.

On
August 16, 2005, the Company issued senior unsecured notes in the amount of $150,000. These notes bear interest at 7.625% payable semi-annually each February and
August. The maturity date of the notes is August 15, 2015. The proceeds from the senior notes, less financing costs, were used to pay

F-15

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

5. Long-Term Debt (Continued)

down
senior bank debt. Since the senior notes are not widely traded, the market value of these notes approximates book value at December 31, 2009.

On
and after August 15, 2010, the Company has the option to redeem all or a portion of the senior notes at the redemption prices (expressed in percentages of principal amount on
the redemption date),
plus accrued interest to the redemption date, if redeemed, during the 12-month period commencing on August 15 of the years set forth below:

Period

Redemption
Price2010


103.813
%2011


102.542
%2012


101.271
%2013 and thereafter


100.000
%


The
terms of the senior notes include customary covenants, including, but not limited to, restrictions pertaining to: (i) incurrence of additional indebtedness and issuance of
preferred stock, (ii) payment of dividends on or making of distributions in respect of capital stock or making certain other restricted payments or investments, (iii) entering into
agreements that restrict distributions from restricted subsidiaries, (iv) sale or other disposition of assets, including capital stock of restricted subsidiaries, (v) transactions with
affiliates, (vi) incurrence of liens, (vii) sale/leaseback transactions, and (viii) merger, consolidation or sale of substantially all of our assets, in each case subject to
numerous baskets, exceptions and thresholds. The Company was in compliance with these and all other financial covenants at December 31, 2009.

The
terms of the senior notes provide for customary events of default, including, but not limited to: (i) failure to pay any principal or interest when due, (ii) failure to
comply with covenants and limitations, (iii) certain insolvency or receivership events affecting us or any of our subsidiaries and (iv) unsatisfied material judgments, claims or
liabilities against us. There were no events of default under the senior notes at December 31, 2009

Capital
lease obligations on the Company's fleet of vehicles totaled $3,352 and $3,276 at December 31, 2008 and 2009, respectively.

Required
payments under the Company's long-term debt and capital lease obligations are as follows:

Amount2010

$
5,5432011


4,9362012


4,5352013


98,8542014


Thereafter


150,000$
263,868


The
Company historically has not needed sources of financing other than its internally generated cash flow and revolving credit facilities to fund its working capital, capital
expenditures and smaller

F-16

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

5. Long-Term Debt (Continued)

acquisitions.
As a result, the Company anticipates that its cash flow from operations and revolving credit facilities will be sufficient to meet its anticipated cash requirements for at least the next
twelve months.

6. Fair Value Measurements

Effective January 1, 2008, the Company adopted new accounting guidance regarding fair value measurements, which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels. The following is a brief description of those three levels:

Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:
Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:
Unobservable inputs that reflect the reporting entity's own assumptions.

The
following table summarizes the basis used to measure certain financial assets and financial liabilities at fair value on a recurring basis in the balance sheet:

Basis of Fair Value MeasurementsBalance at
December 31,
2009

Quoted Prices
In Active
Markets for
Identical Items
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Interest rate swap derivative financial instruments (included in other liabilities)

$
5,141




$
5,141





The
Company has entered into standard International Swaps and Derivatives Association ("ISDA") interest rate swap agreements (the "Swap Agreements") to manage the interest rate risk
associated with its debt. The Swap Agreements effectively convert a portion of the Company's variable rate debt to a long-term fixed rate. Under these agreements, the Company receives a
variable rate of LIBOR plus the applicable margin charged by the banks and pays a fixed rate. The fair value of these interest rate derivatives are based on quoted prices for similar instruments from
a commercial bank and, therefore, the interest rate derivatives are considered a Level 2 item.

Certain
of the Company's Swap Agreements qualify as cash flow hedges while others do not. The change in the fair value of the Swap Agreements that do not qualify for hedge accounting
treatment is recognized in the income statement in the period in which the change occurs. The effective portion of the Swap Agreements that qualify for hedge accounting are included in Other
Comprehensive Income in the period in which the change occurs while the ineffective portion, if any, is recognized in income in the period in which the change occurs.

