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

FORM 10-K

|(Mark One)                                        |                                                                                         
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                 | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2004      
|OR                                               
|o                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from _______ to _______

COMMISSION FILE NUMBER 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.)22 WATER STREET,
CAMBRIDGE, MASSACHUSETTS(Address of principal executive offices)

02141(Zip Code)


Registrant's telephone number, including area code: (617) 492-4040

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 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 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. [    ]

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act) Yes o No ý

The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant as of June 30, 2004 was $44,160,068.

As
of March 26, 2005, 12,816,254 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, 2005 are incorporated by reference into
Part III of this report.



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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 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Investors should
carefully review all of the factors described herein, which may not be an exhaustive list of the factors that could cause these differences.

Item 1. Business



Mac-Gray was founded in 1927. 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 incorporated in Delaware in 1997.

For
the year ended December 31, 2004 we operated three business units, based on different product and service categories: laundry (consisting of our laundry facilities management
and laundry equipment sales and services businesses); MicroFridge®; and reprographics facilities management, or Copico. The laundry business unit and Copico have been aggregated into one
reportable business segment, Laundry and Reprographics, as many operating functions of the laundry facilities management and Copico operations are commingled. The MicroFridge® business
unit is a separate reportable business segment. Financial information with regard to reportable business segments is reported under Note 14 to the consolidated financial statements included in
this report and is incorporated into this Item 1 by reference.

In
January 2005, the Company restructured portions of its sales organization and the corresponding internal financial reporting of its business segments to improve the sales and
marketing efforts associated with the sales of equipment and appliances. Whereas in 2004 and prior years, the revenue, costs, and expenses related to the laundry equipment sales and services business
were reported in the Company's Laundry and Reprographics business segment, beginning on January 1, 2005 laundry equipment sales and services are included in a new business segment entitled
"Product Sales." Also included in this segment is all of the revenue that was previously included in the MicroFridge® reporting business segment. This reporting change results in the
Company having two different reporting business segments: "Laundry Facilities Management," which includes the core business of operating laundry rooms in the multi-unit housing industry,
and "Product Sales," which includes the sales of laundry equipment, MicroFridge® products, and other appliances, equipment and related service businesses operated by the Company. Also
included in the "Laundry Facilities Management" segment is the Copico revenue and related direct expenses, which are immaterial for business segment reporting purposes. These changes in the Company's
reportable business segments will be reflected in the financial statements and analysis in the Company's future reports. Unless otherwise indicated, in this Form 10-K report,
references to our business units and reportable segments are references to our business units and reportable segments in place as of December 31, 2004.

We
derive our revenue principally as a laundry facilities management contractor for the multi-unit housing industry. In 2004, 75% of our consolidated revenue was derived from
laundry facilities management contracts. We operate laundry rooms, under long-term leases with property owners,

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colleges
and universities and governmental agencies. We refer to these leases as "laundry leases" and this business as "laundry facilities management." Our laundry facilities management business is
comprised of revenue-generating laundry equipment. As of December 31, 2004, this equipment was operated in approximately 34,000 multi-unit housing laundry rooms located in 27 states
and the District of Columbia.

As
described in the Recent Development section below, on January 10, 2005, the Company significantly increased the size of its laundry facilities management business through an
acquisition. After the acquisition, the number of laundry rooms in which the Company operates increased to approximately 45,000 and the number of states the Company conducts business in increased to
40.

Our
laundry business unit sells and services commercial laundry equipment manufactured by The Maytag Corporation, or "Maytag", and also sells laundry equipment manufactured by The Dexter
Company, Whirlpool Corporation, and American Dryer Corp. This business unit sells and rents laundry equipment to laundromats, restaurants, hotels, health clubs and similar institutional users that
operate their own on-premise laundry facilities. We refer to this business as our "equipment sales business."

Copico
derives its revenue principally through managing college and municipal libraries' vended (card or coin-operated) reprographic equipment, with operations concentrated
in the Northeast.

The
MicroFridge® segment derives revenue through the sale and rental of a family of patented combination refrigerator/freezer/microwave ovens, or "Units", and other household
appliances, to colleges and universities, military bases, the hotel and motel market, and assisted living facilities. The MicroFridge® segment also derives revenue through the sales of
laundry equipment to the United States military. In 2003 our MicroFridge® segment entered into an agreement with Maytag to become a national distributor of Maytag's Amana®,
Magic Chef® and Maytag brands of kitchen appliances using the brand name "Maytag Direct"®.

Recent Developments

On January 10, 2005, we acquired the laundry facilities management assets of Web Service Company, Inc., or "Web", in 13 western and southern states
for approximately $112 million. We believe this acquisition will add approximately $69 million of revenue in 2005, which would represent approximately 50% of our 2004 revenue derived
from laundry facilities management operations. As a result of this Web acquisition, we expect our consolidated revenue derived from laundry facilities management operations to be approximately 80% of
consolidated revenue in 2005. Concurrent with the Web acquisition, we and a group of lenders entered into a new Senior Secured Credit Facility consisting of a $120 million five-year
revolving credit line and an $80 million five-year term loan. Both the term and the revolving portions of this credit facility mature on January 10, 2010. The 2005 Senior
Secured Credit Facility is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries, as well as a pledge by the Company of all the capital stock of its subsidiaries.
The term loan amortization schedule is as follows:

Year

Amount(In thousands)2005

$
8,0002006


12,0002007


16,0002008


20,0002009


18,0002010


6,000Total

$
80,000


2

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On
January 16, 2004, we acquired Web's laundry facilities management assets in 13 eastern and southeastern states and the District of Columbia. The purchase price consisted of
approximately $39 million in cash and the sale to Web of certain of our laundry facility management assets and related contracts in several western states valued at approximately
$2 million. This acquisition added approximately $27 million of revenue in 2004, representing approximately 20% of our 2004 laundry facilities management revenue.

Industry Overview



Through our laundry facilities management business, we operate in the outsourced laundry facilities management industry throughout the United States. This
industry is characterized by stable operating cash flows generated by long-term leases with multi-unit housing property owners, colleges and universities and governmental
agencies. The Company knows of no reliable independent estimates of the industry size. Based upon our estimates of the industry size, we believe there are three to four million installed machines in
multi-unit housing properties throughout the United States, the majority of which we believe have been outsourced to independent operators such as us and the remainder of which continue to
be operated by the property owners or managers of such locations. The outsourced laundry equipment services industry remains highly fragmented, with many small, private facilities management
businesses operating throughout all major metropolitan areas in the United States.

Industry
participants incur significant capital costs upon the procurement of new leases and the renewal of existing leases. These costs may include replacing existing washers and
dryers, refurbishing laundry rooms and making advance location payments to secure long-term leases. After the initial expenditures, ongoing working capital requirements are typically
minimal. In addition, the useful life of the equipment typically extends beyond the term of the contract under which they are installed. Furthermore, maintenance of the facilities and payment of the
related utilities where the laundry equipment is located are typically the responsibility of the property owner or manager.

Historically,
the industry has been characterized by stable demand and has been resistant to changing market conditions and general economic cycles. We believe that the industry's
consistent and predictable revenue and operating cash flows are primarily due to: (i) the stable demand for laundry services, (ii) the long-term nature of laundry leases, and
(iii) minimal ongoing working capital requirements.



Through our equipment sales business, our laundry business unit participates in the laundry equipment sales industry as a distributor and lessor of commercial
laundry equipment to public laundromats, as well as to the multi-unit housing industry.



Through our MicroFridge® segment, we participate in the combination refrigerator/freezer/microwave ovens industry as a distributor and lessor of these
combination units to multi-unit housing facilities such as hotels, motels, colleges and universities, and assisted living facilities. The Company also distributes its products to military
bases throughout the United States and several foreign countries and through a limited number of retail channels.

In
2003 our MicroFridge® segment entered into an agreement with Maytag to become a national distributor of Maytag's Amana®, Magic Chef® and Maytag
brands of kitchen appliances using the brand name "Maytag Direct"®.

3

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The following is a discussion of each of the Company's reportable business segments: (i) Laundry and Reprographics and
(ii) MicroFridge®. Financial information with regard to the business segments is reported under Note 14 to the Company's consolidated financial statements included in this
report.

Laundry and Reprographics Segment

Mac-Gray believes that it is the United States' second largest supplier of vended (card or coin-operated) laundry facilities management
services in multi-unit housing facilities such as apartment buildings, colleges and universities and public housing complexes. Based upon Mac-Gray's ongoing survey of colleges
and universities, the Company believes it is the United States' largest supplier of such services to the college and university market. As of March 15, 2005, Mac-Gray owned card or
coin-operated washers and dryers in approximately 45,000 multi-unit housing laundry rooms located in 40 states and the District of Columbia. Mac-Gray also believes
that it is the largest user and purchaser of commercial laundry products manufactured by Maytag for both its own use and for resale.



A substantial portion of Mac-Gray's Laundry and Reprographics segment's and Mac-Gray's total revenue is derived through
Mac-Gray's laundry facilities management business, pursuant to which it acts as a laundry facilities management contractor under long-term leases with property owners or
managers. For the year ended December 31, 2004 the laundry facilities management business accounted for approximately 75% of the Company's consolidated revenue. Under Mac-Gray's
long-term leases, the Company typically receives the exclusive right to service laundry rooms within a multi-unit housing property in exchange for a negotiated percentage of
the revenue collected (this percentage is referred to herein as "facilities management rent"). During the past five fiscal years, Mac-Gray has been able to retain approximately 97% of its
equipment base per year. Excluding the January 2004 acquisition, Mac-Gray has been able to add an average of 4% per year to its equipment base through internally generated growth.
Mac-Gray believes that its ability to retain its existing equipment base, while growing that base through internally generated growth in equipment installations, is indicative of its
service of, and attention to, property owners and managers. The Company has also been able to provide its customers with vending card and other proprietary technologies, and continues to invest in
research and development of such technologies. The property owner or manager is usually responsible for maintaining and cleaning, as well as the security of the premises and payment of the utilities.
Mac-Gray leases space within a property, in some instances improves the leased space with flooring, ceilings and other improvements ("betterments"), and then installs and services the
laundry equipment and collects the payments. Mac-Gray generally has the ability to set and adjust the vending pricing for its equipment based upon local market conditions.

Mac-Gray
has centralized its administrative, billing, marketing, purchasing and equipment refurbishing operations at its corporate headquarters in Cambridge, Massachusetts.
Mac-Gray also operates sales and/or service centers in Connecticut, Florida (three locations), Georgia, Illinois, Maine, Maryland, New York (two locations), North Carolina, Tennessee, and
New Jersey. In connection with the January 10, 2005 acquisition of laundry facilities management assets, the Company added sales and/or service centers in Arizona (two locations), Colorado,
Louisiana, New Mexico, Oregon, Texas (three locations), Utah, and Washington.

Mac-Gray's
laundry facilities management business has certain intrinsic characteristics in both its industry and its customer base, including the following:

Recurring Revenue.Mac-Gray operates as a laundry facilities management contractor under long-term
leases with property owners or managers. Mac-Gray's efforts are designed to maintain these customer relationships over the long-term. Our typical lease has an original average
term of

4

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approximately
seven years, with an option to renew if mutually agreed. In each of the past five years, Mac-Gray has been able to retain approximately 97% of its equipment base per year,
largely because of the good relationships we have with our customers.

Diversified and Stable Customer Base.As of March 15, 2005, Mac-Gray provided laundry services to
approximately 45,000 laundry rooms located in 40 states in the Northeast, Southern, Midwest, and Northwest United States, as well as the District of Columbia. As of March 15, 2005, no customer
represented more than 1% of Mac-Gray's equipment base. Mac-Gray serves customers in multi-unit housing facilities, including apartment buildings, colleges and
universities, condominiums and public housing complexes.

Seasonality.The Company experiences moderate seasonality as a result of its operations in the college and university market.
Revenues derived from the college and university market represented approximately 20% of the Company's total revenue for 2004. Academic facilities management revenues are derived substantially during
the school year in the first, second and fourth calendar quarters. Conversely, the Company increases its operating and capital expenditures during a significant portion of the third calendar quarter,
when it has its greatest product installation activities, which is when most colleges and universities are not in session. Product sales, principally of MicroFridge® products, to this
market are typically higher during the third calendar quarter as compared to the rest of the calendar year, somewhat offsetting the seasonality effect of the laundry facilities management business
unit. The Web laundry facilities management assets acquired in January 2005 are not expected to significantly affect the degree of seasonality experienced by the Company.

Competition.The laundry facilities management industry is highly competitive, capital intensive and requires the delivery of
reliable and prompt service to customers. Mac-Gray believes that customers consider different factors in selecting a laundry facilities management contractor, including customer service,
reputation, facilities management rent rates, including advance rents, and a range of products and services. Mac-Gray believes that different types of customers assign varied weight to
each of these factors and that no one factor materially influences a customer's selection of a laundry facilities management contractor. Within any given geographic area, Mac-Gray may
compete with local independent operators, regional operators, multi-region, and national operators. The industry is highly fragmented; consequently, Mac-Gray has grown by acquisitions, as
well as through new equipment placement. As of March 15, 2005, Mac-Gray believes that it is the second largest card or coin-operated laundry facilities management
contractor in the United States.

Impact of Economic Downturns.The Company's laundry facilities management revenue is affected by the changes in the
multi-unit housing vacancy rates. As the United States economy began to slow down in 2002, the Company felt the effects of an increase in multi-unit housing vacancy rates. As
these vacancy rates continued to increase throughout 2002 and 2003 the Company believes laundry facilities management revenue was negatively affected by approximately 2%. In 2004 the Company believes
it experienced increases in revenue in several of its key markets due, in part, to corresponding decreases in vacancy rates. Independent data show the vacancy rate in many markets the Company conducts
business in declined in 2004 as compared to 2003, but remains higher than in 2001. The Company's markets that have been most effected since 2002 have been in the southern states, particularly Florida,
Georgia and North Carolina. Vacancy rates have not increased to the same extent in the Company's northern markets.

Dependence On a Key Supplier.The Company currently purchases a large portion of the equipment that it uses in its laundry
facilities management business from Maytag. In addition, the Company derives a portion of its revenue, as well as certain competitive advantages, from its position as a distributor of Maytag
commercial laundry products. The Company's relationship with Maytag began in 1927. Although the purchase and distribution agreements between the Company and Maytag may be terminated by either party
upon written notice, the Company has never had such an agreement

5

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terminated
by Maytag. A termination of, or substantial revision of the terms of, the contractual arrangements or business relationships with Maytag could have a material adverse effect on the
Company's business, results of operations, financial condition and prospects. The January 10, 2005 acquisition of laundry facilities management assets is expected to increase the Company's
equipment purchases from Maytag. The acquisition will have no effect on the Company's distribution business.



Through its equipment sales and services business, Mac-Gray is a significant distributor for several major laundry equipment manufacturers, primarily
Maytag. Mac-Gray does not manufacture any of the commercial laundry equipment that it sells. As an equipment distributor, Mac-Gray sells commercial laundry equipment to public
laundromats, as well as to the multi-unit housing industry. In addition, Mac-Gray sells commercial laundry equipment directly to institutional purchasers, including hospitals,
restaurants, and hotels, for use in their own on-premises laundry facilities. Mac-Gray also has established a leasing program for commercial laundry customers who choose
neither to purchase equipment nor to become a laundry facilities management customer. This leasing program involves the leasing of commercial laundry equipment to customers who maintain their own
laundry rooms and generated revenues of $2,623,000 and $2,346,000 for the years ended December 31, 2004 and 2003, respectively. This revenue is included in Laundry and Reprographics revenue.
Mac-Gray is certified by the manufacturers to service the commercial laundry equipment that it sells and leases. All 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.



Our reprographics facilities management business unit, which we refer to as Copico, is a provider of card and coin-operated reprographics equipment
and services to the academic and public library markets in the Northeast, and to a lesser extent in the Mid-Atlantic and the Midwest. Copico provides and services copiers and laser
printers for the libraries of colleges, universities, graduate schools and public libraries. Copico represented approximately 2% of the Company's consolidated revenue in 2004.

Copico's
revenue and corresponding operating income have been declining since 1999 when college libraries, followed by public libraries, began to make reference material available
electronically to patrons. Revenue in this segment has decreased since 1999 by approximately 46%. Electronic availability, widespread conversion to laser printers (free of charge in many school
libraries) and other technical advancements have lead to reduced revenue at several accounts. As a result, since 2002, the Company elected either not to renew, or to terminate contracts with several
customers, which were either not sufficiently profitable or forecasted to be unprofitable. The Company expects this trend to continue.

MicroFridge® Segment

Our MicroFridge® segment consists of supplying combination refrigerator/freezer/microwave ovens, or Units, under the brand name
MicroFridge® to multi-unit housing facilities such as military bases, hotels, motels, colleges and universities and assisted living facilities.

The
MicroFridge® product line with Safe Plug is a family of patented combination refrigerator/freezer/ microwave ovens. The Units' patented circuitry has proven
to be an important feature for those customers who have concerns about electrical capacity and seek a safer alternative to hot plates and other cooking or heating appliances. MicroFridge®
sales efforts have been focused on such "home-away-from-home" marketplaces as military bases, hotels, motels, colleges and universities and assisted living
facilities.

6

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Mac-Gray
believes that the MicroFridge® Units product line enhances the Company's ability to provide multiple amenities to both its current customer base as well
as future customers seeking one source to fill multiple needs.

The
MicroFridge® segment revenues are derived from both the sale and rental of MicroFridge® Units and related products. In 2004, the largest market was the
hospitality lodging industry and assisted living market throughout the United States, directly and through an independent dealer network. The second largest market was government living, consisting
principally of military bases. In this market, the MicroFridge® Unit product line is available through government contracts with the General Services Administration and the U.S. Air Force.
MicroFridge® Units have been installed at selected United States government facilities throughout the world. MicroFridge® Units are also sold and leased to colleges and
universities across the United States. The academic living market is composed of more than 1,800 colleges and universities that have on-campus residence halls.

The
MicroFridge® segment maintains original equipment manufacturer, or "OEM" arrangements with two primary manufacturers: Sanyo E&E Corporation, and Nisshin Industry
Co. Ltd. The principal patent underlying the MicroFridge® product is held jointly by us and Sanyo. The patented circuitry of the MicroFridge® Units is marketed under the
trade name Safe Plug. In 1997 Sanyo signed a non-competition agreement with us whereby Sanyo is precluded from entering the MicroFridge® market, provided that
certain minimum annual quantities of products are purchased from Sanyo. These quantity requirements were met in 2004. The OEM agreement with Nisshin Industry Co. Ltd. is renewable year to year
unless terminated with proper notice.