F-17

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

6. Fair Value Measurements (Continued)

The
table below outlines the details of each remaining Swap Agreement:

Date of Origin

Original
Notional
Amount

Fixed/
Amortizing

Notional
Amount
December 31,
2009

Expiration
Date

Fixed
RateMay 8, 2008

$
45,000

Amortizing

$
40,000


Apr 1, 2013


3.78
%May 8, 2008

$
40,000

Amortizing

$
33,000


Apr 1, 2013


3.78
%May 2, 2005

$
17,000

Fixed

$
17,000


Dec 31, 2011


4.69
%May 2, 2005

$
10,000

Fixed

$
10,000


Dec 31, 2011


4.77
%


In
accordance with the Swap Agreements and on a quarterly basis, interest expense is calculated based on the floating 90-day LIBOR and the fixed rate. If interest expense as
calculated is greater based on the 90-day LIBOR, the financial institution pays the difference to the Company. If interest expense as calculated is greater based on the fixed rate, the
Company pays the difference to the financial institution.

Depending
on fluctuations in the LIBOR, the Company's interest rate exposure and its related impact on interest expense and net cash flow may increase or decrease. The counterparty to
the Swap Agreements exposes the Company to credit loss in the event of non-performance; however, nonperformance is not anticipated.

The
Company has also adopted new accounting guidance on disclosures about derivative instruments and hedging activities. The tables below display the impact the Company's derivative
instruments had on the Consolidated Balance Sheets as of December 31, 2008 and 2009 and the Consolidated Income Statements for the years ended December 31, 2008 and 2009.

Fair Values of Derivative Instruments

Liability DerivativesDecember 31, 2008

December 31, 2009Balance Sheet
Location

Fair Value

Balance Sheet
Location

Fair ValueDerivatives designated as hedging instruments under Statement 133:Interest rate contracts

Other liabilities

$
5,078

Other liabilities

$
3,337Derivatives not designated as hedging instruments under Statement 133:Interest rate contracts

Other liabilities


2,697

Other liabilities


1,804Total derivatives



$
7,775



$
5,141


F-18

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

6. Fair Value Measurements (Continued)

The Effect of Derivative Instruments on the Consolidated Income Statements
For the years ended December 31, 2007, 2008 and 2009

Amount of Gain
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
December 31,





Amount of
(Loss) Gain
Recognized in
Income on
Derivative
December 31,Amount of Gain (Loss)
Recognized in OCI
on Derivative
(Effective Portion)
December 31,





Location of
Gain or
(Loss)
Recognized
in Income
on DerivativeDerivatives
Not
Designated as
Hedging
InstrumentsDerivatives in
Net Investment
Hedging
Relationships

Location of Gain
or (Loss)
Reclassified from
Accumulated OCI into Income (Effective Portion)2007

2008

2009

2007

2008

2009

2007

2008

2009Interest rate contracts

$
(138
)
$
(3,162
)
$
1,069

Gain (loss)
related to
derivative
instruments

$


$


$


Interest rate contracts

Gain (loss) related to derivative instruments

$
(1,737
)
$
(1,804
)
$
893


7. Prepaid Facilities Management Rent and Other Current Assets

Prepaid facilities management rent and other current assets consist of the following:

December 31,2008

2009Prepaid facilities managment rent

$
4,526

$
4,272Supplies


4,521


4,094Notes receivable


275


209Due from vendor


313


63Prepaid Marketing


158


132Income tax receivable


3,558


4,453Prepaid insurance


527


502Other


765


561$
14,643

$
14,286


8. Prepaid Facilities Management Rent and Other Assets

Prepaid facilities management rent and other assets consist of the following:

December 31,2008

2009Prepaid facilities managment rent

$
11,768

$
10,412Notes receivable


617


385Deposits


192


122Other


291


280$
12,868

$
11,199


F-19

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

9. Property, Plant and Equipment

Property, plant and equipment consist of the following:

December 31Estimated
Useful Life2008

2009Facilities management equipment

210 years

$
278,059

$
293,688Facilities management improvements

710 years


13,760


14,204Buildings and improvements

1539 years


1,684


1,377Furniture, fixtures and computer equipment

27 years


14,005


14,752Trucks and autos

35 years


9,409


9,972Land and improvements




77


316,994


333,993Less: accumulated depreciation




177,694


205,845139,300


128,148Facilities management equipment, not yet placed in service




2,351


2,393Property, plant and equipment, net



$
141,651

$
130,541


Depreciation
of property, plant and equipment totaled $27,711, $33,373, and $33,461 for the years ended December 31, 2007, 2008 and 2009, respectively.