The
combination refrigerator/freezer/microwave oven industry is highly competitive. In addition to large direct sellers, the MicroFridge® segment also competes with the major
retail stores and local and regional distributors who sell various brand-name compact refrigerators as well as microwave ovens in the markets served by MicroFridge®. Although
we hold a patent on combination units utilizing internal circuitry, there has been increased competition from "similar look" products utilizing an external circuitry control mechanism. There also
exists local and regional competition in the MicroFridge® rental business. Management believes that its expertise gained from being the first entrant in the market enables it to compete
effectively against new entrants
in the combination appliance business. MicroFridge®'s principal competitors include Absocold, Avanti, General Electric, Sanyo Fisher Sales, Sears, Tatung, Home Depot, Lowe's,
Wal-Mart, and several companies focused on the college rental marketplace.

In
2003 our MicroFridge® segment entered into an agreement with Maytag to become a national distributor of Maytag's Amana®, Magic Chef® and Maytag
brands of kitchen appliances using the brand name "Maytag Direct"®. Excluding Maytag laundry equipment sales, which were included with equipment sales and services, for the year ended
December 31, 2004, total sales of these appliances were insignificant.

Employee Base

As of March 15, 2005, the Company employed 720 full-time employees. No employee is covered by a collective bargaining agreement and the Company
believes that its relationship with its employees is good. The January 10, 2005 acquisition of laundry facilities management assets added approximately 180 full time employees.

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Operating Characteristics

The Company maintains a corporate staff as well as centralized finance, human resources, legal services, information technology and marketing departments.
Regionally, the Company maintains service centers and warehouses staffed by service technicians, collectors, customer service representatives and inventory handlers. These facilities service the
Laundry and Reprographics segment.

The
Laundry and Reprographics segment's sales and marketing efforts are conducted primarily by employees of the Company. Outside service providers are used periodically for various
matters, including advertising, research, and equipment installation. The MicroFridge® business segment uses an internal sales force and independent distributors in parts of the United
States where business opportunities do not warrant a direct sales force.

Backlog

Due to the nature of the Company's laundry facilities management business, backlogs do not exist in that business. There is no significant backlog of orders in
the Company's two sales businesses.

Contact Information

The Company files its 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". Company 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.

The
Company's corporate offices are located at 22 Water Street, Cambridge, Massachusetts, 02141. The Company's telephone number is (617) 492-4040; its fax number is
(617) 492-5386, and its email address for investor relations is ir@macgray.com.

Item 2. Properties

Mac-Gray owns its 40,000 square foot corporate headquarters in Cambridge, Massachusetts which houses the Company's administrative and central
services, including an approximately 20,000 square foot warehouse for equipment, parts, and equipment refurbishment. Mac-Gray also owns sales and service facilities in Tampa, Florida and
Austell, Georgia, each consisting of approximately 12,000 square feet. Mac-Gray leases the following regional facilities, which are largely operated as sales and service facilities,
although limited administrative functions are also performed at many of them:

Location

Approximate
Square Footage

Annual
Rental Rate

Expiration
DateBuffalo, New York

9,500

$
48,000

9/2005Charlotte, North Carolina

9,900


57,000

2/2005Deerfield Beach, Florida

8,300


68,475

5/2007East Brunswick, New Jersey

9,600


53,000

5/2005East Hartford, Connecticut

14,900


63,000

5/2006Gurnee, Illinois

12,000


114,000

6/2006Hendersonville, Tennessee

11,000


31,000

3/2007Jessup, Maryland

10,300


61,816

3/2007Lake City, Florida

1,125


7,200

4/2007Orlando, Florida

2,100


19,000

12/2005Syracuse, New York

7,800


45,000

10/2005Westbrook, Maine

6,035


37,000

7/2006Walpole, Massachusetts

19,000


113,000

5/2006


8

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The
laundry segment is also currently renting space in 10 states and 14 separate locations from Web on a month-to-month basis, in connection with the acquisition
of Web assets on January 10, 2005. It is the Company's intention to lease these facilities, or similar facilities, on a long-term basis.

All
properties are primarily utilized for the laundry facilities management business except for the Walpole, Massachusetts facility, which is utilized by both the
MicroFridge® segment and Copico. The MicroFridge® segment also leases space at public warehouses, where rent is based on handling and the number of Units stored.

Mac-Gray
believes that its properties are generally well maintained and in good condition. Mac-Gray believes that its 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 Mac-Gray is a party to litigation arising in the ordinary course of business. There can be no assurance that Mac-Gray's
insurance coverage will be adequate to cover any liabilities resulting from such litigation. In the opinion of management, any liability that Mac-Gray might incur upon the resolution of
currently pending litigation will not, individually or in the aggregate, have a material adverse effect on the financial condition or results of operations of Mac-Gray.

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

No matters were submitted to vote of security holders during the fourth quarter of 2004.

9

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PART II

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

Mac-Gray 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 Mac-Gray common stock on the NYSE for the periods indicated.

Year Ended
December 31,
2003

Year Ended
December 31,
2004High

Low

High

LowFirst Quarter

$
3.38

$
3.04

$
6.62

$
5.16Second Quarter


3.97


3.05


7.05


6.14Third Quarter


4.65


3.98


7.06


6.45Fourth Quarter


5.43


4.65


8.09


7.15


As
of March 8, 2005 there were 943 shareholders of record of Mac-Gray common stock.

The
Company does not currently pay dividends to the holders of Mac-Gray common stock. The Company currently intends to retain future earnings, if any, for the development of
it's businesses and does not anticipate paying cash dividends on common stock in the foreseeable future. Future determinations by the Board of Directors to pay dividends on common stock would be based
primarily upon the financial condition, results of operations, and business requirements of the Company. Dividends, if any, would be payable at the sole discretion of the Board of Directors out of the
funds legally available therefor. In addition, the payment of dividends is restricted under the Company's Senior Secured Credit Facility.

10

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Item 6. Selected Financial Data (In Thousands, Except Per Share)

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 audited consolidated financial statements of
Mac-Gray and the notes thereto included elsewhere in this report.

Year Ended December 31,2000

2001

2002

2003

2004(1)Statement of Income Data:Revenue

$
154,268

$
152,069

$
150,368

$
149,656

$
182,694Cost of revenue:Cost of facilities management revenues


47,596


50,039


49,363


50,133


66,568Facilities management expenditures and other direct costs


24,778


24,786


24,895


23,696


28,197Depreciation and amortization


18,980


19,276


16,501


16,723


20,747Cost of equipment sales


27,766


27,026


27,197


27,797


29,568Total cost of revenue


119,120


121,127


117,956


118,349


145,080Operating expenses:General and administration


9,788


8,823


9,359


9,519


11,078Sales and marketing


10,542


10,994


11,125


11,341


13,005Depreciation


1,225


1,201


1,197


1,100


1,047Gain on sale of assets


(201
)

(52
)

(192
)

(145
)

(1,208
)Loss on early extinguishment of debt











381


183Total operating expenses


21,354


20,966


21,489


22,196


24,105Income from operations


13,794


9,976


10,923


9,111


13,509Interest expense, net


(6,770
)

(5,164
)

(4,578
)

(2,807
)

(4,312
)Gain on sale of lease receivables











836


Other expense, net


(78
)

(28
)

(4
)




Income before provision for income taxes and effect of change in accounting principle


6,946


4,784


6,341


7,140


9,197Provision for income taxes


(3,162
)

(2,299
)

(2,567
)

(3,036
)

(3,934
)Net income before effect of change in accounting principle


3,784


2,485


3,774


4,104


5,263Effect of change in accounting principle, net of tax(3)








(906
)




Net income available to common stockholders

$
3,784

$
2,485

$
2,868

$
4,104

$
5,263Net income per common share before the effect of change in accounting principlebasic

$
0.30

$
0.20

$
0.30

$
0.32

$
0.41Net income per common share before the effect of change in accounting principlediluted

$
0.30

$
0.20

$
0.30

$
0.32

$
0.40Net income per common sharebasic

$
0.30

$
0.20

$
0.23

$
0.32

$
0.41Net income per common sharediluted

$
0.30

$
0.20

$
0.23

$
0.32

$
0.40Weighted average common shares outstandingbasic


12,634


12,645


12,661


12,635


12,702Weighted average common shares outstandingdiluted


12,634


12,647


12,664


12,741


13,028


Year Ended December 31,2000

2001

2002(3)

2003(3)

2004(1)(3)Other Financial Data:EBITDA(2)

33,921

30,425

28,617

27,770

35,303Depreciation and amortization

20,205

20,477

17,698

17,823

21,794Capital expenditures(4)

13,983

12,779

13,334

15,372

17,826Cash flows provided by operating activities

23,177

18,473

26,835

24,480

37,108Cash flows used in investing activites

(11,996
)
(11,917
)
(12,436
)
(12,802
)
(57,101
)Cash flows (used in) provided by financing activites

(11,032
)
(8,046
)
(14,608
)
(11,398
)
21,188Balance Sheet Data (at end of period):Working capital

(2,364
)
195

(2,601
)
5,247

(2,737
)Long-term debt and capital lease obligations, including current portion

77,598

70,219

56,825

50,873

73,328Long-term debt and capital lease obligations, net of current portion

70,454

62,572

47,975

47,254

67,225Total assets

174,625

167,895

162,379

162,005

201,115Stockholders' equity

59,961

60,574

63,688

68,729

75,936


---

11

---



Year Ended December 31,2000

2001

2002

2003

2004(1)Income before provision for income taxes and effect of change in accounting principle

$
6,946

$
4,784

$
6,341

$
7,140

$
9,197Cost of revenue, depreciation and amortization expense


18,980


19,276


16,501


16,723


20,747Operating expenses, depreciation and amortization expense


1,225


1,201


1,197


1,100


1,047Interest expense, net


6,770


5,164


4,578


2,807


4,312EBITDA

$
33,921

$
30,425

$
28,617

$
27,770

$
35,303


Following
is the impact on earnings of implementing FAS 142 on the years ended December 31, 2004, 2003 and 2002, and what the impact on the same period in 2000 and 2001 would have been:

|                                                                           |  | For the year ended December 31, (In thousands, except per share data)
|-------------------------------------------------------------------------- |  | ---------------------------------------------------------------------
|
|Reported earnings                                                          |  | $                                                                    
|Add: Impairment charge to comply with new accounting standardnet of taxes |  |                                                                      
|                                                                           |  |                                                                      
|                                                                           |  | $                                                                    
|Add: Goodwill amortizationnet of taxes                                    |  | $                                                                    
|                                                                           |  |                                                                      
|Earnings, as adjusted                                                      |  | $                                                                    
|                                                                           |  |                                                                      

12

---



Item 7. Management's Discussion and Analysis of Financial Condition and Results of 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.

Overview

For the year to December 31, 2004, Mac-Gray operated three business units, based on different product and service categories: laundry
(consisting of our laundry facilities management and laundry equipment sales and services businesses); MicroFridge®; and reprographics facilities management, or Copico. The laundry
business unit and Copico have been aggregated into one reportable segment, Laundry and Reprographics, as many operating functions of the laundry facilities management and Copico operations are
commingled. The Copico business unit represented approximately 2% of the Company's consolidated revenue in 2004. The MicroFridge® business unit is a separate reportable business segment.

Mac-Gray
derives its revenue principally as a laundry facilities management contractor for the multi-unit housing industry. Mac-Gray also sells and
services commercial laundry equipment and MicroFridge® equipment and operates card/coin-operated reprographics equipment in academic and public libraries. Mac-Gray
operates laundry rooms under long-term leases with property owners or managers. As of December 31, 2004, Mac-Gray's laundry facilities management business is comprised
of revenue-generating laundry equipment, operating in approximately 34,000 multi-housing laundry rooms located in the northeastern, mid-Atlantic, southeastern, and midwestern United
States, and the District of Columbia. As discussed in the Recent Development section below, on January 10, 2005, the Company significantly increased the size of its laundry facilities
management business through an acquisition. This acquisition increased the number of multi-unit housing laundry rooms to approximately 45,000 and expanded its geographic coverage to
include certain Northwest, Southwest, and Rocky Mountain states.

Mac-Gray
sells and services commercial laundry equipment manufactured by Maytag and, to a lesser extent, by American Dryer Corp., The Dexter Company, and Whirlpool
Corporation. Additionally, the Company sells or rents laundry equipment to restaurants, hotels, health clubs and
similar institutional users that operate their own on-premise laundry facilities. The January 10, 2005 acquisition is not expected to significantly impact the sales of commercial
laundry equipment.

Copico
derives its revenue principally through managing college and municipal libraries' vended (card or coin-operated) reprographic equipment, with operations concentrated
in the Northeast.

The
MicroFridge® segment derives revenue through the sale and rental of its MicroFridge® appliances to the hospitality industry, military bases, colleges and
universities and assisted living facilities. The MicroFridge® segment also derives revenue through the sales of laundry equipment to the United States government. Beginning in 2004, the
Company has reported the sales of laundry equipment to the United States government as revenue of the MicroFridge® segment. The comparable periods ended in 2003 and 2002 have been restated
in the segment-reporting table of Note 14 of the consolidated financial statements included in this report.

As
noted in the Overview section of this report, the Company will revise its business segment reporting prospectively in 2005 to align its public reporting with the restructuring of the
internal organization and accountability performed by the Company in January 2005.



On January 10, 2005, we acquired Web's laundry facilities management assets in 13 western and southern states for approximately $112 million. This
acquisition will add approximately $69 million of

13

---



annual
revenue, representing approximately 50% of our 2004 revenue derived from laundry facility management operations, and increasing the percentage of consolidated revenue derived from laundry
facilities management to approximately 80%. Commencing on January 10, 2005, the Company began to operate the acquired assets from the same facilities Web operated from. The Web facilities have
been leased by the Company on a month-to-month basis while an evaluation of total facilities requirements is performed. It is the Company's intention to lease these facilities
or similar facilities on a long-term basis. The Company has conducted several employee training sessions to expedite the operations, sales and marketing integration processes and has begun
to install the necessary systems and networks to ensure a smooth transition. While the Company continues to work towards total integration, Web provides some administrative services for a monthly fee.
The Company expects to be fully integrated within six months.

Concurrent
with the Web acquisition, we entered into a new Senior Secured Credit Facility with a group of lenders to increase the facility from $105 million to
$200 million, consisting of a $120 million five-year revolving credit line and an $80 million five-year term loan. Both the term and the revolving portions
of this credit facility mature on January 10, 2010. The Senior Secured Credit Facility continues to be collateralized by a blanket lien on the assets of the Company and each of its
subsidiaries, as well as a pledge by the Company of all the capital stock of its subsidiaries. The term loan amortization schedule is as follows:

Year

Amount(In thousands)2005

8,0002006

12,0002007

16,0002008

20,0002009

18,0002010

6,000Total

80,000


On
January 16, 2004, we acquired Web's laundry facilities management assets in 13 eastern and southeastern states and the District of Columbia. The purchase price consisted of
approximately $39 million in cash and the sale to Web of certain of our laundry facility management assets and related contracts in several western states valued at approximately
$2 million. This acquisition added approximately $27 million of revenue in 2004, representing approximately 20% of our 2004 laundry facilities management revenue.

14

---



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

The information presented below for the years ended December 31, 2002, 2003 and 2004 is derived from Mac-Gray's consolidated financial
statements and related notes included in this report:

Revenue

2003 to 2002

2004 to 20032002

2003

2004

Increase
(Decrease)

%
Change

Increase
(Decrease)

%
ChangeLaundry facilities management

$
103,710

$
104,789

$
136,699

$
1,079

1
%
$
31,910

30
%Laundry equipment sales


14,292


14,397


14,927

$
105

1
%
$
530

4
%Reprographics facilities management


5,915


5,087


3,755

$
(828
)
-14
%
$
(1,332
)
-26
%Total Laundry & Reprographics


123,917


124,273


155,381


356

0
%

31,108

25
%MicroFridge® equipment sales and rental


26,451


25,383


27,313


(1,068
)
-4
%

1,930

8
%Total revenue

$
150,368

$
149,656

$
182,694

$
(712
)
0
%
$
33,038

22
%


Fiscal Year Ended December 31, 2004 Compared to Fiscal Year Ended December 31, 2003

Total revenue increased by $33,038, or 22%, to $182,694 for the year ended December 31, 2004 compared to $149,656 for the year ended December 31,
2003. The increase in total revenue for the year ended December 31, 2004 is primarily attributable to the revenue associated with the eastern region
laundry facilities management business acquired on January 16, 2004. Of the annual total laundry facilities management revenue increase of $31,910, or 30%, to $136,699 for the year ended
December 31, 2004 as compared to $104,789 for the year ended December 31, 2003, $27,200, or approximately 85% of the increase is attributable to the January 2004 laundry
facilities management acquisition while $4,710, or approximately 15% of the increase, is attributable to organic growth. Organic growth in 2004 was derived from the net addition of assets placed in
the field, vending price increases, increase in usage of installed equipment, and the conversion of coin-operated to card-operated equipment.

Laundry
equipment sales and services increased $530, or 4%, to $14,927 for the year ended December 31, 2004 as compared to $14,397 for the year ended December 31, 2003.
This increase is primarily attributable to a slight increase in the number of units sold and a favorable impact on revenue caused by the product mix sold.

Copico
revenue decreased by $1,332, or 26%, to $3,755 for the year ended December 31, 2004 as compared to $5,087 for the year ended December 31, 2003. This decrease is
primarily attributable to the decrease in equipment use in libraries and similar facilities, as compared to 2003, and a reduction in the number of locations operated by the Company. The Company is
forecasting decreases in Copico revenue to continue as the usage of vended reprographics equipment declines and the Company continues its strategy of not renewing contracts which it does not predict
will have a positive impact on income.

MicroFridge®
total annual equipment sales increased $1,930, or 8%, to $27,313 for the year ended December 31, 2004 as compared to $25,383 for the year ended
December 31, 2003. The largest contributor to this increase in sales was the segment's academic business, which experienced revenue growth of $1,256, or 29% in 2004 as compared to 2003. Sales
to hotel and assisted living customers increased $735, or 8%, for the year ended December 31, 2004 as compared to the same period in 2003. Offsetting these increases was a decrease in sales to
government customers of $700, or 6%, for the year ended December 31, 2004 as compared to the same period in 2003. The increases in sales to the academic and hotel and assisted living customers
are primarily attributable to the improved economic

15

---



conditions,
the Company's ability to attract new customers and the introduction of new appliance products. The decrease in the government sales business is primarily attributable to overall spending
by the government being directed away from military housing improvements and toward the current military efforts in the Middle East.



Facilities Management Rent.Facilities management rent includes the amount of rent paid to laundry facilities management and
Copico customers. Facilities management rent increased by $16,435, or 33%, to $66,568 for the year ended December 31, 2004 as compared to $50,133 for the year ended December 31, 2003.
This increase is primarily attributable to the additional contracts added to the laundry facilities management business as a result of the January 2004 acquisition. As a percentage of laundry
facilities management revenue, laundry facilities management rent has increased to 48.7% for the year ended December 31, 2004 as compared to 48.2% for the year ended December 31, 2003.
This increase is the result of the contractual laundry facilities management rent rate for the portfolio of contracts acquired in January 2004 being slightly higher than the Company's existing
contracts. Laundry facilities management rent can be affected by new and renegotiated contracts and by other factors such as the amount of "prepaid rent" payments and laundry room betterments invested
in new or renegotiated contracts. As the Company varies the amount invested in a property, the facilities management rent as a derivative of facilities management revenue can vary. Prepaid rent
payments and betterments are amortized over the life of the contract. The percentage of facilities management rent to facilities management revenue is also impacted by the facilities management rent
rate structure in the Copico business. Because this business has a much lower facilities management rent rate structure than the laundry facilities management business, any decrease in revenue will
result in an increase in the overall facilities management rent percentage of revenue.