At
December 31, 2008 and 2009, trucks and autos included $8,970 and $9,537, respectively, of equipment under capital lease with an accumulated amortization balance of $5,618 and
$6,261, respectively.

10. Goodwill and Intangible Assets

Goodwill and intangible assets consist of the following:

As of December 31, 2008Cost

Accumulated
Amortization

Net Book ValueGoodwill

$
59,478




$
59,478$
59,478




$
59,478Intangible assets:Trade Name

$
14,050

$


$
14,050Non-compete agreements


4,041


3,936


105Contract rights


238,128


36,729


201,399Distribution rights


1,623


297


1,326Deferred financing costs


6,798


1,919


4,879$
264,640

$
42,881

$
221,759


F-20

---



Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

10. Goodwill and Intangible Assets (Continued)



As of December 31, 2009Cost

Accumulated
Amortization

Net Book ValueGoodwill

$
59,043




$
59,043$
59,043




$
59,043Intangible assets:Trade Name

$
14,050

$


$
14,050Non-compete agreements


4,041


3,965


76Contract rights


238,008


48,800


189,208Distribution rights


1,623


459


1,164Deferred financing costs


6,798


2,797


4,001$
264,520

$
56,021

$
208,499


Estimated
future amortization expense of intangible assets consists of the following:

2010

$
13,1182011


12,7142012


12,4412013


12,1192014


12,015Thereafter


130,879$
193,286


Amortization
expense of intangible assets for the years ended December 31, 2007, 2008 and 2009 was $8,159, $12,213, and $13,139, respectively.

F-21

---



Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

11. Accrued Expenses

Accrued expenses consist of the following:

December 31,2008

2009Accrued interest

$
4,484

$
4,406Accrued salaries/benefits


1,334


1,245Accrued commission/bonuses


3,246


3,487Accrued stock compensation


145


416Reserve for refunds


452


517Accrued rent


526


512Current portion of deferred retirement obligation


104


104Accrued professional fees


553


433Accrued personal property taxes


1,019


1,138Accrued sales tax


1,269


1,964Accrued benefit insurance


1,456


1,208Acquisition payment





1,936Other accrued expenses


423


383$
15,011

$
17,749


12. Income Taxes

The provision for state and federal income taxes consists of the following:

Years Ended December 31,2007

2008

2009Current state

$
(199
)
$
(150
)
$
(129
)Deferred state


183


120


598Current federal


(385
)

(1,149
)

(4,135
)Deferred federal


1,108


421


4,944Total income taxes

$
707

$
(758
)
$
1,278


F-22

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

12. Income Taxes (Continued)

The
net deferred tax liability in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities at December 31:

2008

2009Current deferred tax assets (liabilities):Accounts receivable

$
138

$
154Inventory


103


89Accrued bonus and vacation


303


247Accrued rent


203


198Prepaid expenses


(203
)

(194
)Other


66


65610


559Non-current deferred tax (liabilities) assets:Depreciation


(27,647
)

(30,193
)Amortization


(12,314
)

(15,547
)Other comprehensive income


1,961


1,289Stock compensation


1,347


1,897Derivative instrument interest


1,041


697Net operating loss carryforwards


1,224


2,740Other


141


403(34,247
)

(38,714
)Valuation allowance against non-current deferred tax assets


(350
)

(445
)(34,597
)

(39,159
)Net deferred tax liabilities

$
(33,987
)
$
(38,600
)


For
the years ended December 31, 2007, 2008 and 2009, the statutory income tax rate differed from the effective rate primarily as a result of the following differences:

2007

2008

2009Taxes computed at federal statutory rate


34.0
%

34.0
%

34.0
%State income taxes, net of federal benefit


8.2


(1.3
)

11.7Change in state deferred rate


(25.3
)

10.3


(1.1
)Change in valuation allowance


11.8


(6.2
)

4.1Tax settlement adjustments


(8.6
)

10.6


Meals & entertainment


4.9


(5.0
)

3.3Non-deductible stock options


5.5


(2.4
)

2.1Other


5.7


(0.6
)

1.0Income tax provision


36.2
%

39.4
%

55.1
%


At
December 31, 2009, the Company had a federal net operating loss carryforward of $1,592, of which $520 expires in the year 2028 and $1,072 expires in the year 2029, and state
net operating loss

F-23

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

12. Income Taxes (Continued)

carryforwards
of $1,149 which expire at various times through the year 2029. The Company has evaluated the positive and negative evidence bearing upon the realization of the Net Operating Losses and
has increased the valuation allowance to $445 for the corresponding deferred tax asset, which is comprised principally of state net operating loss carryovers incurred in various jurisdictions.

The
Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes("FIN 48"), as of
January 1, 2007. FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 requires a company to evaluate whether the tax position taken by a company will more likely than not be
sustained upon examination by the appropriate taxing authority. Upon adoption, the liability for income taxes associated with uncertain tax positions was $893. As a result of the implementation of
FIN 48, the change to the Company's reserve for uncertain tax positions was accounted for as a $500 adjustment to increase the Company's beginning retained earnings. The Company had estimated
potential exposure related to all tax years open for review by the relevant taxing authorities.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

2008

2009Beginning Balance

$
333

$
21Additions based on tax positions related to the current year


11


10Reductions for tax positions of prior years


(323
)

Lapse of statute of limitations





Ending Balance

$
21

$
31


The
Company's continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the year ended December 31, 2009, the
Company recognized $2 in interest expense and no interest income. The Company had $3 accrued for the payment of interest and no accrual for penalties at the end of fiscal year December 31,
2009. Accrued interest included in the reserve at January 1, 2009 was $1.

The
Company and its subsidiaries are subject to U.S. federal income tax as well as to income tax of multiple state jurisdictions. The Company has concluded all U.S. federal income tax
matters for years through 2005. All material state and local income tax matters have been concluded for years through 2004.

13. Preferred Stock Purchase Rights

The Company has adopted a Shareholder Rights Agreement, the purpose of which is, among other things, to enhance the Board's ability to protect shareholder interests and to ensure that
shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. The Shareholder Rights Agreement could make it more difficult for a third party to
acquire, or

F-24

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

13. Preferred Stock Purchase Rights (Continued)

could
discourage a third party from acquiring, the Company or a large block of the Company's Common Stock. The following summary description of the Shareholder Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to the Company's Shareholder Rights Agreement, which has been previously filed with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A.

Pursuant
to the terms of a Shareholder Rights Agreement (the "Rights Agreement"), the Board of Directors declared a dividend distribution on June 15, 2009 of one Preferred Stock
Purchase Right (a "Right") for each outstanding share of Common Stock of the Company (the "Common Stock") to stockholders of record as of the close of business on June 15, 2009 (the "Record
Date"). In addition, one Right will automatically attach to each share of Common Stock issued between the Record Date and the Distribution Date (as hereinafter defined). Under certain circumstances,
each Right entitles the holder thereof to purchase from the Company a unit consisting of one ten thousandth of a share (a "Unit") of Series A Junior Participating Cumulative Preferred Stock,
par value $.01 per share, of the Company (the "Preferred Stock"), at a cash exercise price of $45.00 per Unit, subject to adjustment. The Rights are not exercisable and are attached to and trade with
all shares of Common Stock outstanding as of, and issued subsequent to, the Record Date until the earlier to occur of (i) the close of business on the tenth calendar day following the first
public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding shares of Common Stock, other
than as a result of repurchases of stock by the Company or certain inadvertent actions by a stockholder (the date of said announcement being referred to as the "Stock Acquisition Date") or
(ii) the close of business on the tenth business day (or such later day as the Board of Directors may determine) following the commencement of a tender offer or exchange offer that could result
upon its consummation in a person or group becoming the
beneficial owner of 15% or more of the outstanding shares of Common Stock (the earlier of such dates being herein referred to as the "Distribution Date"). The Rights will expire at the close of
business on June 15, 2019 (the "Expiration Date"), unless previously redeemed or exchanged by the Company as described below. Until a Right is exercised, the holder will have no rights as a
stockholder of the Company (beyond those as an existing stockholder), including the right to vote or to receive dividends.

In
the event that a Stock Acquisition Date occurs, each holder of a Right (other than an Acquiring Person) will be entitled to receive upon exercise, in lieu of a number of Units of
Preferred Stock, that number of shares of Common Stock having a market value of two times the exercise price of the Right. In the event that, at any time following the Stock Acquisition Date,
(i) the Company merges with and into any other person, and the Company is not the continuing or surviving corporation, (ii) any person merges with and into the Company and the Company is
the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the shares of Common Stock are changed into or exchanged for securities of any other person
or cash or any other property, or (iii) 50% or more of the Company's assets or earning power is sold, each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon
exercise, common stock of the acquiring company having a market value equal to two times the exercise price of the Right. Rights that are or were beneficially owned by an Acquiring Person may (under
certain circumstances specified in the Rights Agreement) become null and void.