Facilities Management Expenditures and Other Direct Costs.Facilities management expenditures and other direct costs include
costs associated with installing and servicing laundry facilities management equipment, as well as the costs of collecting, counting and depositing the revenue. Facilities management expenditures and
other direct costs also include the costs of delivering and servicing rented laundry facilities management equipment and MicroFridge® equipment. Facilities management expenditures and
other direct costs increased by $4,501, or 19%, to $28,197 for the year ended December 31, 2004 as compared to $23,696 for the year ended December 31, 2003. Facilities management
expenditures and other direct costs were 15% and 16%, respectively, of total revenues for the years ended December 31, 2004 and 2003. Facilities management expenditures and other direct costs
can be affected significantly by the mix of revenue. In 2004, laundry and MicroFridge® equipment sales decreased as a percentage of total revenue. These sales typically create higher
operating costs due to delivery and installation generally being more costly in the sales business than in the facilities management business.

Depreciation and Amortization.Depreciation and amortization include amounts included as a component of cost of revenue,
which are primarily related to laundry facilities management equipment in the field, and amounts included as an operating expense, which are primarily non-revenue-generating corporate
assets. Aggregate depreciation and amortization increased by $3,971, or 22%, to $21,794 for the year ended December 31, 2004 as compared to $17,823 for the year ended December 31, 2003.
This increase is primarily attributable to the depreciation and amortization of assets and contracts comprising the laundry facilities management assets purchased in January 2004. The laundry
facilities management field equipment acquired had an appraised value of $12,027 as of the acquisition date. The Company is depreciating this equipment over five years. The contract rights acquired
had an appraised value of $28,060 as of the acquisition date and are being amortized over twenty years. Also contributing to the increased depreciation expense over 2003 was more new equipment placed
in service at new locations and more replacement of equipment as contracts were renegotiated.

16

---



Cost of Product Sales.Cost of product sales consists primarily of the cost of laundry equipment, MicroFridge®
equipment, parts and supplies sold. Cost of product sales increased by $1,771, or 6%, to $29,568 for the year ended December 31, 2004 as compared to $27,797 for the year ended
December 31, 2003. Gross margins on product sales were 28% for both of the years ended December 31, 2004 and 2003. The gross margin on product sales includes laundry and
MicroFridge® equipment sales. The gross margin in the laundry equipment sales business decreased slightly in 2004 as compared to 2003 due to competitive pressure and a cost increase to the
Company which was not entirely passed on to its customers. The gross margin associated with MicroFridge® equipment sales increased from 26.5% of revenue in 2003 to 27.5% in 2004. This
increase was caused primarily by the change in sales mix, specifically, an increase in higher margin sales to the academic markets.



General, Administration, Sales and Marketing Expense.General, administration, sales and marketing expense increased by
$3,223, or 15%, to $24,083 for the year ended December 31, 2004 as compared to $20,860 for the year ended December 31, 2003. As a percentage of total revenue, general, administration,
sales and marketing expense decreased from 14% in 2003 to 13% in 2004. The increases in general, administration, sales and marketing expense are primarily attributable to the additional sales
personnel, selling expenses and marketing expenditures associated with the January 2004 acquisition of laundry facilities management contracts. Also contributing to the increase were increases
in general liability insurance, information technology systems related depreciation, and costs associated with the preparation for compliance with Section 404 of the Sarbanes-Oxley Act.

Loss on Early Extinguishment of Debt.In connection with the January 16, 2004 acquisition of Web's eastern region
assets and the corresponding amendment to the Company's 2003 Senior Secured Credit Facility, $183 of unamortized financing costs associated with the 2003 Senior Secured Credit Facility was expensed
during 2004. In connection with the June 24, 2003 refinancing of the Company's 2000 Senior Secured Credit Facility, $381 of unamortized financing costs was expensed during 2003.

Gain on Sale of Assets, net.The net gain on sale of assets was $1,208 and $145 for the years ended December 31, 2004
and 2003, respectively. In January of 2004, in connection with the acquisition of the eastern region assets of Web, the Company realized a gain of $1,218 on the sale of certain laundry facilities
equipment and contracts for approximately $2,000, the Company's best estimate of fair value. Also included in the transaction were prepaid facilities rent, equipment and parts inventory. Also included
in gain on sale of assets was the sale of miscellaneous laundry and MicroFridge® equipment in the ordinary course of the Company's business.

Income from Operations.Income from operations increased by $4,398, or 48%, to $13,509 for the year ended December 31,
2004 as compared to $9,111 for the year ended December 31, 2003. To supplement the consolidated financial statements presented on a generally accepted accounting principles (GAAP) basis, we
have used a non-GAAP measure of adjusted 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. Excluding the loss on early extinguishment of debt and the gain on sale of assets to Web, income from
operations would have been $12,474 and $9,492 for the years ended December 31, 2004 and 2003, respectively, or a 31% increase. These increases were due primarily to the reasons discussed above.

17

---



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

For the years ended
December 31,2003

2004Income from operations, as reported

$
9,111

$
13,509Loss on early extinguishment of debt


381


183Gain on sale of fixed assets to Web





(1,218
)Income from operations, as adjusted

$
9,492

$
12,474


Income
from operations, as adjusted, is provided because the Company believes that certain investors may find it to be a useful tool towards understanding of the Company's overall
historical financial performance.

Interest Expense, net.Interest expense, net, increased by $1,505, or 54%, to $4,312 for the year ended December 31,
2004 as compared to $2,807 for the year ended December 31, 2003. This increase is primarily attributable to the increased borrowings in January 2004 to finance the approximately
$41 million acquisition of Web's eastern region laundry facilities management assets. Non-cash interest expense associated with the accounting treatment of the Company's interest
rate swap agreements resulted in interest expense of $1,368 and $648 for the years ended December 31, 2004 and 2003, respectively.

Gain on Sale of Lease Receivables.During 2003, the Company sold certain lease receivables associated with the
MicroFridge® segment. The $836 gain associated with this sale is primarily attributable to the interest income that would have been recognized throughout the life of the lease had it not
been sold.

Provision for Income Tax.The provision for income taxes increased by $898, or 30%, to $3,934 for the year ended
December 31, 2004 as compared to $3,036 for the year ended December 31, 2003. The increase is primarily attributable to the changes in taxable income. The effective tax rate has remained
relatively constant at 42.8% and 42.5%, for the years ended December 31, 2004 and 2003, respectively.

Net Income.As a result of the foregoing, net income increased $1,159, or 28%, to $5,263 for the year ended
December 31, 2004 as compared to $4,104 for the year ended December 31, 2003.

Fiscal Year Ended December 31, 2003 Compared to Fiscal Year Ended December 31, 2002

Total revenue decreased by $712, or less than 1%, to $149,656 for the year ended December 31, 2003 compared to $150,368 for the year ended
December 31, 2002. This decrease was related to decreases in MicroFridge® sales and rental revenue and reprographics facilities management revenue, offset by increases in laundry
facilities management revenue, and laundry equipment sales. The decrease in MicroFridge® revenue, as compared to 2002, is attributable primarily to a decrease of 39% in the academic sales
and rental business. The MicroFridge® academic market decreases were offset, in part, by an increase in revenue of 14% in the MicroFridge® government and military sales
business. Revenues for the MicroFridge® hotel and assisted living business was essentially the same in 2003 as in 2002. The decrease in the 2003 academic business, as compared to 2002, was
caused primarily by fewer sales of MicroFridge® units to colleges and universities, and less rental business on campuses, both rented to colleges and directly to students. We believe these
lower numbers were due to colleges and universities shifting the cost of purchasing certain amenities to the students as well as the increased availability of similar products at retail stores. The
increased availability of similar appliances at retail stores and our avoidance of low margin rental contracts are the primary reasons for MicroFridge® rental income decreasing in 2003 as
compared to 2002. Although it is the Company's strategy to

18

---



convert
school rental customers to a purchase program, the Company has not been successful in converting sufficient programs to offset losses resulting from this ongoing decline in
MicroFridge® rental revenue and does not believe it will be able to achieve this objective in the future. The increase in MicroFridge® government and military sales is due
primarily to the increased government spending on military base housing, and the Company's increased sales and marketing efforts toward this business segment. In general, hotels and assisted living
facilities have not increased spending on amenities such as MicroFridge® products as compared to 2002, which were down significantly from prior levels due to the general U.S. economic
slowdown. The Company has succeeded at maintaining its market share in this business by increasing its market penetration and promotional spending.

Total
laundry facilities management revenue increased by $1,079, or 1%, to $104,789 for the year ended December 31, 2003 as compared to $103,710 for the year ended
December 31, 2002. This increase is primarily due to an increase in the number of pieces of equipment in service, increases in vend rates, and continued conversion from
coin-operated equipment to higher revenue generating card-operated equipment, partially offset by a decrease in revenue caused by an increase in apartment vacancy rates in
several of the Company's laundry facilities management markets. The apartment vacancy rates have increased for the second consecutive year, particularly in Florida, Georgia, and North Carolina, where
the Company generates approximately 50% of its laundry facilities management revenue. Vacancy rates also continue to increase in the northern markets where the Company also conducts a significant
portion of its business, though not to the extent of the increases in the southern markets. Fourth quarter industry indicators show that growth in the apartment vacancy rate is slowing in nearly all
of the Company's markets. The increase in the number of pieces of equipment placed in service was achieved through increases in all of the Company's laundry facilities management markets, particularly
the northeast, where targeted marketing campaigns, and experienced
sales personnel were added. Increases in equipment vend rates are typically made at locations which have not had an increase in vend price for over a year. An increase in vend price at a
coin-operated location will typically be in increments of $0.25 per use, whereas at a card-operated location the increase may vary due to technology allowing for increases in
more flexible increments.

Copico
revenue decreased by $828, or 14%, to $5,087 for the year ended December 31, 2003 as compared to $5,915 for the year ended December 31, 2002. This decrease was
attributable to the decrease in equipment use in libraries and similar facilities, as compared to 2002, and a reduction in the number of locations operated by the Company. In 2003, the Company
continued its strategy, begun in the second half of 2002, of not renewing contracts when it could not negotiate acceptable pricing terms. This resulted in the elimination of approximately 25 accounts
in 2003, representing approximately 7% of its 2003 revenue. Also affecting the revenue decline in 2003 as compared to 2002 were accounts not yet renegotiated or eliminated which had decreased usage as
compared to 2002.

Laundry
equipment sales increased by $105, or 1% to $14,397 for the year ended December 31, 2003 as compared to $14,292 for the year ended December 31, 2002. This slight
increase is primarily attributable to a slight increase in the number of units sold and a favorable impact on revenue caused by the product mix sold.



Facilities Management Rent.Facilities management rent includes the amount of rent paid to laundry facilities management and
Copico customers. Facilities management rent increased by $770, or 2%, to $50,133 for the year ended December 31, 2003 as compared to $49,363 for the year ended December 31, 2002. This
increase was primarily attributable to an increase in laundry facilities management revenue of $1,079 partially offset by a decrease in Copico revenue of $828. The ratio of laundry facilities
management rent to laundry facilities management revenue did not change for the year ended December 31, 2003 as compared to 2002. Laundry facilities management rent can be affected by new and
renegotiated contracts and by other factors such as the amount of "prepaid rent"

19

---



payments
and laundry room betterments invested in new or renegotiated contracts. As the Company varies the amount invested in a property, the facilities management rent as a derivative of facilities
management revenue can vary. Prepaid rent payments and betterments are amortized over the life of the contract. The percentage of facilities management rent to facilities management revenue is also
impacted by the rent rate structure in the Copico business. Because this business has a much lower rent rate structure than the laundry facilities management business, any decrease in revenue will
result in an increase in the overall facilities management rent percentage of revenue.

Facilities Management Expenditures and Other Direct Costs.Facilities management expenditures and other direct costs include
costs associated with installing and servicing laundry and reprographics facility equipment, as well as the costs of collecting, counting and depositing the revenue. Facilities management expenditures
and other direct costs also include the costs of delivering and servicing sold and rented laundry and MicroFridge® equipment. Facilities management expenditures and other direct costs
decreased by $1,199, or 5%, to $23,696 for the year ended December 31, 2003 as compared to $24,895 for the year ended December 31, 2002. Facilities management expenditures and other
direct costs were 16% and 17%, respectively, of total revenues for the years ended December 31, 2003 and 2002. Facilities management expenditures and other direct costs can be affected
significantly by the mix of revenue. In 2003, laundry and MicroFridge® equipment sales decreased slightly as a percentage of total revenue. These sales typically create higher operating
costs due to delivery and installation generally being more costly in the sales business than in the facilities management business. The decrease in facilities management expenditures and other direct
costs was due to the decrease in overall revenue and the Company's implementation of various cost cutting programs.

Depreciation and Amortization.Depreciation and amortization include amounts included as a component of cost of revenue,
which are primarily related to laundry facilities management and MicroFridge® equipment in the field, and amounts included as an operating expense, which are primarily
non-revenue-generating corporate assets. Aggregate depreciation and amortization increased by $125, or 1%, to $17,823 for the year ended December 31, 2003 as compared to $17,698 for
the year ended December 31, 2002. Depreciation expense of property, plant and equipment increased by 2% when compared to 2002 due to increased purchases of equipment in 2003 as compared to
2002.

Cost of Product Sales.Cost of product sales increased by $600, or 2%, to $27,797 for the year ended December 31, 2003
as compared to $27,197 for the year ended December 31, 2002. Gross margins on
product sales were 31% and 28% for the years ended December 31, 2002 and 2003, respectively. The gross margin on product sales includes laundry and MicroFridge® equipment sales. The
gross margin in the laundry equipment sales business remained unchanged in 2003 as compared to 2002. The gross margin associated with MicroFridge® equipment sales decreased from 32% of
revenue in 2002 to 27% in 2003. This decline was caused primarily by the change in sales mix, specifically, a decrease in higher margin sales to the academic markets.



General, Administration, Sales and Marketing Expense.General, administration, sales and marketing expenses increased by
$376, or 2%, to $20,860 for the year ended December 31, 2003 as compared to $20,484 for the year ended December 31, 2002. General, administration, sales and marketing expenses were 14%
of revenue for the years ended December 31, 2002 and 2003. This increase in spending was primarily attributable to increases in advertising, promotional spending and professional fees. The
increase in advertising was primarily in the MicroFridge® and laundry facilities management businesses, followed by the laundry equipment sales business. The increase in advertising
spending in the laundry facilities management business was in connection with growth strategies in some markets. In the MicroFridge® and laundry equipment sales businesses, increased
advertising expenditures were in reaction to the effect of the general economic downturn and competitive factors.

20

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Loss on Early Extinguishment of Debt.On June 24, 2003 the Company entered into a new Senior Secured Credit Facility
to replace a credit agreement entered into in 2000. In connection with the termination of the 2000 credit agreement, $381 of related expenses, which had previously been capitalized and not fully
amortized at the time the June 24, 2003 agreement was executed, was written-off.

Gain on Sale of Assets, net.The net gain on sale of assets includes the sale of miscellaneous laundry and
MicroFridge® equipment in the ordinary course of the Company's business.

Income from Operations.Income from operations decreased by $1,812, or 17%, to $9,111 for the year ended December 31,
2003 as compared to $10,923 for the year ended December 31, 2002. To supplement the consolidated financial statements presented on a generally accepted accounting principles (GAAP) basis, we
have used a non-GAAP measure of adjusted 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. Excluding the loss on early extinguishment of debt, income from operations would have been
$9,492 and $10,923 for the years ended December 31, 2003 and 2002, respectively, or a 13% decrease. These decreases were due primarily to the reasons discussed above.

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

For the years ended
December 31,2002

2003Income from operations, as reported

$
10,923

$
9,111Loss on early extinguishment of debt





381Income from operations, as adjusted

$
10,923

$
9,492


Income
from operations, as adjusted, is provided because the Company believes that certain investors may find it to be a useful tool towards understanding of the Company's overall
historical financial performance.

Interest Expense, net.Interest expense, net, decreased by $1,771, or 39%, to $2,807 for the year ended December 31,
2003 as compared to $4,578 for the year ended December 31, 2002. This decrease is primarily related to the decrease in interest rates charged to the Company, a decrease in total borrowings, and
the impact of the new interest rate swap agreement having a lower fixed rate than those that were terminated. The total bank borrowings of the Company decreased by $5,432 during the year from $56,825
at December 31, 2002, to $50,873 at December 31, 2003. Interest expense for the years ended December 31, 2003 and 2002 include non-cash expense of $648 and $828
respectively, before the effect of income taxes, related to the terminated swap agreements.

Gain on Sale of Lease Receivables.During 2003, the Company sold certain lease receivables associated with the
MicroFridge® segment. The $836 gain associated with this sale is primarily attributable to the interest income that would have been recognized throughout the life of the lease had it not
been sold.

Provision for Income Tax.The provision for income taxes increased $469, or 18%, to $3,036 for the year ended
December 31, 2003 as compared to $2,567 for the year ended December 31, 2002. The effective tax rate increased from 41% to 43% from the year ended December 31, 2002 to the year
ended December 31, 2003. The provision for income tax is higher than the Company's statutory tax

21

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rate
primarily due to deductions recognized for financial reporting purposes, which are not deductible for federal and state tax purposes.

Effect of Change in Accounting Principle.On January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). As a result of an evaluation conducted by an independent third party valuation firm, it was
determined that the fair value of the laundry and MicroFridge® business units exceeded their book value; therefore no impairment of goodwill occurred in these business units. However, due
to the continued decline in the services of the reprographics business unit as a result of expanding use of the Internet and access to free laser printers in college and public libraries, the book
value of the reprographics business unit exceeded the fair value, resulting in a non-cash write-off of the remaining book value of the business unit's goodwill in the period
ended March 31, 2002, of $906, or $0.07 per share.

Following
is the impact on earnings of implementing FAS 142 on the years ended December 31, 2003 and 2002 (also see Note 6 of the consolidated financial statements):

For the years ended December 31,2002

2002
per share

2003

2003
per shareReported earnings

$
2,868

$
0.23

$
4,104

$
0.32Add: Impairment charge to comply with new accounting standardnet of taxes


906


0.07





3,774


0.30


4,104


0.32Add: Goodwill amortizationnet of taxes











Earnings, as adjusted

$
3,774

$
0.30

$
4,104

$
0.32


Net Income.As a result of the foregoing, net income increased $1,236, or 43%, to $4,104 for the year ended
December 31, 2003 as compared to $2,868 for the year ended December 31, 2002.