F-25

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

13. Preferred Stock Purchase Rights (Continued)

The
Rights may be redeemed in whole, but not in part, at a price of $0.001 per Right by the Board of Directors only until the earlier of (i) the time at which any person becomes
an Acquiring Person or (ii) the Expiration Date.

14. Commitments and Contingencies

The Company is involved in various litigation proceedings arising in the normal course of business. In the opinion of management, the Company's ultimate liability, if any, under pending
litigation would not materially affect its financial condition, results of its operations, or its cash flow.

Leases.The Company leases certain equipment and facilities under non-cancelable operating leases. The Company also leases certain
vehicles under capital leases.

Future
minimum lease payments under non-cancelable operating and capital leases consist of the following:

Capital
Leases

Operating
LeasesYear ended December 31,2010

$
1,543

$
3,2382011


936


2,9782012


535


2,5672013


262


2,1242014





1,868Thereafter





2,0393,276

$
14,814Less: future minimum lease payments due within one year


1,543Amounts due after one year

$
1,733


Rent
expense incurred by the Company under non-cancelable operating leases totaled $3,221, $3,942, and $3,966 for the years ended December 31, 2007, 2008 and 2009,
respectively.

Guaranteed Facilities Management Rent Payments.The Company operates card- and coin-operated facilities management laundry
rooms under various lease agreements in which the Company is required to make minimum guaranteed rent payments to the respective lessors. The following is a schedule by

F-26

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

14. Commitments and Contingencies (Continued)

years
of future minimum guaranteed rent payments required under these lease agreements that have initial or remaining non-cancelable contract terms in excess of one year as of
December 31, 2009:

2010

$
16,9392011


12,8552012


10,7592013


8,5772014


6,850Thereafter


12,203$
68,183


15. Employee Benefit and Stock Plans

Retirement Plans.The Company maintains a qualified profit-sharing/401(k) plan (the "Plan") covering substantially all employees. The
Company's
contributions to the Plan are at the discretion of the Board of Directors. Costs under the Plan amounted to $1,098, $1,410, and $1,396 for the years ended December 31, 2007, 2008 and 2009,
respectively.

Stock Option and Incentive Plans.On April 7, 1997, the Company's stockholders approved the 1997 Stock Option and Incentive Plan
for the
Company (the "1997 Stock Plan"). On May 26, 2005, the Company's stockholders approved the 2005 Stock Option and Incentive Plan for the Company (the "2005 Stock Plan"). On May 8, 2009,
the Company's stockholders approved the 2009 Stock Option and Incentive Plan for the Company (the "2009 Stock Plan" and together with the 1997 and 2005 Stock Plans the "Stock Plans"). The Stock Plans
are designed and intended as a performance incentive for officers, employees, and independent directors to promote the financial success and progress of the Company. All officers, employees and
independent directors are eligible to participate in the Stock Plans. Awards, when made, may be in the form of stock options, restricted stock, restricted stock units, unrestricted stock options, and
dividend equivalent rights. The Stock Plans require the maximum term of options to be ten years. Costs under the Plans amounted to $1,814, $2,271 and $2,593 for the years ended December 31,
2007, 2008 and 2009, respectively. The related income tax benefit recognized was $622, $853 and $1,350 for the years ended December 31, 2007, 2008 and 2009, respectively.

Employee
options generally vest such that one-third of the options will become exercisable on each of the first through third anniversaries of the date of grant of the
options; however, the administrator of the Stock Plans may determine, at its discretion, the vesting schedule for any option award. In the event of termination of the optionee's relationship with the
Company, vested options not yet exercised terminate within 90 days. The non-qualified options granted to independent directors as part of their annual compensation are exercisable
on May 1st of the succeeding year and terminate ten years from the date of the grant. Directors have one year after leaving the board to exercise their options. The exercise prices are the fair market
value of the shares underlying the options on the respective dates of the grants. The Company issues shares upon exercise of options from its treasury shares, if available. The grant-date
fair value of employee share options and similar instruments is estimated using the Black-Scholes option-pricing model.

F-27

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

15. Employee Benefit and Stock Plans (Continued)

The
fair values of the stock options granted in 2007, 2008 and 2009 were estimated using the following components:

2007

2008

2009Weighted average fair value of options at grant date

$4.37

$3.74

$3.06Risk free interest rate

4.25%  4.98%

2.68%  4.11%

1.695%  2.35%Estimated forfeiture rate

0.00%  4.00%

0.00%  15.00%

0.00%  11.00%Estimated option term

1.0  8.0 years

5.0  9.0 years

6.0  8.5 yearsExpected volatility

23.82%  26.36%

29.22%  36.17%

35.53%  43.40%


The
expected volatility of the Company's stock price was based on the weighted average of the historical performance over the prior number of years equal to the expected term and the two
most recent years.

The
following is a summary of stock option plan activity under the Plans as of December 31, 2009, and changes during the year then ended:

Options

Weighted
Average
Exercise
Price

Weighted
Average
Grant Date
Fair ValueOutstanding at January 1, 2009


1,695,283

$
8.99

$
3.41Granted


639,955


7.60


3.06Exercised


(112,343
)

6.97


2.84Forfeited


(63,876
)

11.30


3.97Expired


(50,000
)

8.50


3.38Outstanding at December 31, 2009


2,109,019

$
8.62

$
3.32Exercisable at December 31, 2009


1,202,109

$
8.39

$
3.35Options vested during the year


237,711Weighted average remaining life of the outstanding options


6.58Weighted average remaining life of the exercisable options


4.97Total intrinsic value of the outstanding options

$
5,053,674Total intrinsic value of the exercisable options

$
3,368,710




Year Ended December 31,2007

2008

2009Weighted average fair value of options granted

$
4.36

$
3.74

$
3.06Intrinsic value of options exercised


1,018,046


74,353


468,044Fair value of shares vested


2,600,554


3,661,665


4,027,065


F-28

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

15. Employee Benefit and Stock Plans (Continued)

A
summary of the status of the Company's nonvested shares as of December 31, 2009 and changes during the year then ended is presented below:

Options

Grant Date
Fair ValueNonvested at January 1, 2009


543,816

$
3.89Granted


639,955


3.06Vested


(237,711
)

4.08Forfeited


(39,150
)

3.65Nonvested at December 31, 2009


906,910

$
3.27


In
the year ended December 31, 2009, the Company granted restricted stock units covering 80,270 shares of stock with an average fair market value on date of grant of $6.70 per
share. The stock vests in one year upon the achievement of certain performance objectives as determined by the Board of Directors at the beginning of the fiscal year. In addition, the Company granted
a cash award equivalent to 33,872 restricted stock units and subject to the same performance criteria. The award had a fair market value of $10.30 per share at December 31, 2009. The Company
also granted restricted stock units covering 19,740 shares of stock with a fair market value of $5.80 per share that vest over three years which do not have a performance requirement. Restricted stock
activity for fiscal 2009 is presented below:

Restricted
Stock

Weighted
Average
Grant Date
Fair ValueOutstanding at January 1, 2009


63,191

$
11.53Restricted Stock Granted


100,010


6.52Restricted Stock Issued


(56,601
)

11.63Restricted Stock Forfeited


(2,198
)

7.97Outstanding at December 31, 2009


104,402

$
6.91Cash settlement equivalent of restricted stock units paid during the year

$
109,320Restricted stock earned during the year


88,837

$
7.61Cash award equivalent of restricted stock units earned during the year

$
349,559Weighted average remaining life of the outstanding restricted stock


1.17Total intrinsic value of the outstanding restricted stock

$
72


F-29

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

15. Employee Benefit and Stock Plans (Continued)

Compensation
expense related to nonvested options and restricted shares will be recognized in the following years:

2010

$
1,1562011


5792012


27$
1,762


At
December 31, 2009, the stock plans provide for the issuance of up to 3,719,639 shares of Common Stock of which 806,933 shares have been issued pursuant to the exercise of
option agreements or restricted stock awards. At December 31, 2009 2,109,019 shares are subject to outstanding options, 104,402 shares have been granted, of which 78,047 are subject to certain
performance criteria and 699,285 shares remain available for issuance. Of the 699,285 shares, 104,908 shares have been committed to future restricted stock awards for which performance criteria have
not yet been established. Upon the adoption of the 2009 plan, no additional options can be issued from the 1997 and 2005 plans.