Liquidity and Capital Resources (Dollars in Thousands)

For the years ended December 31, 2002, 2003, and 2004, Mac-Gray's source of cash has been primarily from operating activities and, in
connection with the January 2004 acquisition of laundry facilities management assets, funds borrowed under the Company's credit facility. In addition to the January 2004 acquisition, the
Company's primary uses of cash have been the purchase of new laundry equipment and MicroFridge® equipment, and reduction of debt. The Company anticipates that it will continue to use cash
flow from its operating activities to finance working capital needs, capital expenditures, interest payments on outstanding indebtedness, principal payments of outstanding indebtedness, and other
purposes.

For
the years ended December 31, 2002, 2003, and 2004, cash flows provided by operating activities were $26,835, $24,480 and $37,108, 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, 2004 as compared to the year ended December 31, 2003 is primarily attributable to ordinary changes in working capital and the addition of the
laundry facilities management business acquired in January 2004. The most significant increases in cash flows provided by operating activities were net income and depreciation and amortization
expense as well as increases in accounts payable and accrued expenses and decreases in accounts receivable. The increase in depreciation and amortization expense is primarily attributable to the
additional laundry facilities management equipment and contract rights acquired in January 2004. The increase in accounts payable

22

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is
primarily attributable to an increase in accrued facilities management rent as a result of the January 2004 acquisition as well as the timing of trade accounts payable. The decrease in
accounts receivable was primarily attributable to the timing of sales of laundry and MicroFridge® equipment and the Company's continued emphasis on collection efforts.

For
the years ended December 31, 2002, 2003, and 2004, cash flows used in investing activities were $12,436, $12,802, and $57,101, respectively. The increase for the year ended
December 31, 2004 as compared to the year ended December 31, 2003 is primarily attributable to the payment for certain acquisitions of laundry facilities management assets during 2004 of
$41,454. Other capital expenditures for the years ended December 31, 2004 and 2003 were $17,826 and $15,372, respectively. The increase of $2,454, or 16%, in capital expenditures was the result
of more laundry equipment being placed in service, and more laundry facilities management contracts being renegotiated in the year ended December 31, 2004 than in the same period in 2003, due
in part to the additional laundry facilities management contracts acquired in January. Proceeds of $2,000 from the January 2004 sale of laundry facilities equipment and contracts to Web were
used to fund a portion of the aforementioned acquisitions.

For
the years ended December 31, 2002, 2003, and 2004, cash flows (used in) provided by financing activities were $(14,608), $(11,398) and $21,188, respectively. Cash flows (used
in) provided by financing activities consist primarily of proceeds from and repayments of bank borrowings, and other long-term debt, which increased due to borrowings to fund the
January 2004 acquisition of laundry facilities management assets. Also included in the year ended December 31, 2004 is the financing cost related to the 2003 Senior Secured Credit
Facility amendment obtained in January in connection with the acquisition.

During
2003, the Company repurchased 155,500 shares of its common stock at a total cost of $622.

On
June 24, 2003, the Company entered into a Senior Secured Credit Facility with a group of banks. This transaction retired both the June 2000 Revolving Line of Credit and
the June 2000 Senior Secured
Term Loan Facility, which were due to expire in July 2004 and June 2005, respectively. On January 16, 2004, in connection with the January 2004 acquisition of assets, the
Company obtained an amendment to its 2003 Senior Secured Credit Facility, which provided for borrowings up to $105,000. The average interest rate on borrowings outstanding at December 31, 2004
was approximately 4.5%, including the applicable spread paid to the banks. At December 31, 2004, the Company was in compliance with all financial covenants related to the amended 2003 Senior
Secured Credit facility.

On
January 10, 2005, the Company entered into a new Senior Secured Credit Facility ("2005 Credit Facility") in connection with the January 2005 acquisition of assets from
Web. The 2005 Credit Facility provides for borrowings up to $200,000, consisting of a $120,000 Revolving Line of Credit ("2005 Revolver") and an $80,000 Senior Secured Term Loan Facility ("2005 Term
Loan"). Both portions of the 2005 Credit Facility mature on January 10, 2010. The 2005 Credit Facility is collateralized by a blanket lien on the assets of the Company and each of its
subsidiaries, except for its corporate headquarters, as well as a pledge by the Company of all the capital stock of its subsidiaries. The 2005 Term Loan requires quarterly payments of $2,000 during
2005, $3,000 during 2006, $4,000 during 2007, $5,000 during 2008, and $6,000 for the first three quarters of 2009 and a final payment of $6,000 on January 10, 2010. In addition to the scheduled
quarterly payments, the Company is required to pay an amount equal to 50% of Excess Cash Flow, as defined, for each fiscal year, commencing with the fiscal year ended December 31, 2005, if the
Funded Debt Ratio (as defined) is greater than or equal to 1.50 to 1. This payment is first used to reduce the 2005 Term Loan with any remaining amounts used to reduce amounts outstanding under the
revolving line of credit.

23

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Outstanding indebtedness under the 2005 Credit Facility bears interest, at the Company's option, at a rate equal to the prime rate plus 1.25%, or LIBOR plus 2.25%. The Applicable prime
rate and LIBOR margin may be adjusted quarterly based on certain financial ratios.

The
2005 Credit Facility contains a commitment fee which is calculated as a percentage of the average daily-unused portion of the 2005 Credit Facility. This percentage, currently
0.0375%, may be adjusted quarterly based on the Funded Debt Ratio.

The
2005 Credit Facility includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and
incurring indebtedness, and requires that the Company maintain certain financial ratios. The most important of these financial ratios are for the Company to maintain a leverage ratio of less than or
equal to 3.75:1.00, reducing quarterly to 3.00:1.00 from and after December 31, 2006, and a coverage ratio of greater than or equal to 1.00:1.00. All covenants are measured quarterly. These
covenants limit the Company's ability to undertake certain additional financing activities without consent of its lenders.

On
March 4, 2004, the Company obtained a $4,000 mortgage loan on its corporate headquarters in Cambridge, Massachusetts. The loan bears interest at a rate of LIBOR plus 1.50%, has
a twenty-five year amortization, which includes quarterly payments of $40 plus interest beginning in June 2004, and has a balloon payment of $3,280 due upon its maturity on
December 31, 2008. As of December 31, 2004, there was $3,880 outstanding under the mortgage loan and the interest rate was 4.98%.

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 2003 and 2005 Credit Facility. The Company has also elected to enter into a swap agreement to coincide with the amortizing mortgage loan. The Company has designated its interest
rate swap agreements as cash flow hedges.

The
table below outlines the details of each Swap Agreement:

Date of
Origin

Original
Notional
Amount

Fixed/
Amortizing

Notional Amount
December 31,
2004

Expiration
Date

Fixed
RateJun 24, 2003

$
20,000

Fixed

$
20,000

Jun 30, 2008

2.69
%Jun 24, 2003

$
20,000

Amortizing

$
15,715

Jun 30, 2008

2.34
%Feb 17, 2004

$
21,600

Fixed

$
21,600

Feb 17, 2007

2.58
%Mar 8, 2004

$
4,000

Amortizing

$
3,880

Dec 31, 2008

3.09
%


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 Company is exposed to credit loss in the event of non-performance by the counter party to the swap agreement; 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, 2004, the fair value of the Swap Agreements, net of related taxes, was an unrealized gain of $940. This amount has been
included in other assets on the consolidated balance sheet.

On
June 24, 2003, the Company terminated its two $20,000 interest rate swap agreements, which had been in effect since February 2000 and January 2002, respectively.
The January 2002 interest rate swap agreement was due to expire in February 2004 while the February 2000 interest rate swap

24

---



agreement
was due to expire in February 2005. The Company paid $3,037 to terminate both the February 2000 and January 2002 swap agreements. As the timing of the forecasted future
interest payments did not significantly change as a result of the new credit facility, the accumulated other comprehensive losses related to the terminated interest rate swap agreements are
reclassified against current period earnings in the same period the forecasted interest payments occur. Upon termination, there was $1,419, net of taxes of $946, included in accumulated other
comprehensive loss. The $88 associated with the January 2002 interest rate swap agreement was reclassified as an earnings charge through February 2004 and the $1,331 associated with the
February 2000 interest rate swap agreement is being reclassified as an earnings charge through February 2005.

Contractual Obligations

A summary of the Company's contractual obligations and commitments related to its outstanding long-term debt and future minimum lease payments related
to the Company's vehicle fleet, warehouse rent and facilities management rent as of December 31, 2004 is as follows:

Fiscal
Year

Long Term
Debt

Facilities Rent
Commitments

Capital Lease
Commitments

Operating Lease
Commitments

Total2005

$
5,161

$
6,920

$
1,021

$
761

$
13,8632006


42,142


6,119


922


423


49,6062007


5,160


5,190


506


119


10,9752008


18,400


3,994


152


13


22,5592009





2,956








2,956Thereafter





4,206








4,206Total

$
70,863

$
29,385

$
2,601

$
1,316

$
104,165


We
anticipate that available funds from current operations, existing cash and other sources of liquidity will be sufficient to meet current operating requirements and
anticipated capital expenditures. However, we may require external sources of financing for any significant future acquisitions. Further, the 2005 Credit Facility matures in January 2010. We
expect the repayment of this facility will require external financing.

Off Balance Sheet Arrangements

At the year ended December 31, 2002, 2003 and 2004, the Company had no relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off balance sheet arrangements, or other contractually
narrow or limited purposes. The Company is, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.

Seasonality

The Company experiences moderate seasonality as a result of its operations in the college and university market. Revenues derived from the college and university
market represent approximately 20% of the Company's total annual revenue. Academic facilities management and rental revenues are derived substantially during the school year in the first, second and
fourth calendar quarters. Conversely, the Company's operating and capital expenditures have historically been higher during the third calendar quarter, when the Company installs a large amount of
equipment while colleges and universities are generally on summer break. Product sales, principally of MicroFridge® products, to this market are typically higher during the third calendar
quarter as compared to the rest of the calendar year, somewhat offsetting the seasonality effect of the laundry facilities management business unit. The

25

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laundry
facilities management assets acquired in January 2005 are not expected to affect the degree of seasonality experienced by the Company.

Inflation

The Company does not believe that its 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 effect 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 were 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.

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

Cash and cash equivalents.The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents. On occasion the Company has excess cash available for a short period of time; when this occurs, the Company invests such excess cash in repurchase agreements and other
highly liquid short-term investments. Accordingly, the investments are subject to minimal credit and market risk. Included in cash and cash equivalents is an estimate of cash not yet
collected at period end, which remains at laundry facilities management and Copico customer locations. At December 31, 2004 and 2003, this totaled $4,549 and $3,621, 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. These
estimates are based upon historical collection trends, so that total cash at the end of each period will be reasonably stated.

Revenue recognition.The Company recognizes laundry facilities management and Copico revenue on the accrual basis.
MicroFridge® rental revenue is recognized ratably over the related contractual period, which is generally less than one year. The Company recognizes revenue from product sales upon
shipment of the products, unless otherwise specified. The Company offers limited-duration warranties on MicroFridge® products and, at the time of sale, provides reserves for all estimated
warranty costs based upon historical warranty costs. Actual costs have not exceeded the Company's estimates. 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.

The
Company has entered into long-term lease transactions that meet the qualifications of a sales-type lease for certain equipment. For these transactions, the
amount of revenue recognized upon product shipment is the present value of the minimum lease payments, excluding executory costs and excluding profits on executory costs, discounted at the interest
rate implicit in the lease. Interest revenue is recognized over the life of the rental agreement. At December 31, 2004 and 2003 the Company had $4,276 and $6,553, respectively, in receivables
related to sales-type leases. These receivables have been recorded net of unearned interest income of $359 and $667 at December 31, 2004 and 2003. These receivables are primarily
due ratably over the next seven years and have been classified as other current assets and other long-term assets, as appropriate, on the balance sheet. The

26

---



related
reserve for uncollectible lease receivables at December 31, 2004 and 2003 was $152 and $542, respectively. The Company has not entered into significant sales-type leases
since 2001.

All
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.

The
Company believes it's accounting for facilities management revenue, rental revenue, service fees and long-term lease transactions are appropriate for the Company,
properly matching the earnings process with the proper reporting period.

Provision for Doubtful Accounts.On a regular basis, the Company reviews the adequacy of its provision for doubtful accounts
for trade accounts receivable and lease receivables based on historical collection results and current economic conditions using factors based on the aging of its trade accounts and lease receivable.
In addition, the Company estimates 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 first-in, first-out
method) or market and primarily consist of finished goods. Based on the nature of the Company's inventory, being laundry and MicroFridge® equipment, and the inventory handling practices of
the Company, the Company believes the lower of cost or market is the most appropriate valuation method for the Company.

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.

Goodwill and Intangible Assets.Intangible assets primarily consist of various non-compete agreements, customer
lists, 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. Customer lists are amortized using the straight-line method over 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: the seller's renewal rate of the contract portfolio for
the most recent years prior to the acquisition, the number of 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 1.5% 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 its experience, the Company believes that these costs associated with various acquisitions are
properly recognized and amortized over a reasonable length of time. In accordance with FAS 142, the Company stopped amortizing goodwill on January 1, 2002.

Impairment of Long-Lived Assets.The Company reviews long-lived assets, including fixed assets,
acquired contract rights and intangible assets with definitive lives, 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. The Company's annual impairment test for contract rights assigned a 15-year amortization period consists of
comparing the current number of machines under contract and the current cash flow of all the Company's contracts in the market where the portfolios were acquired to the original number of machines
acquired and the cash flow as predicted by the Company at the time of the acquisition. For those contract rights assigned a 20-year amortization period, the Company's annual impairment test consists
primarily of identifying the accumulated retention rate of the specific contract portfolio in order to assess the appropriateness

27

---



of
the net book value of the related contract rights. If impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis.

In
accordance with FAS 142, the Company tests its goodwill annually for impairment and whenever events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. The goodwill impairment review consists of a two-step process of first determining the fair value of the reporting unit and comparing it to the
carrying value of the net assets allocated to the reporting unit. Fair values of the reporting units were determined based on estimates of comparable market price or discounted future cash flows. If
this fair value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value of the reporting unit is less than the carrying value of the net assets,
the fair value of the reporting unit is allocated to all the underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If
necessary, goodwill is then written-down to its fair value. On January 1, 2002, in connection with the initial application of FAS 142, the Company recognized an impairment
charge of $906.

Financial Instruments.The Company accounts for derivative instruments in accordance with Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and Statement of Financial Accounting Standard No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities-an amendment of FASB No. 133" ("FAS 138"). These statements require the Company to recognize derivatives 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. The Company has designated its 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, the Company has determined that the fair value of
financial instruments approximates book value at December 31, 2003 and 2004, based upon terms currently available to the Company in financial markets. The fair value of the 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

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN
46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity
must be included in the consolidated financial statements with those of the business enterprise. FIN 46, as revised in December 2003, must be applied at the end of periods ending after
March 15, 2004, and is effective immediately for all new variable interest entities created or acquired after January 31, 2003. The adoption of the revised FIN 46 by the Company did not
have any impact on its results of operations or financial position, as at this time the Company does not have a controlling interest in any variable interest entities. The Company will apply the
consolidation requirement of FIN 46 in future periods if it should own any interest in any variable interest entity.

28

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In
November 2004, the FASB issued FASB Statement No. 151, "Inventory Costs, an Amendment of ARB No. 43 Chapter 4" ("SFAS 151"). SFAS 151 is applicable
for inventory costs incurred during fiscal years beginning after June 15, 2005. SFAS 151 requires that items such as idle facility expense, excessive
spoilage, double freight and rehandling be recognized as current-period charges rather than being included in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB
43. We are currently completing our evaluation of the adoption of SFAS 151 and the impact, if any, that this statement will have on our results of operations.

In
December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment"
("SFAS 123R"). SFAS 123R is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation," supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and amends FASB Statement No. 95 "Statement of Cash Flows." SFAS 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123R is applicable for all interim and fiscal periods beginning after
June 15, 2005. Early adoption is permitted. We are currently completing our evaluation of the adoption of SFAS 123R and the impact that this statement will have on our results of
operations.

Risk Factors

This annual report on Form 10-K contains statements 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 the Company's 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 the Company's
control. These risks, uncertainties and other factors may cause the Company's 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:

The Company's Cash Flows May Not Be Sufficient to Finance the Significant Capital Expenditures Required to Replace Equipment and Implement New Technology.

The Company must continue to make capital expenditures in order to maintain and replace existing equipment. While it is anticipated that existing capital
resources, as well as cash from operations, will be adequate to finance anticipated capital expenditures for at least the next year, the Company cannot guarantee investors that the Company's resources
or cash flows will be sufficient. To the extent that available resources are insufficient to fund capital requirements, the Company may need to raise additional funds through public or private
financings or curtail certain capital expenditures. Such financings may not be available or available only on less favorable terms and, in the case of equity financings, could result in dilution to
its stockholders.

29

---



' Indebtedness May Limit the Company's Use of Cash Flow and Restrict its Flexibility.

In the event the Company is unable to decrease the outstanding indebtedness under the 2005 Credit Facility, the increased indebtedness could:



Failure to Comply With the 2005 Credit Facility Covenants May Result in an Acceleration of Substantial Indebtedness

The 2005 Credit Facility requires the Company to comply with various financial and other operating covenants on a quarterly basis. Failure to comply with any of
these covenants, without obtaining a waiver from the lender, would permit the lender to accelerate the repayment of all amounts outstanding under the 2005 Credit Facility. An acceleration of the 2005
Credit Facility would have a material adverse effect on our liquidity, financial condition and results of operations. These financial covenants consist of various leverage ratios and other targets,
including maximum total leverage, maximum capital expenditures and restricted payments.

If the Company Were Unable to Renew its Laundry Leases the Company's Results of Operations and Business Could be Adversely Affected.

The laundry facilities management business is highly dependent upon the renewal of leases with property owners, colleges and universities and public housing
authorities. These leases have an average length of seven to ten years with approximately 10% to 15% due for renewal each year. Mac-Gray has traditionally relied upon exclusive,
long-term leases with its customers, as well as frequent customer interaction and a historical emphasis on customer service, to assure continuity of financial and operating results. The
Company cannot guarantee investors that:



Failure
by the Company to continue to obtain long-term exclusive leases with a substantial number of its customers, or to successfully renew existing leases as they expire,
could have a material adverse effect on its results of operations and business.

Competition on Local and National Levels May Hinder the Company's Ability to Expand.

The
vended (card or coin-operated) outsourced laundry facilities management industry is highly competitive, with local, regional and national competitors. On the local and
regional levels, private businesses tend to have long-standing relationships with property owners and managers in their specific geographic market. On the national level, there is one
competitor with a larger installed equipment

30

---



base
than Mac-Gray, which we compete with in several markets. These competitive forces may increase purchase prices for future acquisitions to levels that make the acquisitions less
attractive or uneconomical. Additionally, our competitors may make acquisitions or may establish agreements among themselves or with third parties to increase their ability to compete within the
industry. Accordingly, it is possible that new competitors may emerge and rapidly acquire significant market share. Therefore, the Company cannot assure investors that it will be able to compete
effectively in any specific geographic location in the business of supplying laundry facilities management services to property owners and managers or in the acquisition of other businesses.

If the Company is Unable to Continue its Relationships With Maytag and Other Suppliers, the Company's Profit Margins Could be Reduced and its Ability to Meet Customer
Requirements Could be Adversely Impacted.

Currently the Company purchases a majority of the equipment that it uses in its laundry facilities management business from Maytag. In addition, the Company
derives a significant amount of its non-laundry facilities management revenue, as well as competitive advantages, from its position as a distributor of Maytag commercial laundry products.
Although either party, upon written notice, may terminate the agreements between the Company and Maytag, Maytag has never terminated any agreement with the Company. The Company's relationship with
Maytag dates from 1927.

In
addition, the Company currently procures the products used by the MicroFridge® segment from a limited number of suppliers. If these suppliers terminated or demanded a
substantial revision of the contracts or business relationships currently in place, there may be a delay in finding a replacement, and an inability to find terms as favorable as the current terms,
which could adversely affect the Company's results of operations or its ability to meet customer demands.

The
MicroFridge® segment has a non-competition agreement with Sanyo whereby Sanyo is precluded from entering the MicroFridge® market, provided that
certain minimum annual quantities of products are purchased from Sanyo.

The Company's Ability to Consummate Acquisitions Depends Upon its Ability to Access Capital on Acceptable Terms.

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



31

---





If the Company Acquires any Companies in the Future, They Could Prove Difficult to Integrate, Disrupt the Company's Business or Have an Adverse Effect on the Company's Results
of Operations.

The Company has in the past, and may in the future, engage in acquisitions to continue expansion of its laundry facilities management business. For example, in
each of January 2004 and 2005, the Company completed acquisitions of certain laundry facilities management assets. While the Company generally believes that the management team and business
structure currently in place enables it to operate a significantly larger and more diverse operation, it may be exposed to the following risks in connection with finding, completing, and successfully
integrating acquisitions:



Failure to Successfully Integrate the Business Acquired from Web Service Company, Inc. would have an Adverse Effect on our Business and Results of Operations

On January 10, 2005 the Company acquired the southern and western laundry facilities management assets of Web Service Company, Inc. The majority of
these assets are outside the Company's existing geographical markets. There can be no guarantee that a successful integration of these assets will occur. Failure to successfully complete the
integration could adversely affect the overall results and financial strength of the Company.

Multi-unit Housing Vacancy Rates Could Affect Revenue From the Operations of Laundry Facilities Management Contracts.

Consistency of revenue from the operations of vended laundry equipment, particularly in the multi-unit housing industry, depends partially upon the
level of tenant occupancy. The number of apartments occupied in an apartment building with a vended laundry room directly affects the Company's revenue. Extended periods of reduced occupancy in our
customers' buildings can adversely affect our revenue.

The
level of occupancy can be adversely affected by many market economic conditions, all of which are beyond the Company's control, including:



32

---





The Company May be Susceptible to Product Liability Claims for Which Insurance May Not be Adequate.

Through
the MicroFridge® segment, the Company markets and distributes combination refrigerator/freezer/ microwave ovens, or Units, under the brand name
MicroFridge®. In addition, the Company acts as a third party distributor of Maytag's and other suppliers' equipment. The sale and distribution of MicroFridge® Units, as well as
other products, entails a risk of product liability claims. Further, although MicroFridge® Units are manufactured by third parties under contract with the Company, the Company may be
subject to risks of product liability claims related to this manufacture. Potential product liability claims may exceed the amount of the Company's product liability insurance coverage or may be
excluded from that coverage. The Company cannot assure investors that it will be able to renew its existing product liability insurance at a cost and level of coverage comparable to that currently in
effect, if at all. In the event that the Company is held liable for a claim for which it is not indemnified or for damages exceeding the limits of its product liability insurance coverage, the claim
could have a material adverse effect on the Company's business, results of operations and financial condition.

Reliance Upon Common Law and Contractual Intellectual Property Rights May be Insufficient to Protect the Company From Adverse Claims.

The
Company relies upon certain trademark, service mark, copyright, patent and trade secret, confidentiality provisions, employee and third-party non-disclosure and
non-solicitation agreements and other methods to establish and protect its intellectual property and proprietary rights. The Company cannot be certain that steps it has taken to protect
its intellectual property and proprietary rights will be adequate or that third parties will not infringe or misappropriate any of its intellectual property or proprietary rights. While the Company
has periodically made filings with the U.S. Patent and Trademark Office, the Company has traditionally relied upon the protections afforded by contract rights and through common law ownership rights,
and the Company cannot assure investors that these contract rights and legal claims to ownership will adequately protect its intellectual property or proprietary rights. Any infringement or
misappropriation of the Company's intellectual property or proprietary rights could damage their value and could have a material adverse effect on the Company's business, prospects, results of
operations and financial condition. The Company may have to engage in litigation to protect its intellectual property and proprietary rights, which could result in significant litigation costs and
require a significant amount of management's time.

The Company Has Significant Intangible Assets, the Value of Which Might not be Realized in the Event of a Sale or Liquidation of the Company's Businesses.

As of December 31, 2004, approximately $71.9 million, or 36%, of the Company's total assets were intangible assets, consisting primarily of contract
rights and goodwill. In the event of a sale or liquidation, there can be no assurance that the value of these intangible assets would be realized.

The Company Faces Risks Associated with Environmental Regulation.

The Company's business and operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of, and
establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of, certain materials, substances and wastes. To the best of the Company's knowledge,
there are no existing or potential environmental claims against it, nor has the Company received any notification of responsibility for, or any inquiry or investigation regarding, any disposal,
release or threatened release of any hazardous material, substance or waste generated by us that is likely to have a material adverse effect on the Company's business or financial condition. However,
the Company cannot predict with any certainty that it will not in the future incur any liability under environmental laws and regulations that could have a material adverse effect on its business or
financial condition.

33

---



Certain Stockholders, Directors and Executive Officers Could Exercise Control and Prevent a Sale or Merger.

As
of March 15, 2005, Mac-Gray's directors, executive officers, and certain of its stockholders and their affiliates beneficially owned in the aggregate approximately
49% of the outstanding shares of the Company's common stock. This percentage ownership does not include options to purchase 352,000 shares of the common stock held by some of these persons, all of
which are currently exercisable. If these affiliates exercised any of their options, then the ownership of common stock would be further concentrated. As a result of this concentration in ownership,
these stockholders, acting together, have the ability to significantly influence the outcome of the election of directors and all other matters requiring approval by a majority of stockholders.
Matters requiring stockholder approval include significant corporate transactions, such as mergers and sales of all or substantially all of the Company's assets. The concentration of ownership in
affiliates, together, in some cases, with specific provisions of the Company's charter and bylaws, as described below, and applicable
sections of the corporate law of Delaware, may have the effect of delaying or preventing a change in control of Mac-Gray.

Provisions of the Company's Charter, Bylaws, Delaware Law, and the Shareholder Rights Agreement Could Have the Effect of Discouraging Takeovers.

Specific
provisions of the Company's charter and bylaws, as described below; sections of the corporate law of Delaware; the shareholder rights agreement, and powers of the 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. 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 stockholders. The anti-takeover provisions and powers of the Board of Directors include, among other things:



34

---





Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to a variety of risks, including changes in interest rates on its borrowings. In the normal course of its business, the Company manages its
exposure to these risks as described below. The Company does not engage in trading market-risk sensitive instruments for speculative purposes.



The table below provides information about the Company's 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 debt approximates book value at December 31, 2004.

Expected Maturity Date (In Thousands)December 31, 20042005

2006

2007

2008

2009

Thereafter

TotalLong-term Debt:Fixed Rate

$
1

$


$


$


$


$


$
1Average interest rate


8.0
%Variable rate

$
5,160

$
42,142

$
5,160

$
18,400

$


$


$
70,862Average interest rate


4.5
%

4.5
%

4.5
%

4.5
%


On
June 24, 2003, the Company terminated its two $20,000 interest rate swap agreements, which had been in effect since February 2000 and January 2002, respectively.
The January 2002 interest rate swap agreement was due to expire in February 2004 while the February 2000 interest rate swap agreement was due to expire in February 2005.
The Company paid $3,037 to terminate both the February 2000 and January 2002 swap agreements. As the timing of the forecasted future interest payments did not significantly change as a
result of the new credit facility, the accumulated other comprehensive losses
related to the terminated interest rate swap agreements are reclassified against current period earnings in the same period the forecasted interest payments occur. Upon termination, there was $1,419,
net of taxes of $946, included in accumulated other comprehensive loss. The $88 associated with the January 2002 interest rate swap agreement was reclassified as an earnings charge through
February 2004 and the $1,331 associated with the February 2000 interest rate swap agreement will be reclassified as an earnings charge through February 2005.

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 2003 and 2005 Credit Facility. The Company has also elected to enter into a swap agreement to coincide with the amortizing mortgage loan. The Company has designated its interest
rate swap agreements as cash flow hedges.

The
table below outlines the details of each swap agreement:

Date of
Origin

Original
Notional
Amount

Fixed/
Amortizing

Notional
Amount
December 31,
2004

Expiration
Date

Fixed
RateJun 24, 2003

$
20,000

Fixed

$
20,000

Jun 30, 2008

2.69
%Jun 24, 2003

$
20,000

Amortizing

$
15,715

Jun 30, 2008

2.34
%Feb 17, 2004

$
21,600

Fixed

$
21,600

Feb 17, 2007

2.58
%Mar 8, 2004

$
4,000

Amortizing

$
3,880

Dec 31, 2008

3.09
%


In
accordance with the 2003 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

35

---



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 Company is exposed to credit loss in the event of non-performance by the other party to the swap agreement; however, nonperformance is not anticipated.

The
fair value of the 2003 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, 2004, the fair value of the 2003 Swap Agreements, net of related taxes, was an unrealized gain of $940. This
amount has been included in other assets on the consolidated balance sheet.

As
of December 31, 2004, there was $30,000 outstanding under the term loan, $36,982 outstanding under the revolving line of credit, $21 in outstanding letters of credit and $3,880
outstanding under the mortgage loan. The unused balance under the revolving line of credit was $32,997 at December 31, 2004. The average interest rate on the borrowings outstanding at
December 31, 2004 was approximately 4.5%, including the applicable spread paid to the banks.

Item 8. Financial Statements and Supplementary Data

Financial statements and supplementary data are contained in pages F-1 through F-33 hereto.

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

None.

Item 9A. Controls and Procedures

As of the end of the period covered by this Report, and pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, the Company's
Chief Executive Officer and Chief Financial Officer, together with other members of the Company's management, conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to make known
to them in a timely fashion material information related to the Company required to be filed in this report. There have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date of their evaluation.

While
the Company believes that the present design of its disclosure controls and procedures is effective to make known to its senior management in a timely fashion all material
information concerning its business, the Company will continue to improve the design and effectiveness of its disclosure controls and procedures to the extent necessary in the future to provide senior
management with timely access to such material information, and to correct any deficiencies that the Company may discover in the future.

Item 9B. Other Information

None.

36

---





PART III

Item 10. Directors and Executive Officers of the Registrant

The information appearing under the caption "Information Regarding Directors/Nominees" and "Information Regarding Executive Officers" in the Company's definitive
proxy statement for its 2005 annual meeting of stockholders is incorporated herein by reference.

Item 11. Executive Compensation

The information appearing under the caption "Executive Compensation" in the Company's definitive proxy statement for its 2005 annual meeting of stockholders is
incorporated herein by reference.

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

The information appearing under the caption "Principal and Management Stockholders" in the Company's definitive proxy statement for its 2005 annual meeting of
stockholders is incorporated herein by reference.

Stock Option Plan Information and Employee Stock Purchase Plan Information

The following tables provide information as of December 31, 2004 regarding shares of common stock of the Company that may be issued under the existing
equity compensation plans, including the Company's 1997 Stock Option and Incentive Plan (the "Stock Option Plan") and the Company's 2001 Employee Stock Purchase Plan (the "ESPP"). 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

Weighted average
exercise price of
outstanding options,
warrants and rights

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

(b)

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

914,367

$
4.24

239,351
(2)Equity compensation plans not approved by security holders

-0-


-0-

-0-Total

914,367

$
4.24

239,351
(2)


---

37

---



Item 13. Certain Relationships and Related Transactions

The information appearing under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for its 2005 annual
meeting of stockholders is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information concerning our principal accountant fees and services required by Item 14 will be included in our definitive proxy statement for our 2005 annual
meeting of stockholders and is incorporated herein by reference.

38

---





PART IV

Item 15. Exhibits, Financial Statements, Schedules

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

(a)
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.



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

39

---



3.1

Amended and Restated Certificate of Incorporation (3.1) +3.2

By-laws, as amended (3.2) v4.1

Specimen certificate for shares of Common Stock, $.01 par value, of the Registrant (4.1) #4.2

Shareholder Rights Agreement, dated as of June 15, 1999, by and between the Registrant and State Street Bank and Trust Company (4.1) x10.01

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

Credit Agreement, dated January 10, 2005, by and among the Registrant, the other Borrowers (as defined therein), the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent (filed herewith)10.05

Guarantee and Collateral Agreement dated as of January 10, 2005 among Mac-Gray Corporation and Subsidiaries and JPMorgan Chase Bank, N.A., as Collateral Agent (filed herewith)10.06

Form of Revolving Credit Note issued by the Registrant in favor of the Banks (as defined therein) (filed herewith)10.07

Form of Term Note issued by the Registrant in favor of the Banks (as defined therein) (filed herewith)10.08

Form of Noncompetition Agreement between the Registrant and its executive officers (10.11) + (10.15) v ***10.09

Form of Director Indemnification Agreement between the Registrant and each of its Directors (10.17) + (10.16) v ***10.10

April 2001 Amendment to the Mac-Gray Corporation 1997 Stock Option and Incentive Plan (10.17) v ***10.11

Directors Compensation Plan (filed herewith) ***10.12

Senior Executive Compensation Plan (filed herewith) ***10.13

Form of executive severance agreement between the Registrant and its chief financial officer and chief operating officer (10.18) s ***10.14

Form of executive severance agreement between the Registrant and its chief executive officer (10.19) s ***10.15

Stock Purchase Agreement, dated as of March 31, 1998, by and among Mac-Gray Services, Inc., Copico, Inc. and the stockholders of Copico, Inc. (10.20) z10.16

Stock and Asset Purchase Agreement, dated as of March 4, 1998, by and among Mac-Gray Services, Inc., Amerivend Corporation, Amerivend Southeast Corporation, Gerald E. Pulver and Gerald E. Pulver Grantor Retained
Annuity Trust (2.2) y10.17

Asset Purchase Agreement, dated as of January 16, 2004, between Mac-Gray Services, Inc. and Web Service Company (2.1) T10.18

Asset Purchase Agreement, dated as of January 10, 2005, between Mac-Gray Services, Inc. and Web Service Company (filed herewith)10.19

Trademark License Agreement dated January 10, 2005 by and between Web Service Company, Inc., ("Licensor") and Mac-Gray Services, Inc., ("Licensee") (filed herewith)21.1

Subsidiaries of the Registrant (21.1) z23.1

Consent of PricewaterhouseCoopers LLP (filed herewith).


40

---



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)


---

41

---





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 28th DAY OF MARCH, 2005.

|                     |  | MAC-GRAY CORPORATION
|-------------------- |  | --------------------
|                     |  | By:                 
|Date: March 28, 2005 |  |                     

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. BRYANDavid W. Bryan         |  | Director                                                                                                                |  | March 28, 2005
|/s/THOMAS E. BULLOCKThomas E. Bullock   |  | Director                                                                                                                |  | March 28, 2005
|/s/EDWARD F. MCCAULEYEdward F. McCauley |  | Director                                                                                                                |  | March 28, 2005
|/s/LARRY L. MIHALCHIKLarry L. Mihalchik |  | Director                                                                                                                |  | March 28, 2005
|/s/JERRY A. SCHILLERJerry A. Schiller   |  | Director                                                                                                                |  | March 28, 2005
|/s/MICHAEL J. SHEAMichael J. Shea       |  | Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) |  | March 28, 2005

42

---





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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

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

|MAC-GRAY CORPORATION |                                                                                                      |                                                                                                                                                                                               
|-------------------- | ---------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     | Report of Independent Registered Public Accounting Firm                                              |                                                                                                                                                                                               
|                     | Consolidated Balance Sheets at December 31, 2003 and 2004                                            |                                                                                                                                                                                               
|                     | Consolidated Income Statements for the Years Ended December 31, 2002, 2003 and 2004                  |                                                                                                                                                                                               
|                     | Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2003 and 2004 |                                                                                                                                                                                               
|                     | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003, and 2004          |                                                                                                                                                                                               
|                     | Notes to Consolidated Financial Statements                                                           |                                                                                                                                                                                               
|                     |                                                                                                      | The following consolidated financial statement schedule of Mac-Gray Corporation is included in Item 15 (a)(2) and should be read in conjunction with the financial statements included herein.
|                     |                                                                                                      | Schedule II Valuation and Qualifying Accounts                                                                                                                                                 

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

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In
our opinion, the 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 and its subsidiaries at December 31, 2003 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2004, 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
appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion.

As
disclosed in Note 6, the Company changed the manner in which it accounts for goodwill and other intangible assets upon adoption of the accounting guidance of Statement of
Financial Accounting Standards No. 142 effective on January 1, 2002.