Mac-Gray Corporation 2001 Employee Stock Purchase Plan.The Company established the Mac-Gray Corporation 2001 Employee Stock
Purchase Plan (the "ESPP") in May 2001. Under the terms of the ESPP, eligible employees may have between 1% and 15% of eligible compensation deducted from their pay to purchase Company Common Stock.
The per share purchase price is 85% of the fair market value of the stock on, the lower of, the first day or the last day of each six month interval. Up to 500,000 shares may be offered pursuant to
the ESPP. The plan includes certain restrictions, such as the holding period of the stock by employees. At December 31, 2009 there were 100 participants in the ESPP. The number of shares of
Common Stock purchased through the ESPP was 36,545 and 67,372 for the years ended December 31, 2008 and 2009, respectively. There have been 277,792 shares purchased since the inception of the
ESPP. At December 31, 2008 and 2009, the Company had accumulated employee withholdings associated with this plan of $161 and $120 for acquisition of stock in 2009 and 2010, respectively.

F-30

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

16. Earnings Per Share

Year Ended December 31,2007

2008

2009Income (loss) from continuing operations, net

$
1,247

$
(1,166
)
$
1,041Income from discontinued operations, net


1,272


1,707


1,074Net income

$
2,519

$
541

$
2,115Weighted average number of common shares outstandingbasic


13,209


13,346


13,529Effect of dilutive securities:Stock options


471





411Weighted average number of common shares outstandingdiluted


13,680


13,346


13,940Earnings(loss) per sharebasiccontinuing operations

$
0.09

$
(0.09
)
$
0.08Earnings(loss) per sharedilutedcontinuing operations

$
0.09

$
(0.09
)
$
0.07Earnings per sharebasicdiscontinued operations

$
0.10

$
0.13

$
0.08Earnings per sharediluteddiscontinued operations

$
0.09

$
0.13

$
0.08Earnings per sharebasic

$
0.19

$
0.04

$
0.16Earnings per sharediluted

$
0.18

$
0.04

$
0.15


There
were 552, 1,189 and 850 shares under option plans that were excluded from the computation of diluted earnings per share at December 31, 2007, 2008 and 2009, respectively,
due to their anti-dilutive effects.

F-31

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

17. Summary of Quarterly Financial Information (unaudited)

Year Ended December 31, 20081st Qtr

2nd Qtr

3rd Qtr

4th Qtr

TotalRevenue

$
70,894

$
83,969

$
85,402

$
86,964

$
327,229Cost of revenue


56,989


70,650


71,563


72,479


271,681Gross margin


13,905


13,319


13,839


14,485


55,548Operating expenses


8,248


9,220


8,431


9,164


35,063Income from operations


5,657


4,099


5,408


5,321


20,485Interest and other expense, net


(3,726
)

(5,527
)

(5,592
)

(5,760
)

(20,605
)Gain (loss) related to derivative instruments


(1,202
)

1,165


(122
)

(1,645
)

(1,804
)Income (loss) from continuing operations before provision for income taxes


729


(263
)

(306
)

(2,084
)

(1,924
)Provision for income taxes


92


(25
)

(231
)

(594
)

(758
)Income (loss) from continuing operations


637


(238
)

(75
)

(1,490
)

(1,166
)Income from discontinued operations, net


125


448


728


406


1,707Net income (loss)

$
762

$
210

$
653

$
(1,084
)
$
541Earnings (loss) per sharebasicfrom continuing operations

$
0.05

$
(0.02
)
$
(0.01
)
$
(0.11
)
$
(0.09
)(a)Earnings (loss) per sharedilutedfrom continuing operations

$
0.05

$
(0.02
)
$
(0.01
)
$
(0.11
)
$
(0.09
)(a)Earnings per sharebasicfrom discontinued operations

$
0.01

$
0.03

$
0.05

$
0.03

$
0.13
(a)Earnings per sharedilutedfrom discontinued operations

$
0.01

$
0.03

$
0.05

$
0.03

$
0.13
(a)Earnings (loss) per sharebasic

$
0.06

$
0.02

$
0.05

$
(0.08
)
$
0.04
(a)Earnings (loss) per sharediluted

$
0.06

$
0.02

$
0.05

$
(0.08
)
$
0.04
(a)Weighted average common shares outstandingbasic


13,300


13,338


13,366


13,381


13,346Weighted average common shares outstandingdiluted


13,670


13,338


13,366


13,381


13,346


(a)The
sum of the quarterly earnings per share amounts may not equal the full year amount since the computations of the weighted average shares outstanding for
each quarter and the full year are computed independently of each other.