/s/
PricewaterhouseCoopers LLP

Boston,
Massachusetts
February 25, 2005

F-2

---





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

|                                                              |                                                                                                                                                                                                                               | December 31,
2003 |                            | December 31,
2004 |  
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------------------------- | ----------------- | -
|ASSETS                                                        |                                                                                                                                                                                                                               |                   |                            |                   |  
|Current assets:                                               |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                                              | Cash and cash equivalents                                                                                                                                                                                                     |                   | $                          | 5,296             |  
|                                                              | Trade receivables, net of allowance for doubtful accounts                                                                                                                                                                     |                   |                            | 9,067             |  
|                                                              | Inventory of finished goods                                                                                                                                                                                                   |                   |                            | 4,858             |  
|                                                              | Deferred income taxes                                                                                                                                                                                                         |                   |                            | 2,608             |  
|                                                              | Prepaid expenses, facilities management rent and other current assets                                                                                                                                                         |                   |                            | 7,858             |  
|                                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                                              |                                                                                                                                                                                                                               |                   | Total current assets       |                   |  
|Property, plant and equipment, net                            |                                                                                                                                                                                                                               |                   | 76,621                     |                   |  
|Goodwill                                                      |                                                                                                                                                                                                                               |                   | 37,941                     |                   |  
|Intangible assets, net                                        |                                                                                                                                                                                                                               |                   | 7,348                      |                   |  
|Prepaid expenses, facilities management rent and other assets |                                                                                                                                                                                                                               |                   | 10,408                     |                   |  
|                                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                                              |                                                                                                                                                                                                                               |                   | Total assets               |                   | $
|                                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                          |                                                                                                                                                                                                                               |                   |                            |                   |  
|Current liabilities:                                          |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                                              | Current portion of long-term debt                                                                                                                                                                                             |                   | $                          | 2,984             |  
|                                                              | Current portion of capital lease obligations                                                                                                                                                                                  |                   |                            | 635               |  
|                                                              | Trade accounts payable                                                                                                                                                                                                        |                   |                            | 5,568             |  
|                                                              | Accrued facilities management rent                                                                                                                                                                                            |                   |                            | 8,380             |  
|                                                              | Accrued expenses                                                                                                                                                                                                              |                   |                            | 5,868             |  
|                                                              | Deferred revenues and deposits                                                                                                                                                                                                |                   |                            | 1,005             |  
|                                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                                              |                                                                                                                                                                                                                               |                   | Total current liabilities  |                   |  
|Long-term debt                                                |                                                                                                                                                                                                                               |                   | 46,000                     |                   |  
|Long-term capital lease obligations                           |                                                                                                                                                                                                                               |                   | 1,254                      |                   |  
|Deferred income taxes                                         |                                                                                                                                                                                                                               |                   | 20,720                     |                   |  
|Deferred retirement obligation                                |                                                                                                                                                                                                                               |                   | 437                        |                   |  
|Other liabilities                                             |                                                                                                                                                                                                                               |                   | 425                        |                   |  
|Commitments and contingencies (Note 15)                       |                                                                                                                                                                                                                               |                   |                            |                   |  
|Stockholders' equity:                                         |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                                              | Preferred stock of Mac-Gray Corporation ($.01 par value, 5 million shares authorized, no shares outstanding)                                                                                                                  |                   |                            |                  |  
|                                                              | Common stock of Mac-Gray Corporation ($.01 par value, 30 million shares authorized, 13,449,354 issued and 12,579,494 outstanding at December 31, 2003, and 13,443,754 issued and 12,782,089 outstanding at
December 31, 2004) |                   |                            | 134               |  
|                                                              | Additional paid in capital                                                                                                                                                                                                    |                   |                            | 68,561            |  
|                                                              | Accumulated other comprehensive (loss) income                                                                                                                                                                                 |                   |                            | (372              | )
|                                                              | Retained earnings                                                                                                                                                                                                             |                   |                            | 9,439             |  
|                                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                                              |                                                                                                                                                                                                                               |                   | 77,762                     |                   |  
|                                                              | Less common stock in treasury, at cost (869,860 shares at December 31, 2003 and 661,665 shares at December 31, 2004)                                                                                                          |                   |                            | (9,033            | )
|                                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|                                                              |                                                                                                                                                                                                                               |                   | Total stockholders' equity |                   |  
|                                                              |                                                                                                                                                                                                                               |                   |                            |                   |  
|Total liabilities and stockholders' equity                    |                                                                                                                                                                                                                               | $                 | 162,005                    |                   | $
|                                                              |                                                                                                                                                                                                                               |                   |                            |                   |  

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

F-3

---





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

|                                                                                      |                                                                | Years Ended December 31, |       
|------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------ | ------
|
|Revenue:                                                                              |                                                                |                          |       
|                                                                                      | Facilities management revenue                                  |                          | $     
|                                                                                      | Sales                                                          |                          |       
|                                                                                      | Other                                                          |                          |       
|                                                                                      |                                                                |                          |       
|                                                                                      |                                                                | Total revenue            |       
|                                                                                      |                                                                |                          |       
|Cost of revenue:                                                                      |                                                                |                          |       
|                                                                                      | Facilities management rent                                     |                          |       
|                                                                                      | Facilities management expenditures                             |                          |       
|                                                                                      | Depreciation and amortization                                  |                          |       
|                                                                                      | Cost of product sales                                          |                          |       
|                                                                                      |                                                                |                          |       
|                                                                                      |                                                                | Total cost of revenue    |       
|                                                                                      |                                                                |                          |       
|Gross margin                                                                          |                                                                |                          | 32,412
|                                                                                      |                                                                |                          |       
|Operating expenses:                                                                   |                                                                |                          |       
|                                                                                      | General and administration                                     |                          |       
|                                                                                      | Sales and marketing                                            |                          |       
|                                                                                      | Depreciation and amortization                                  |                          |       
|                                                                                      | Gain on sale of assets, net                                    |                          |       
|                                                                                      | Loss on early extinguishment of debt                           |                          |       
|                                                                                      |                                                                |                          |       
|                                                                                      |                                                                | Total operating expenses |       
|                                                                                      |                                                                |                          |       
|Income from operations                                                                |                                                                |                          | 10,923
|                                                                                      | Interest expense, net                                          |                          |       
|                                                                                      | Other income (expense), net                                    |                          |       
|                                                                                      | Gain on sale of lease receivables                              |                          |       
|                                                                                      |                                                                |                          |       
|Income before provision for income taxes and effect of change in accounting principle |                                                                |                          | 6,341 
|                                                                                      | Provision for income taxes                                     |                          |       
|                                                                                      |                                                                |                          |       
|Net income before effect of change in accounting principle                            |                                                                |                          | 3,774 
|                                                                                      | Effect of change in accounting principlenet of taxes (Note 6) |                          |       
|                                                                                      |                                                                |                          |       
|Net income                                                                            |                                                                | $                        | 2,868 
|                                                                                      |                                                                |                          |       
|Net income per common share before effect of change in accounting principlebasic     |                                                                | $                        | 0.30  
|                                                                                      |                                                                |                          |       
|Net income per common share before effect of change in accounting principlediluted   |                                                                | $                        | 0.30  
|                                                                                      |                                                                |                          |       
|Net income per common sharebasic                                                     |                                                                | $                        | 0.23  
|                                                                                      |                                                                |                          |       
|Net income per common sharediluted                                                   |                                                                | $                        | 0.23  
|                                                                                      |                                                                |                          |       
|Weighted average common shares outstandingbasic                                      |                                                                |                          | 12,661
|                                                                                      |                                                                |                          |       
|Weighted average common shares outstandingdiluted                                    |                                                                |                          | 12,664
|                                                                                      |                                                                |                          |       

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

F-4

---





MAC-GRAY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)

|                           |                                                                                                         | Common stock |        |   |     |   |   |        |    |   |        | Treasury Stock |   |       |      
|-------------------------- | ------------------------------------------------------------------------------------------------------- | ------------ | ------ | - | --- | - | - | ------ | -- | - | ------ | -------------- | - | ----- | -----
|
|
|Balance, December 31, 2001 |                                                                                                         | 13,443,754   |        | $ | 134 |   | $ | 68,540 |    | $ | (1,911 | )              |   |       |      
|                           | Net income                                                                                              |              |       |   |     |  |   |        |   |   |        |               |   | $     | 2,868
|                           | Other comprehensive income:                                                                             |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Unrealized gain on derivative instruments and reclassification adjustment, net of tax of $125 (Note 11) |              |       |   |     |  |   |        |   |   |        | 188            |   |       | 188  
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|Comprehensive income       |                                                                                                         |             |        |   |    |   |   |       |    |   |       |                | $ | 3,056 |      
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Stock issuanceEmployee Stock Purchase Plan                                                             |              |       |   |     |  |   |        |   |   |        |               |   |       |      
|                           | Repurchase of common stock                                                                              |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Stock granted                                                                                           |              |       |   |     |  |   |        |   |   |        |               |   |       |      
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|Balance, December 31, 2002 |                                                                                                         | 13,443,754   |        |   | 134 |   |   | 68,540 |    |   | (1,723 | )              |   |       |      
|                           | Net income                                                                                              |              |       |   |     |  |   |        |   |   |        |               |   | $     | 4,104
|                           | Other comprehensive income:                                                                             |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Unrealized gain on derivative instruments and reclassification adjustment, net of tax of $901 (Note 11) |              |       |   |     |  |   |        |   |   |        | 1,351          |   |       | 1,351
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Comprehensive income                                                                                    |              |       |   |     |  |   |        |   |   |        |               |   | $     | 5,455
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Stock issuanceEmployee Stock Purchase Plan                                                             |              |       |   |     |  |   |        |   |   |        |               |   |       |      
|                           | Repurchase of common stock                                                                              |              |       |   |     |  |   |        |   |   |        |               |   |       |      
|                           | Options exercised                                                                                       |              | 5,600  |   |     |  |   |        | 21 |   |        |               |   |       |      
|                           | Stock granted                                                                                           |              |       |   |     |  |   |        |   |   |        |               |   |       |      
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|Balance, December 31, 2003 |                                                                                                         | 13,449,354   |        |   | 134 |   |   | 68,561 |    |   | (372   | )              |   |       |      
|                           | Net income                                                                                              |              |       |   |     |  |   |        |   |   |        |               |   | $     | 5,263
|                           | Other comprehensive income:                                                                             |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Unrealized gain on derivative instruments and reclassification adjustment, net of tax of $796 (Note 11) |              |       |   |     |  |   |        |   |   |        | 1,194          |   |       | 1,194
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Comprehensive income                                                                                    |              |       |   |     |  |   |        |   |   |        |               |   | $     | 6,457
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|                           | Options exercised                                                                                       |              | 2,000  |   |     |  |   |        | 7  |   |        |                |   |       |      
|                           | Retirement of treasury stock                                                                            |              | (7,600 | ) |     |   |   |        |    |   |        |                |   |       |      
|                           | Stock issuanceEmployee Stock Purchase Plan                                                             |              |       |   |     |  |   |        |   |   |        |               |   |       |      
|                           | Stock granted                                                                                           |              |       |   |     |  |   |        |   |   |        |               |   |       |      
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      
|Balance, December 31, 2004 |                                                                                                         | 13,443,754   |        | $ | 134 |   | $ | 68,568 |    | $ | 822    |                |   |       |      
|                           |                                                                                                         |              |        |   |     |   |   |        |    |   |        |                |   |       |      

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

F-5

---





MAC-GRAY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

|                                                 |                                                                                         | Years ended December 31,                                                              |                                                          
|------------------------------------------------ | --------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------
|
|Cash flows from operating activities:            |                                                                                         |                                                                                       |                                                          
|                                                 | Net income                                                                              |                                                                                       | $                                                        
|                                                 | Adjustments to reconcile net income to net cash flows provided by operating activities: |                                                                                       |                                                          
|                                                 |                                                                                         | Depreciation and amortization                                                         |                                                          
|                                                 |                                                                                         | Effect of change in accounting principle                                              |                                                          
|                                                 |                                                                                         | Loss on early extinguishment of debt                                                  |                                                          
|                                                 |                                                                                         | (Decrease) increase in allowance for doubtful accounts and lease reserves             |                                                          
|                                                 |                                                                                         | Gain on sale of assets                                                                |                                                          
|                                                 |                                                                                         | Deferred income taxes                                                                 |                                                          
|                                                 |                                                                                         | Director stock grant                                                                  |                                                          
|                                                 |                                                                                         | Non-cash interest expense                                                             |                                                          
|                                                 |                                                                                         | Decrease (increase)in accounts receivable                                             |                                                          
|                                                 |                                                                                         | Decrease (increase) in inventory                                                      |                                                          
|                                                 |                                                                                         | (Increase) decrease in prepaid expenses, facilities management rent and other assets  |                                                          
|                                                 |                                                                                         | Increase in accounts payable, accrued facilities management rent and accrued expenses |                                                          
|                                                 |                                                                                         | Decrease in deferred revenues and customer deposits                                   |                                                          
|                                                 |                                                                                         |                                                                                       |                                                          
|                                                 |                                                                                         |                                                                                       | Net cash flows provided by operating activities          
|                                                 |                                                                                         |                                                                                       |                                                          
|Cash flows from investing activities:            |                                                                                         |                                                                                       |                                                          
|                                                 | Capital expenditures                                                                    |                                                                                       |                                                          
|                                                 | Payments for acquisitions                                                               |                                                                                       |                                                          
|                                                 | Proceeds from sale of lease receivables                                                 |                                                                                       |                                                          
|                                                 | Proceeds from sale of property and equipment                                            |                                                                                       |                                                          
|                                                 |                                                                                         |                                                                                       |                                                          
|                                                 |                                                                                         |                                                                                       | Net cash flows used in investing activities              
|                                                 |                                                                                         |                                                                                       |                                                          
|Cash flows from financing activities:            |                                                                                         |                                                                                       |                                                          
|                                                 | Payments on long-term debt and capital lease obligations                                |                                                                                       |                                                          
|                                                 | Borrowings on term credit facility and mortgage note payable                            |                                                                                       |                                                          
|                                                 | Payments on term credit facility and mortgage note payable                              |                                                                                       |                                                          
|                                                 | Payments on 2000 Senior Secured Credit Facility, net                                    |                                                                                       |                                                          
|                                                 | Borrowings on revolving credit facility, net                                            |                                                                                       |                                                          
|                                                 | Payments for repurchase of common stock                                                 |                                                                                       |                                                          
|                                                 | Financing costs                                                                         |                                                                                       |                                                          
|                                                 | Payments for termination of derivitive instruments                                      |                                                                                       |                                                          
|                                                 | Proceeds from issuance of common stock                                                  |                                                                                       |                                                          
|                                                 | Proceeds from exercise of stock options                                                 |                                                                                       |                                                          
|                                                 |                                                                                         |                                                                                       |                                                          
|                                                 |                                                                                         |                                                                                       | Net cash flows (used in) provided by financing activities
|                                                 |                                                                                         |                                                                                       |                                                          
|(Decrease) increase in cash and cash equivalents |                                                                                         |                                                                                       | (209                                                     
|Cash and cash equivalents, beginning of period   |                                                                                         |                                                                                       | 5,225                                                    
|                                                 |                                                                                         |                                                                                       |                                                          
|Cash and cash equivalents, end of period         |                                                                                         | $                                                                                     | 5,016                                                    
|                                                 |                                                                                         |                                                                                       |                                                          
|Supplemental cash flow information:              |                                                                                         |                                                                                       |                                                          
|                                                 | Interest paid                                                                           |                                                                                       | $                                                        
|                                                 | Income taxes paid                                                                       |                                                                                       | $                                                        

Supplemental disclosure of non-cash investing activities: During the years ended December 31, 2002, 2003 and 2004, the Company acquired
various vehicles under capital lease agreements totaling $915, $1,380 and $1,579, respectively.

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

F-6

---





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/coin-operated laundry rooms located in the Northeastern, Southeastern and Midwestern United States. A portion of its revenue is also derived from the sale and lease of the Company's
MicroFridge® product lines. 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, services and leases commercial laundry equipment to commercial laundromats, multi-unit housing properties and institutions. The Company also generates revenue from
card/coin-operated reprographics equipment located in university and municipal libraries, and other buildings. 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.

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. On occasion the Company has excess cash available for a short period of time; when this occurs, the Company invests such excess cash in repurchase agreements and other
highly liquid short-term investments. Accordingly, the investments are subject to minimal credit and market risk. The Company has cash investments with financial institutions in excess of the $100
insured limit of the Federal Deposit Insurance Corporation. Included in cash and cash equivalents is an estimate of cash not yet collected which remains at laundry and reprographics customer
locations. At December 31, 2003 and 2004, this estimate was $3,621 and $4,549, respectively.

Revenue Recognition.The Company recognizes facilities management revenue on the accrual basis. Rental revenue is recognized
ratably over the related contractual period, which is generally less than one year. The Company recognizes revenue from product 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. All 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.

The
Company has entered into long-term lease transactions that meet the qualifications of a sales-type lease for certain equipment. For these transactions, the amount of revenue
recognized upon product shipment is the present value of the minimum lease payments, excluding executory costs and excluding profits on executory costs, discounted at the interest rate implicit in the
lease. Interest revenue is recognized over the life of the rental agreement. At December 31, 2003 and 2004 the Company had $6,553 and $4,276, respectively, in receivables related to sales-type
leases. These receivables have been recorded net of unearned interest income of $667 and $359 at December 31, 2003 and 2004. These receivables are primarily due ratably over the next six years
and have been classified as other current assets and other long-term assets, as appropriate, in the consolidated balance sheet. The related reserve for lease receivables at December 31, 2003
and 2004 was $542 and $152, respectively. The Company has not entered into any significant sales-type leases since 2001. In

F-7

---



September
of 2003, the Company received $3,284 for the sale of certain lease receivables resulting in a gain of $836.

Allowance for Doubtful Accounts.On a regular basis, the Company reviews the adequacy of its provision for doubtful accounts
for trade accounts receivable and lease receivables based on historical collection results and current economic conditions using factors based on the aging of its trade accounts and lease
receivables. 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 receivable of $393 and $230 at December 31, 2003 and 2004, respectively.

Concentration of Credit Risk.Financial instruments which potentially expose the Company to concentration of credit risk
include trade and lease receivables generated by the Company as a result of the selling and leasing of laundry equipment and MicroFridge® products. 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 customer accounted for more than 10% of
revenues or accounts receivable for any period presented.

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, 2003 and 2004, based upon terms currently available to the Company in financial markets. The fair value of the 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.

Inventories.Inventories are stated at the lower of cost (as determined using the first-in, first-out 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. The prepaid amount is amortized ratably over the life of the contract.

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

F-8

---



next
twelve months and have not been purchased for commercial sale. These assets are grouped in Property, Plant and Equipment.

Advertising Costs.Advertising costs are expensed as incurred. These costs were $878, $1,101 and $1,251 for the years ended
December 31, 2002, 2003 and 2004, respectively.

Goodwill and Intangible Assets.Intangible assets primarily consist of various non-compete agreements, customer lists,
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 two to
five years. Customer lists are amortized using the straight-line method over 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: the seller's renewal rate of the contract portfolio for the most recent years prior to the acquisition, the number of 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 1.5% 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. In accordance with the adoption of the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142") (see
note 6), the Company stopped amortizing goodwill on January 1, 2002.

Impairment of Long-Lived Assets.The Company reviews long-lived assets, including fixed assets and intangible assets with
definitive lives, 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. The Company's annual impairment test for contract rights assigned a 15-year amortization period consists of comparing the current number of machines under contract
and the current cash flow of all the Company's contracts in the market where the portfolios were acquired to the original number of machines acquired and the cash flow as predicted by the Company at
the time of the acquisition. For those contract rights assigned a 20-year amortization period, the Company's annual impairment test consists primarily of identifying the accumulated retention rate of
the specific contract portfolio in order to assess the appropriateness of the net book value of the related contract rights. If an impairment is indicated, the asset is written down to its estimated
fair value on a discounted cash flow basis.

In
accordance with FAS 142, the Company tests its goodwill annually for impairment. The goodwill impairment review consists of a two-step process of first determining the fair
value of the reporting unit and comparing it to the carrying value of the net assets allocated to the reporting unit. Fair values of the reporting units were determined based on estimates of
comparable market price or discounted future cash flows. If this fair value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value of the
reporting unit is less than the carrying value of the net assets, the implied fair value of the reporting unit is allocated to all the underlying assets and liabilities, including both recognized and
unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written-down to its fair value.