F-32

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

17. Summary of Quarterly Financial Information (unaudited) (Continued)

Year Ended December 31, 20091st Qtr

2nd Qtr

3rd Qtr

4th Qtr

TotalRevenue

$
85,284

$
80,832

$
78,364

$
81,444

$
325,924Cost of revenue


68,530


68,879


66,823


66,600


270,832Gross margin


16,754


11,953


11,541


14,844


55,092Operating expenses


8,420


9,138


8,334


8,099


33,991Income from operations


8,334


2,815


3,207


6,745


21,101Interest and other expense, net


(5,004
)

(4,962
)

(4,811
)

(4,898
)

(19,675
)Gain (loss) related to derivative instruments


62


439


57


335


893Income (loss) from continuing operations before provision for income taxes


3,392


(1,708
)

(1,547
)

2,182


2,319Provision for income taxes


1,508


(704
)

(813
)

1,287


1,278Income (loss) from continuing operations


1,884


(1,004
)

(734
)

895


1,041Income from discontinued operations, net


357


136


348


233


1,074Net income (loss)

$
2,241

$
(868
)
$
(386
)
$
1,128

$
2,115Earnings (loss) per sharebasicfrom continuing operations

$
0.14

$
(0.07
)
$
(0.05
)
$
0.07

$
0.08
(a)Earnings (loss) per sharedilutedfrom continuing operations

$
0.14

$
(0.07
)
$
(0.05
)
$
0.06

$
0.07
(a)Earnings per sharebasicfrom discontinued operations

$
0.03

$
0.01

$
0.03

$
0.02

$
0.08
(a)Earnings per sharedilutedfrom discontinued operations

$
0.03

$
0.01

$
0.03

$
0.02

$
0.08
(a)Earnings (loss) per sharebasic

$
0.17

$
(0.06
)
$
(0.03
)
$
0.08

$
0.16
(a)Earnings (loss) per sharediluted

$
0.16

$
(0.06
)
$
(0.03
)
$
0.08

$
0.15
(a)Weighted average common shares outstandingbasic


13,406


13,498


13,587


13,622


13,529Weighted average common shares outstandingdiluted


13,612


13,498


13,587


14,018


13,940


(a)The
sum of the quarterly earnings per share amounts may not equal the full year amount since the computations of the weighted average shares outstanding for
each quarter and the full year are computed independently of each other.


F-33

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Table of Contents

MAC-GRAY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except per share data)

18. Subsequent Events

On January 4, 2010, the Company entered into an interest rate swap agreement to manage the interest rate risk associated with its debt. The swap agreement effectively converts a
portion of our fixed rate senior notes to a variable rate. Under this agreement, we receive the fixed rate on our senior notes (7.625%) and pay a variable rate of LIBOR plus the applicable margin
charged by the banks.

On
February 5, 2010, the Company sold its MicroFridge® (Intirion Corporation) business to Danby Products. The transaction is valued at approximately $11,500. Danby
Products paid Mac-Gray $8,500 in cash, and assumed existing liabilities and financial obligations for MicroFridge totaling approximately $3,000. Concurrent with this transaction, the
Company paid $8,000 on its Secured Term Loan.

On
February 5, 2010, the Company's Board of Directors approved the initiation of a quarterly dividend policy for its common stock. The Company declared a dividend of $0.05 per
share payable on April 1, 2010 to shareholders of record of the Company's common stock as of the close of business on March 1, 2010.

F-34

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Table of Contents

MAC-GRAY CORPORATION        SCHEDULE II        VALUATION AND QUALIFYING ACCOUNTS        YEARS ENDED DECEMBER 31, 2007, 2008, AND 2009

Balance
Beginning
of Year

Charged to
Cost and
Expenses

Deductions

Balance
at End
of YearYear Ended December 31, 2007:Accounts recevable reserves

$
301

$
75

$
80

$
296Inventory reserves

$
313

$
191

$


$
504Income tax valuation allowance

$


$
231

$


$
231Year Ended December 31, 2008:Allowance for doubtful accounts

$
296

$
79

$
18

$
357Inventory reserves

$
504

$
60

$
299

$
265Income tax valuation allowance

$
231

$
119

$


$
350Year Ended December 31, 2009:Allowance for doubtful accounts

$
357

$
90

$
249

$
198Inventory reserves

$
265

$
69

$
104

$
230Income tax valuation allowance

$
350

$
95

$


$
445


F-35

---