F-9

---



Income Taxes.The Company accounts for income taxes utilizing the asset and liability method as prescribed by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under the provisions of FAS 109, the current or deferred tax consequences of a transaction are measured
by applying the provisions of enacted tax laws to determine the amount of taxes payable currently or in future years. The classification of net current and non-current deferred tax assets or
liabilities depend upon the nature of the related asset or liability. Deferred income taxes are provided for temporary differences between the income tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes.

Stock Compensation.The Company's stock option plans are accounted for in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The Company uses the disclosure requirements of Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"). Under APB No. 25, the Company does not recognize compensation expense on stock options granted to employees, because the exercise price of each
option is equal to the market price of the underlying stock on the date of the grant.

If
the company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by FAS 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:

Year Ended December 31,2002

2003

2004Net income, as reported

$
2,868

$
4,104

$
5,263Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects


(244
)

(377
)

(241
)Pro forma net income

$
2,624

$
3,727

$
5,022Earnings per share:Basic, as reported

$
0.23

$
0.32

$
0.41Basic, pro forma

$
0.21

$
0.29

$
0.40Diluted, as reported

$
0.23

$
0.32

$
0.40Diluted, pro forma

$
0.21

$
0.29

$
0.39


F-10

---



The
fair value of the Company's options was estimated as of the date of grant using a Black-Scholes option pricing model with the following components:

December 31,2002

2003

2004Fair value of options granted at grant date

$1.85

$2.42

$2.48Risk free interest rate

2.5%-4.9%

3.74%

3.03%Expected option termemployees

7 years

7 years

7 yearsExpected option termindependent directors

3 years

3 years

3 yearsExpected volatility

52%

41%

36%


Because
the determination of the fair value of all options granted includes vesting periods over several years and additional option grants are expected to be made each year, the above
pro forma disclosures are not representative of pro forma effects of reported net income for future periods.

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.The Company accounts for earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 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 earnings per share has been calculated using the treasury stock method.

Other Comprehensive Income.The Company accounts for comprehensive income in accordance with Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). This statement requires disclosure of comprehensive income and its components in interim and annual reports.
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 in accordance with the provisions of Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), and Statement of Financial Accounting Standard No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB No. 133" ("FAS 138"). These statements require the Company to recognize derivatives 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

F-11

---



value
will be immediately recognized in earnings. The Company has designated its interest rate swap agreements as cash flow hedges. Accordingly, the change in fair value of the agreements are
recognized in other comprehensive income and the ineffective portion of the change is recognized in earnings immediately.

Product Warranties.The Company offers limited-duration warranties on MicroFridge® products and, at the time of
sale, provides reserves for all estimated warranty costs based upon historical experience. Actual costs have not exceeded the Company's estimates.

The
activity for the year ended December 31, 2004 is as follows:

Accrued
WarrantyBalance, December 31, 2002

$
165Accruals for warranties issued


238Settlements made (in cash or in kind)


(153
)Balance, December 31, 2003


250Accruals for warranties issued


383Settlements made (in cash or in kind)


(365
)Balance, December 31, 2004

$
268


New Accounting Pronouncements.In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," addresses consolidation by business enterprises of
variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. FIN 46, as revised in
December 2003, must be applied at the end of periods ending after March 15, 2004, and is effective immediately for all new variable interest entities created or acquired after
January 31, 2003. The adoption of the revised FIN 46 by the Company did not have any impact on its results of operations or financial position, as at this time the Company does not have a
controlling interest in any variable interest entities. The Company will apply the consolidation requirement of FIN 46 in future periods if it should own any interest in any variable interest entity.

In
November 2004, the FASB issued FASB Statement No. 151, "Inventory Costs, an Amendment of ARB No. 43 Chapter 4" ("SFAS 151"). SFAS 151 is applicable
for inventory costs incurred during fiscal years beginning after June 15, 2005. SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight and
rehandling be recognized as current-period charges rather than being included in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. The Company is currently
completing its evaluation of the adoption of SFAS 151 and the impact, if any, that this statement will have on its results of operations.

In
December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment"
("SFAS 123R").

F-12

---



SFAS 123R
is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation," supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), and amends FASB Statement No. 95 "Statement of Cash Flows." SFAS 123R requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values. SFAS 123R is applicable for all interim and fiscal periods beginning after June 15, 2005. Early adoption
is permitted. The Company is currently completing its evaluation of the adoption of SFAS 123R and the impact that this statement will have on its results of operations.

Reclassifications.Certain amounts from prior years have been reclassified to conform to current year presentation.

3. Prepaid Expenses, Facilities Management Rent and Other Current Assets

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

December 31,2003

2004Prepaid facilities managment rent

$
1,718

$
1,906Prepaid supplies


1,959


1,892Leases receivable


2,521


1,884Prepaid insurance


836


972Other


824


803$
7,858

$
7,457


4. Prepaid Expenses, Facilities Management Rent and Other Assets

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

December 31,2003

2004Prepaid facilities managment rent

$
5,192

$
6,514Leases receivable


3,272


2,048Notes receivable


1,045


635Derivative instruments


566


940Other


333


257$
10,408

$
10,394


F-13

---





5. Property, Plant and Equipment

Property, plant and equipment consist of the following:

December 31Estimated
Useful Life2003

2004Facilities management equipment

10 years

$
138,955

$
165,456Rental equipment

7 years


4,221


2,243Facilities management improvements

7-10 years


8,786


9,938Buildings and improvements

15-39 years


2,652


2,658Furniture, fixtures and computer equipment

2-7 years


8,860


9,466Trucks and autos

3-5 years


5,432


5,917Tooling costs

3 years


340


394Land and improvements




221


221169,467


196,293Less: accumulated depreciation




94,324


108,60375,143


87,690Facilities management equipment, not yet placed in service




1,478


2,086Property, plant and equipment, net



$
76,621

$
89,776


Depreciation
of property, plant and equipment totaled $16,212, $16,466 and $19,254 for the years ended December 31, 2002, 2003 and 2004, respectively.

At
December 31, 2003 and 2004, trucks and autos included $5,085 and $5,794, respectively, of equipment under capital lease with an accumulated amortization balance of $3,197 and
$3,328, respectively.

6. Goodwill and Intangible Assets

On January 1, 2002, the Company adopted the provisions of FAS 142. FAS 142 requires an initial impairment assessment upon adoption on
January 1, 2002, as well as an annual assessment thereafter. The Company engaged an independent third-party business appraisal firm to assist in this process. After their review of information
provided by the Company and obtained from public sources, the outside firm performed a fair market valuation of the Company's Laundry and Reprographics, and MicroFridge® segments. These
segments represent the Company's reporting units under FAS 142. Upon the completion of this evaluation it was determined that the fair value of the Laundry and MicroFridge®
reporting units exceeded their book value, therefore no impairment of goodwill occurred in these reporting units. However, due to the continued decline in the performance of the reprographics
reporting unit as a result of expanding use of the Internet in college and public libraries, and access to free laser printers, the book value of the reprographics reporting unit exceeded the fair
value, resulting in a non-cash write-off of the remaining book value of the reporting unit's goodwill in the period ended March 31, 2002, of $906, or $0.07 per share. In accordance with
FAS 142, this has been recorded as the effect of a change in accounting principle.

F-14

---



Goodwill,
which will not be further amortized, and intangible assets to be amortized consist of the following:

As of December 31, 2003Cost

Accumulated
Amortization

Net Book ValueGoodwill:Laundry

$
37,718




$
37,718MicroFridge®


223





223$
37,941




$
37,941Intangible assets:Laundry and reprographics:Non-compete agreements

$
4,532

$
3,812

$
720Contract rights


9,832


4,652


5,180MicroFridge®:Customer lists


1,451


538


913Deferred financing costs


921


386


535$
16,736

$
9,388

$
7,348


As of December 31, 2004Cost

Accumulated
Amortization

Net Book ValueGoodwill:Laundry and reprographics

$
37,718




$
37,718MicroFridge®


223





223$
37,941




$
37,941Intangible assets:Laundry and reprographics:Non-compete agreements

$
4,580

$
4,018

$
562Contract rights


38,807


6,661


32,146MicroFridge®:Customer lists


1,451


637


814Deferred financing costs


1,029


601


428$
45,867

$
11,917

$
33,950


F-15

---



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

2005

$
2,5082006


2,4402007


2,2972008


2,2862009


2,270Thereafter


22,149$
33,950


Amortization
expense associated with the above intangible assets amounted to $1,486, $1,357 and $2,540 for the years ended December 31, 2002, 2003 and 2004, respectively.

7. Accrued Expenses

Accrued expenses consist of the following:

December 31,2003

2004Accrued interest

$


$
135Accrued salaries/benefits


680


80Accrued commission/bonuses


1,318


1,605Accrued warranty


250


268Deferred service revenue


333


203Deferred smart card revenue


747


813Current portion of deferred retirement obligation


104


104Accrued professional fees


241


257Accrued personal property taxes


140


515Accrued income taxes


1,160


416Accrued sales tax


308


289Accrued insurance


342


503Other accrued expenses


245


149$
5,868

$
5,337


8. Deferred Retirement Obligation

The deferred retirement obligation at December 31, 2003 and 2004 relates to payments due to a former shareholder of the Company in connection with a
retirement agreement, which provides for annual payments of $104 until the death of the former shareholder. The liability has been estimated based upon the life expectancy of the former shareholder
utilizing actuarial tables.

F-16

---



9. Acquisitions

On January 16, 2004, the Company acquired substantially all the assets of the eastern region of Web Service Company, Inc. In addition, the Company
sold certain of its laundry facilities management assets in several western states for approximately $2,000 to Web Service Company, Inc. In accordance with SFAS No. 141, "Business
Combinations", the disposal of certain of our laundry facilities management assets and related contracts in western states was recognized at fair value, the difference between the fair value and the
Company's cost recognized as a gain and the fair value of the assets transferred to the seller is included in the acquisition costs. This sale resulted in a gain of approximately $1,218. The
acquisition has been reflected in the accompanying condensed consolidated financial statements from the date of acquisition, and has been accounted for as a purchase business combination in accordance
with SFAS No. 141, "Business Combinations". The total purchase price of $41,422 has been allocated to the acquired assets and liabilities based on estimates of their related fair value. The
Company engaged an independent business appraisal firm to estimate the fair value of the assets acquired and to advise the Company on the proper allocation of the purchase price and the useful lives
to be assigned where applicable. A twenty-year amortization period has been assigned to the acquired contract rights and a five-year depreciation period was assigned to the acquired used laundry
equipment. The acquisition of these assets, which are primarily in the Company's existing geographical markets, helps fulfill the
Company's strategic objective of increasing laundry equipment density, thereby achieving a higher level of operational efficiencies.

The
total purchase price, including costs of acquisition of $387, was allocated as follows:

|Contract Rights                    |  | $ | 28,060 |  
|---------------------------------- |  | - | ------ | -
|Equipment                          |  |   | 12,027 |  
|Inventory                          |  |   | 804    |  
|Accrued Uncollected Cash           |  |   | 941    |  
|Furniture & Fixtures               |  |   | 30     |  
|Non-Compete Agreement              |  |   | 49     |  
|Accrued Facilities Management Rent |  |   | (489   | )
|                                   |  |   |       
|Total Purchase Price               |  | $ | 41,422 |  
|                                   |  |   |       

The
following unaudited pro forma operating results of the Company assume the acquisition took place on January 1, 2003. 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.

For the year ended
December 31,
2003Net revenue

$
178,639Net income


2,785Net income per share:Basic

$
0.22Diluted

$
0.22


F-17

---





10. Long-Term Debt

Long-term debt consists of the following:

December 31,2003

20042003 Senior Secured Credit Facility


48,694


66,982Mortgage loan





3,880Various fixed interest rate notes, (8.4%-11.51%) due through February 1, 2005


15


1Acquisition note payable, 8% imputed interest rate (estimated fair market rate), monthly payments, due May 31, 2006


275


Total long-term debt


48,984


70,863Less: current portion


2,984


5,161$
46,000

$
65,702


Credit Agreement and Revolving Credit Facility

On June 24, 2003, the Company entered into a Senior Secured Credit Facility with a group of banks. This transaction retired both the June 2000
Revolving Line of Credit and the June 2000 Senior Secured Term Loan Facility, which were due to expire in July 2004 and June 2005, respectively. On January 16, 2004, the
Company and its group of banks amended the June 24, 2003 Senior Secured Credit Facility. On January 10, 2005 the Company entered into a new Senior Secured Credit Facility in connection
with a business acquisition (see Note 19).

The
amended Revolving Line of Credit and Term Loan Facility (the "2003 Senior Secured Credit Facility") provides for borrowings up to $105,000 with borrowings under a Revolving Line of
Credit of up to $70,000 maturing December 31, 2006 and a $35,000 Senior Secured Term Loan Facility maturing December 31, 2008. The Senior Secured Term Loan Facility requires quarterly
payments of $1,250 and a final payment of the remaining principal balance due at maturity. In addition to the scheduled quarterly payments on the Senior Secured Term Loan Facility, the Company is
required to pay an amount equal to 50% of Excess Cash Flow, as defined, for each fiscal year if the Funded Debt Ratio (as defined) for each of the preceding four fiscal quarters is less than 1.50 to
1.00. This payment is first used to reduce the Senior Secured Term Loan Facility with any remaining amounts used to reduce the Revolving Line of Credit. No Excess Cash Flow payment was required at
December 31, 2004.

Outstanding
indebtedness under the 2003 Senior Secured Credit Facility bears interest, at the Company's option, at a rate equal to the prime rate, or LIBOR plus 1.75%. The Applicable
LIBOR margin may be adjusted quarterly based on certain financial ratios. The average interest rate at December 31, 2003 and 2004 was 4.1% and 4.5%, respectively, including the applicable
spread paid to the banks.

The
2003 Senior Secured Credit Facility is collateralized by a blanket lien on the assets of the Company and each of its subsidiaries, except for its corporate headquarters, as well as a
pledge by the Company of all of the capital stock of its subsidiaries. The 2003 Senior Secured Credit Facility includes certain financial and operational covenants. The most restrictive financial
ratio is a minimum level of

F-18

---



debt
service coverage. The Company was in compliance with all financial covenants at December 31, 2004.

The
2003 Senior Secured Credit Facility contains a commitment fee which is calculated as a percentage of the average daily-unused portion of the 2003 Senior Secured Credit Facility. This
percentage may be adjusted quarterly based on the Funded Debt Ratio. As of December 31, 2004, the Company's commitment fee was equal to 0.375%.

As
of December 31, 2004, there was $30,000 outstanding under the term loan, $36,982 outstanding under the revolving line of credit, and $21 in outstanding letters of credit. The
available balance under the revolving line of credit was $32,997 at December 31, 2004.

Required
payments under the 2003 Senior Secured Credit Facility are as follows:

2005

$
5,0002006


41,9822007


5,0002008


15,0002009


Thereafter


$
66,982


Concurrent
with the June 24, 2003 refinancing and the January 16, 2004 amendment to the 2003 Senior Secured Credit Facility, the Company expensed approximately $381 and
$183 in deferred financing costs, respectively.

On
March 4, 2004, the Company obtained a $4,000 mortgage loan on its corporate headquarters in Cambridge, Massachusetts. The loan bears interest at a rate of LIBOR plus 1.50%, has
a twenty-five year amortization, which includes quarterly payments of $40 plus interest beginning in June 2004, and has a balloon payment of $3,280 due upon its maturity on December 31,
2008. As of December 31, 2004, there was $3,880 outstanding under the mortgage loan and the interest rate was 4.98%. The loan is cross-defaulted to the 2003 Senior Secured Credit Facility.

Long-term
debt also includes various notes payable totaling $290 and $1 at December 31, 2003 and 2004.

11. Derivative Instruments

As required by the 2003 Senior Secured Credit Facility, 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 2003 Senior Secured Credit Facility. The Company has also elected to enter into a swap agreement to
coincide with the mortgage note

F-19

---



payable.
The Company has designated its interest rate swap agreements as cash flow hedges. The table below outlines the details of each swap agreement:

Date of
Origin

Original
Notional
Amount

Fixed/
Amortizing

Notional
Amount
December 31,
2004

Expiration
Date

Fixed
RateJun 24, 2003

$
20,000

Fixed

$
20,000

Jun 30, 2008

2.69
%Jun 24, 2003

$
20,000

Amortizing

$
15,715

Jun 30, 2008

2.34
%Feb 17, 2004

$
21,600

Fixed

$
21,600

Feb 17, 2007

2.58
%Mar 8, 2004

$
4,000

Amortizing

$
3,880

Dec 31, 2008

3.09
%


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 Company is exposed to credit loss in the event of non-performance by the counter party to the swap agreement; 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, 2003 and 2004, the fair value of the Swap Agreements, net of related taxes, was an unrealized gain of $556 and $940,
respectively. This amount has been included in other assets on the consolidated balance sheet.

On
June 24, 2003, the Company terminated its two $20,000 interest rate swap agreements, which had been in effect since February 2000 and January 2002, respectively.
The January 2002 interest rate swap agreement was due to expire in February 2004 while the February 2000 interest rate swap agreement was due to expire in February 2005.
The Company paid $3,037 to terminate both the February 2000 and January 2002 swap agreements. As the timing of the forecasted future interest payments did not significantly change as a
result of the new credit facility, the accumulated other comprehensive losses related to the terminated interest rate swap agreements are reclassified against current period earnings in the same
period the forecasted interest payments occur. Upon termination, there was $1,419, net of taxes of $946, included in accumulated other comprehensive loss. The $88 associated with the
January 2002 interest rate swap agreement was reclassified as an earnings charge through February 2004 and the $1,331 associated with the February 2000 interest rate swap
agreement is being reclassified as an earnings charge through February 2005.

F-20

---



The
changes in accumulated other comprehensive (loss) income relate entirely to the Company's interest rate swap agreements. The components of other comprehensive income are as follows:

|                                                     |                                  | For the years ended December 31, |      
|---------------------------------------------------- | -------------------------------- | -------------------------------- | -----
|
|Unrealized gain on derivative instruments            |                                  | $                                | (877 
|Reclassification adjustment                          |                                  |                                  | 1,190
|                                                     |                                  |                                  |      
|Total other comprehensive income before income taxes |                                  |                                  | 313  
|Income tax expense                                   |                                  |                                  | (125 
|                                                     |                                  |                                  |      
|                                                     | Total other comprehensive income |                                  | $    
|                                                     |                                  |                                  |      

12. Income Taxes

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

|                 |                    | Years Ended December 31,
|---------------- | ------------------ | ------------------------
|
|Current state    |                    | $                       
|Deferred state   |                    |                         
|Current federal  |                    |                         
|Deferred federal |                    |                         
|                 |                    |                         
|                 | Total income taxes |                         
|                 |                    |                         

F-21

---



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

2003

2004Deferred tax assets:Net operating loss carryforwards

$
1,044

$
130Alternative minimum tax credit carryforwards


1,418


1,404Derivative instrument interest


599


77Accounts receivable


182


107Accrued bonus





336Deferred compensation


215


168Warranty Reserve


396


185Deferred revenue


294


332Long term lease receivable reserve


443


43Other


110


34,701


2,785Deferred tax liabilities:Depreciation


19,132


21,375Amortization


1,697


2,380Sales-type leases


1,984


1,606Other





10322,813


25,464Net deferred tax liabilities

$
18,112

$
22,679


For
the years ended December 31, 2002, 2003 and 2004 the statutory income tax rate differed from the effective rate primarily as a result of the following differences:

2002

2003

2004Taxes computed at federal statutory rate

34.0
%
34.0
%
34.0
%State income taxes, net of federal benefit

6.5

6.5

6.7Other



2.0

2.1Income tax provision

40.5
%
42.5
%
42.8
%


F-22

---



At
December 31, 2004, the Company has the following net operating loss carryforwards available to reduce certain future state taxable income:

Net operating loss carryforwards relating to certain losses incurred prior to the year ended December 31, 2001

$
732Net operating loss carryforwards relating to certain losses incurred in the year ending December 31, 2001


1,203Net operating loss carryforwards relating to certain losses incurred in the year ending December 31, 2002


548$
2,483


The
state net operating loss carryforwards expire 10-20 years from the year in which they were incurred, except for the Massachusetts portion. The Company believes it will be able
to fully utilize the state net operating loss carryforwards prior to their expiration date and accordingly, no valuation allowance has been recorded associated with these balances. The Federal and
Massachusetts net operating losses that were carried forward to 2004 were entirely utilized during 2004.

13. Repurchase of Common Stock

On December 2, 2002, the Board of Directors authorized a $2,000 stock repurchase program. The authorization expired on December 2, 2003. As of
December 31, 2002 and 2003, 3,800 shares and 155,500 shares had been purchased at a total cost of $12 and $622, respectively. No shares were purchased during 2004.

14. Segment Information

The Company operates three business units which are based on the Company's different product and service categories: Laundry, MicroFridge® and
Reprographics. These three business units have been aggregated into two reportable segments ("Laundry and Reprographics" and "MicroFridge®"). The Laundry and Reprographics business units
have been aggregated into one reportable segment since many operating functions of the laundry and reprographics operations are integrated. The Laundry business unit provides coin and card-operated
laundry equipment to multiple housing facilities such as apartment buildings, colleges and universities and public housing complexes. The Laundry business unit also operates as a distributor of and
provides service to commercial laundry equipment in public laundromats, as well as institutional purchasers, including hospitals, restaurants and hotels, for use in their own on-premise laundry
facilities. The MicroFridge® segment sells its own patented and proprietary line of refrigerator/freezer/microwave oven combinations to a customer base which includes colleges and
universities, government, hotel, motel and assisted living facilities. The MicroFridge® segment also sells laundry equipment to the United States government. The Reprographics business
unit provides coin and card-operated reprographics equipment to academic and public libraries.

There
are no intersegment revenues.

F-23

---





For the year ended December 31, 2004, the Company has included sales of laundry equipment to the United States government in the MicroFridge®
division. Prior to 2004, these sales were included in the laundry equipment sales results, which are included in the Laundry and Reprographics segment information. For comparative purposes the Company
has reclassified sales of laundry equipment to the United States government to be included in the MicroFridge® division for the years ended December 31, 2002 and 2003. Sales of
laundry equipment to the United States government were $2,771, $3,062 and $2,172 for the years ended December 31, 2002, 2003 and 2004, respectively. The Company has elected to report United
States government sales of laundry equipment in the MicroFridge® business segment due to the following considerations:



For
these reasons, management is of the opinion it is more appropriate to report sales of laundry equipment to the United States government in the MicroFridge® division for
segment reporting purposes.

The
tables below present information about the operations of the reportable segments of Mac-Gray for the years ended December 31, 2002, 2003 and 2004. The information presented
represents the key
financial metrics that are utilized by the Company's senior management in assessing the performance of each of the Company's reportable segments.

Year Ended December 31, 2002Laundry and
Reprographics

MicroFridge®

TotalRevenues

$
123,917

$
26,451

$
150,368Gross margin


24,919


7,493


32,412Depreciation and amortization


15,497


1,195


16,692Capital expenditures


12,843


100


12,943Total assets


130,248


24,228


154,476


Year Ended December 31, 2003Laundry and
Reprographics

MicroFridge®

TotalRevenues

$
124,273

$
25,383

$
149,656Gross margin


24,578


6,729


31,307Depreciation and amortization


15,842


1,013


16,855Capital expenditures


14,428


379


14,807Total assets


126,929


24,504


151,433


F-24

---



Year Ended December 31, 2004Laundry and
Reprographics

MicroFridge®

TotalRevenues

$
155,381

$
27,313

182,694Gross margin


30,724


6,890

37,614Depreciation and amortization


19,953


713

20,666Capital expenditures


17,313


114

17,427Total assets


165,578


25,948

191,526


The
following are reconciliations to corresponding totals in the accompanying consolidated financial statements:

|                                                                                      |                                                | 2002 |       | 2003    |   | 2004  |        
|------------------------------------------------------------------------------------- | ---------------------------------------------- | ---- | ----- | ------- | - | ----- | -------
|Income                                                                                |                                                |      |       |         |   |       |        
|                                                                                      | Total gross margin for the reportable segments |      | $     | 32,412  |   | $     | 31,307 
|                                                                                      | Operating expenses                             |      |       | (21,489 | ) |       | (22,196
|                                                                                      | Interest expense, net                          |      |       | (4,578  | ) |       | (2,807 
|                                                                                      | Other expense, net                             |      |       | (4      | ) |       |       
|                                                                                      | Gain on sale of lease receivables              |      |       |        |   |       | 836    
|                                                                                      |                                                |      |       |         |   |       |        
|Income before provision for income taxes and effect of change in accounting principle |                                                | $    | 6,341 |         | $ | 7,140 |        
|                                                                                      |                                                |      |       |         |   |       |        

|                                    |                               | 2002 |        | 2003   |   | 2004  
|----------------------------------- | ----------------------------- | ---- | ------ | ------ | - | ------
|Depreciation and amortization       |                               |      |        |        |   |       
|                                    | Total for reportable segments |      | $      | 16,692 |   | $     
|                                    | Corporate                     |      |        | 1,006  |   |       
|                                    |                               |      |        |        |   |       
|Total depreciation and amortization |                               | $    | 17,698 |        | $ | 17,823
|                                    |                               |      |        |        |   |       

|                           |                               | 2002 |        | 2003   |   | 2004  
|-------------------------- | ----------------------------- | ---- | ------ | ------ | - | ------
|Capital expenditures       |                               |      |        |        |   |       
|                           | Total for reportable segments |      | $      | 12,943 |   | $     
|                           | Corporate                     |      |        | 391    |   |       
|                           |                               |      |        |        |   |       
|Total capital expenditures |                               | $    | 13,334 |        | $ | 15,372
|                           |                               |      |        |        |   |       

|             |                               | 2002 |         | 2003    |   | 2004   
|------------ | ----------------------------- | ---- | ------- | ------- | - | -------
|Assets       |                               |      |         |         |   |        
|             | Total for reportable segments |      | $       | 154,476 |   | $      
|             | Corporate                     |      |         | 6,836   |   |        
|             | Deferred income taxes         |      |         | 1,067   |   |        
|             |                               |      |         |         |   |        
|Total assets |                               | $    | 162,379 |         | $ | 162,005
|             |                               |      |         |         |   |        

F-25

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15. Commitments and Contingencies

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 31,2005

$
1,021

$
7612006


922


4232007


506


1192008


152


132009 and thereafter





2,601

$
1,316Less: amount representing interest (LIBOR of 2.18% at December 31, 2004)


1362,465Present value future minimum lease payments less amounts due within one year


942Amounts due after one year

$
1,523


Rent
expense incurred by the Company under non-cancelable operating leases totaled $1,278, $1,187, and $1,409 for the years ended December 31, 2002, 2003 and 2004, 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 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, 2004:

2005

$
6,9202006


6,1192007


5,1902008


3,9942009


2,956Thereafter


4,206$
29,385


Litigation.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 or the results of its operations.

F-26

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16. 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 $620, $606 and $644, for the years ended December 31, 2002,
2003 and 2004, respectively.

Stock Option and Incentive Plans.On April 7, 1997, the Board of Directors adopted, and the Company's stockholders
approved, the 1997 Stock Option and Incentive Plan for the Company (the "1997 Stock Plan"). The 1997 Stock Plan is designed and intended as a performance incentive for officers, employees, consultants
and directors to promote the financial success and progress of the Company. All officers, employees and independent directors are eligible to participate in the 1997 Stock Plan. Awards, when made, may
be in the form of stock options, restricted stock, unrestricted stock options, and dividend equivalent rights. The 1997 Stock Plan requires the maximum term of options to be ten years.

Employee
options generally vest such that thirty-three percent (33%) 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 1997 Stock Plan may determine, at its discretion, the vesting schedule for any option award. In the event of termination of the optionees' relationship with
the Company, vested options not yet exercised terminate within 90 days. The 1997 Stock Plan also provided for the automatic annual grant to each of the independent directors to purchase 1,000
shares of common stock. The non-qualified options granted to independent directors are exercisable immediately and will terminate on the tenth anniversary of the grant. The exercise prices are the
fair market value of the shares underlying the options on the respective dates of the grants. Other than the stock option grants, there were no other grants of equity-based compensation awards.

The
1997 Stock Plan provides for the issuance of up to the greater of 750,000 shares of common stock or ten percent of the outstanding shares of common stock. At December 31,
2004, approximately 1,266,357 shares of common stock were reserved for issuance under the 1997 Stock Plan, of which 914,367 shares were subject to outstanding options, 222,999 shares were issued
pursuant to the exercise of option agreements and 128,991 remained available for issuance.

F-27

---



The
following is a summary of stock option plan activity:

|                               |  | 2002      |   | 2003 |      | 2004
|------------------------------ |  | --------- | - | ---- | ---- | ----
|
|Outstanding, beginning of year |  | 779,600   |   | $    | 4.09 |     
|Granted                        |  | 276,600   |   | $    | 3.26 |     
|Exercised                      |  |          |   |      |     |     
|Forfeited                      |  | (44,120   | ) | $    | 4.31 |     
|                               |  |           |   |      |      |     
|Outstanding, end of year       |  | 1,012,080 |   | $    | 3.85 |     
|                               |  |           |   |      |      |     
|Exercisable, end of year       |  | 273,100   |   | $    | 4.74 |     
|                               |  |           |   |      |      |     

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$3.00$3.85   |  | 682,767             |  | 6.79               
|$3.86$6.54   |  | 174,600             |  | 9.05               
|$7.94$8.50   |  | 54,000              |  | 4.18               
|$11.00$15.13 |  | 3,000               |  | 3.22               
|              |  |                     |  |                    
|              |  | 914,367             |  | 7.06               
|              |  |                     |  |                    

Mac-Gray Corporation 2001 Employee Stock Purchase Plan.The Company established the Mac- Gray Corporation 2001 Employee Stock
Purchase Plan (the "ESPP") in May of 2001. Under the terms of the ESPP, eligible employees may have between 1% and 15% of eligible compensation deducted from their pay to purchase 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 200,000 shares may be offered pursuant to the
ESPP. The plan includes certain restrictions, such as the holding period of the stock by employees. The number of shares of common stock purchased through the ESPP was 24,079 and 23,855 for the years
ended December 31, 2003 and 2004, respectively. There have been 73,713 shares purchased since the inception of the plan. At December 31, 2003 and 2004 the Company had accumulated
employee withholdings associated with this plan of $42 and $79 for acquisition of stock in 2004 and 2005, respectively.

F-28

---



17. Earnings Per Share

For the Year Ended December 31, 2002Income
(Numerator)

Shares
(Denominator)

Per-Share
AmountNet incomebasic

$
2,868

12,661

$
0.23Effect of dilutive securities:Stock options




3Net incomediluted

$
2,868

12,664

$
0.23


For the Year Ended December 31, 2003Income
(Numerator)

Shares
(Denominator)

Per-Share
AmountNet incomebasic

$
4,104

12,635

$
0.32Effect of dilutive securities:Stock options




106Net incomediluted

$
4,104

12,741

$
0.32


For the Year Ended December 31, 2004Income
(Numerator)

Shares
(Denominator)

Per-Share
AmountNet incomebasic

$
5,263

12,702

$
0.41Effect of dilutive securities:Stock options




326Net incomediluted

$
5,263

13,028

$
0.40


There
were 974, 57, and 57 shares under option plans that were excluded from the computation of diluted earnings per share at December 31, 2002, 2003 and 2004, respectively, due
to their anti-dilutive effects.

F-29

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

18. Summary of Quarterly Financial Information (unaudited)

|                                                                                      |  | Year Ended December 31, 2003 |        | Year Ended December 31, 2004 |  
|------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---------------------------- | -
|
|Revenue                                                                               |  | $                            | 35,974 |                              | $
|Cost of revenue                                                                       |  |                              | 28,382 |                              |  
|                                                                                      |  |                              |        |                              |  
|Gross margin                                                                          |  |                              | 7,592  |                              |  
|Operating expenses                                                                    |  |                              | 5,264  |                              |  
|                                                                                      |  |                              |        |                              |  
|Income from operations                                                                |  |                              | 2,328  |                              |  
|Gain on sale of lease receivables                                                     |  |                              |       |                              |  
|Interest and other expense, net                                                       |  |                              | (773   | )                            |  
|                                                                                      |  |                              |        |                              |  
|Income before provision for income taxes and effect of change in accounting principle |  |                              | 1,555  |                              |  
|Provision for income taxes                                                            |  |                              | 649    |                              |  
|                                                                                      |  |                              |        |                              |  
|Net income                                                                            |  | $                            | 906    |                              | $
|                                                                                      |  |                              |        |                              |  
|Net income per common sharebasic                                                     |  | $                            | 0.07   |                              | $
|                                                                                      |  |                              |        |                              |  
|Net income per common sharediluted                                                   |  | $                            | 0.07   |                              | $
|                                                                                      |  |                              |        |                              |  
|Weighted average common shares outstandingbasic                                      |  |                              | 12,681 |                              |  
|                                                                                      |  |                              |        |                              |  
|Weighted average common shares outstandingdiluted                                    |  |                              | 12,684 |                              |  
|                                                                                      |  |                              |        |                              |  

F-30

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19. Subsequent Events

On January 10, 2005, the Company acquired the laundry facilities management assets of Web Service Company, Inc. in 13 western and southern states
for approximately $112 million. The assets acquired primarily consisted of approximately $74,000 of laundry facilities management contract rights and approximately $24,000 of laundry equipment
in use. The allocation of the purchase price, to comply with the provisions of FAS 141, "Business Combinations", is an estimate pending the finalization of a valuation by an independent third
party appraisal firm. Commencing on January 10, 2005, the Company began to operate the acquired assets from the same facilities Web operated from. The Web facilities have been leased by the
Company on a month-to-month basis while an evaluation of total facilities requirements is performed. The Company has conducted several employee training sessions to expedite the operations, sales and
marketing integration processes and has begun to install the necessary systems and networks to ensure a smooth transition. While the Company continues to work towards total integration, Web provides
some administrative services for a monthly fee. The Company expects to be fully integrated within six months. The acquisition of these assets addresses the Company's growth objectives by penetrating
new geographic markets. In addition, it expands the Company's leading position in the academic marketplace and creates other opportunities for economies of scale.

Concurrent
with the Web acquisition, on January 10, 2005, the Company entered into a new Senior Secured Credit Facility ("2005 Credit Facility") in connection with the
January 2005 acquisition of assets from Web. The 2005 Credit Facility provides for borrowings up to $200,000, consisting of a $120,000 Revolving Line of Credit ("2005 Revolver") and an $80,000
Senior Secured Term Loan Facility ("2005 Term Loan"). Both portions of the 2005 Credit Facility mature on January 10, 2010. The 2005 Credit Facility is collateralized by a blanket lien on the
assets of the Company and each of its subsidiaries, except for its corporate headquarters, as well as a pledge by the Company of all the capital stock of its subsidiaries. The 2005 Term Loan requires
quarterly payments of $2,000 during 2005, $3,000 during 2006, $4,000 during 2007, $5,000 during 2008, and $6,000 for the first three quarters of 2009 and a final payment of $6,000 on
January 10, 2010. In addition to the scheduled quarterly payments, the Company is required to pay an amount equal to 50% of Excess Cash Flow, as defined, for each fiscal year, commencing with
the fiscal year ended December 31, 2005, if the Funded Debt Ratio (as defined) is greater than or equal to 1.50 to 1. This payment is first used to reduce the 2005 Term Loan with any remaining
amounts used to reduce the revolving line of credit.

Outstanding
indebtedness under the 2005 Credit Facility bears interest, at the Company's option, at a rate equal to the prime rate plus 1.25%, or LIBOR plus 2.25%. The Applicable prime
rate and LIBOR margin may be adjusted quarterly based on certain financial ratios.

The
2005 Credit Facility contains a commitment fee which is calculated as a percentage of the average daily-unused portion of the 2005 Credit Facility. This percentage, currently
0.0375%, may be adjusted quarterly based on the Funded Debt Ratio.

The
2005 Credit Facility includes certain financial and operational covenants, including restrictions on paying dividends and other distributions, making certain acquisitions and
incurring indebtedness, and requires that the Company maintain certain financial ratios. The most important of these financial ratios are for the Company to maintain a leverage ratio of less than or
equal to 3.75:1.00 and a coverage ratio of greater than or equal to 1.00:1.00. All covenants are measured quarterly.

F-31

---





As of January 10, 2005, the scheduled future principal payments on the 2005 Secured Credit Facility are as follows:

2005

$
8,0002006


12,0002007


16,0002008


20,0002009


18,0002010


99,367$
173,367


F-32

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MAC-GRAY CORPORATION

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2003, AND 2004

|                              |                                                    | Balance
Beginning
of Year |   | Charged to
Cost and
Expenses |  | Deductions |     | Balance
at End
of Year
|----------------------------- | -------------------------------------------------- | ------------------------- | - | ---------------------------- |  | ---------- | --- | ----------------------
|Year Ended December 31, 2002: |                                                    |                           |   |                              |  |            |     |                       
|                              | Allowance for doubtful accounts and lease reserves |                           | $ | 1,017                        |  | $          | 703 |                       
|Year Ended December 31, 2003: |                                                    |                           |   |                              |  |            |     |                       
|                              | Allowance for doubtful accounts and lease reserves |                           | $ | 850                          |  | $          | 322 |                       
|Year Ended December 31, 2004: |                                                    |                           |   |                              |  |            |     |                       
|                              | Allowance for doubtful accounts and lease reserves |                           | $ | 935                          |  | $          | 234 |                       

F-33

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